<PAGE>
As filed with the Securities and Exchange Commission on October 8, 1998
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------------
KEY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
---------------------------------------------
MARYLAND 6022 52-1723536
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation
or organization)
7F GWYNNS MILL COURT
OWINGS MILLS, MARYLAND 21117
(410) 363-7050
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
-----------------------------------------
DAVID H. WELLS, JR., PRESIDENT
KEY CAPITAL CORPORATION
7F GWYNNS MILL COURT
OWINGS MILLS, MARYLAND 21117
(410) 363-7050
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
JAMES C. STEWART, ESQUIRE RICHARD A. SCHABERG, ESQUIRE
HOUSLEY KANTARIAN & BRONSTEIN, P.C. THACHER PROFFITT & WOOD
1220 19TH STREET, N.W., SUITE 700 1700 PENNSYLVANIA AVENUE, N.W., SUITE 800
WASHINGTON, D.C. 20036 WASHINGTON, D.C. 20006
(202) 822-9611 (202) 347-8400
-----------------------------------------
Approximate date of commencement of proposed sale to public: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_] __________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PRICE PER UNIT PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $1.00 per share 1,500,000 shares $12.00 $18,000,000 $5,310
- --------------------------------------------------------------------------------------------------
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
<PAGE>
COMMUNITY OFFERING PROSPECTUS
UP TO __________ SHARES OF COMMON STOCK
KEY CAPITAL CORPORATION
7F GWYNNS MILL COURT
OWINGS MILL, MARYLAND 21117
(410) 363-7050
================================================================================
The Company is offering up to _________ shares of its Common Stock at a
price between $10.00 and $12.00 per share through Ryan, Beck on a best efforts
basis in the Community Offering. Ryan, Beck is not required to sell any
specific number or dollar amount of shares but will use its best efforts to sell
the shares offered in the Community Offering. If you wish to subscribe for
shares in the Community Offering, the Company must receive your order by
___________, 1998. The Company expects to sell any shares which are not sold in
the Community Offering (along with an additional _______ shares) to Ryan, Beck
for resale in a firm commitment Public Offering. No shares will be sold in the
Community Offering unless the Public Offering is completed. Subscribers in the
Community Offering will pay the same per share price paid by purchasers in the
Public Offering.
There is currently no public trading market for the Common Stock. The
Company has applied for quotation of the Common Stock on the Nasdaq National
Market under the symbol "KCCO." Quotation on the Nasdaq National Market is
subject to completion of the Offerings.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER AT (410)
363-7050.
================================================================================
TERMS OF THE COMMUNITY OFFERING
<TABLE>
<CAPTION>
<S> <C>
. Price Per Share: $10.00 to $12.00
. Number of Shares: __________
. Underwriting Fee (Minimum/Maximum): $0.25 to $0.30
. Estimated Net Proceeds to the Company (Minimum/
Maximum): $_________ to $_________
. Estimated Net Proceeds Per Share (Minimum/Maximum): $9.75 to $11.70
</TABLE>
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE 1 OF THIS DOCUMENT.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Ryan, Beck & Co.
The date of this Prospectus is ___________, 1998
<PAGE>
[MAP OF MARKET AREA]
IN CONNECTION WITH THE COMMUNITY OFFERING AND PUBLIC OFFERING, RYAN, BECK &
CO. MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET
PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME OR DISCONTINUED AT SUCH TIME AS REQUIRED UNDER THE FEDERAL SECURITIES LAWS.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain information from this Prospectus. Because
it is a summary, it is not complete and may not contain all the information you
will need to make your investment decision. To understand the Company and the
Offerings more fully, you should carefully read this entire document, including
the Company's consolidated financial statements and the notes to those financial
statements.
In reading this document, please note the following:
. references to the "Company" are intended to include its subsidiaries
unless the context of the sentence clearly suggests otherwise.
. various capitalized and technical terms are defined in the Glossary.
. all historic financial information has been restated for the 2-for-1
stock split which the Company effected on January 31, 1996 and the __-
for-1 stock split effected on _______, 1998.
. references to the number of shares to be sold and the Company's
capitalization following the Offerings generally assume that Ryan,
Beck does not exercise the "over-allotment" option which the Company
expects to grant to Ryan, Beck in connection with the Public Offering.
Finally, this Prospectus contains forward-looking statements which involve
numerous risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in these forward-looking statements.
Factors that could cause these differences include, but are not limited to, the
various factors described in the section entitled "Risk Factors" beginning on
page 1 of this document.
KEY CAPITAL CORPORATION
Key Capital Corporation is the holding company for Key Bank and Trust, a
Maryland trust company headquartered in Owings Mills, Maryland. Through its
seven branch offices in suburban Baltimore and branch office in Leesburg,
Virginia, the Bank offers a full range of commercial banking services to small
and medium sized businesses and individuals in Central Maryland and Northern
Virginia. The Bank is particularly active in residential construction and
development lending and small business lending. In addition to its community
banking activities, the Bank has also developed several profitable niches in the
specialty finance area including national subprime credit card issuance and
processing and subprime automobile lending. The development of profitable niche
lending products like these has long been a significant part of the Company's
operating strategy. While this strategy exposes the Company to additional credit
risk, the Company believes that its experience in managing these risks enables
it to compete profitability in these areas. The Bank does not exercise trust
powers. At June 30, 1998, the Company had $277.7 million in assets, $243.5
million in deposits and $24.9 million in stockholders' equity.
Since its founding in 1961 as Key Federal Savings and Loan Association, the
Bank has strived to be an innovator in non-traditional financial services both
in Maryland and across the United States. In 1976, the Bank undertook one of
the first conversions of a federal thrift from mutual to stock form. In 1982,
the Bank pioneered the secured credit card which it has marketed on a nationwide
basis. Introduced during a period of tight credit, the secured credit card was
intended to make credit available to individuals who did not otherwise qualify
for the unsecured credit cards offered by other banks. In 1996, the Bank
converted from a federal savings bank to a Maryland trust company to gain more
flexibility in pursuing its existing lines of commercial and consumer lending.
With this conversion, the Bank is in a position to take further advantage of the
lending opportunities that have been created by the continuing consolidation in
the Mid-Atlantic banking industry.
The Company is organized by profit centers. Each profit center is run by a
senior officer who has substantial responsibility for their business area and
who is compensated based on the profitability of their division. The Company
currently concentrates on five main business lines:
(i)
<PAGE>
. RESIDENTIAL CONSTRUCTION AND DEVELOPMENT LENDING. The Bank has focused on
residential construction and development lending since its founding. At
June 30, 1998, the total outstanding balances on the Bank's construction
and development loans approximated $67.1 million, net of loans in process.
In addition to serving Central Maryland, the Bank makes development and
construction loans in Northern Virginia through its Leesburg office and in
Delaware. Since residential construction and development loans generally
have relatively short terms and bear floating rates of interest, they
reduce the Company's exposure to the risk that increases in market interest
rates will make these loans unprofitable. These loans are repaid as the
lots or houses are sold which helps limit the Bank's exposure to an
individual borrower or project. The Company believes that development and
construction lending are areas in which its expertise and local orientation
give it an advantage over larger banks. See "Business -- Lending
Activities."
. CREDIT CARD LENDING AND OPERATIONS. At June 30, 1998, the Bank had a
$41.0 million portfolio of partially secured and unsecured credit card
loans to customers around the country and expects that credit card lending
will continue to contribute to the Company's future profitability. See
"Business --Lending Activities." Over the past several years, the high
returns on partially secured lending to subprime borrowers have attracted
many new competitors into this market. Many of these competitors have
offered credit cards to subprime borrowers on much easier terms than the
Bank and the Bank reduced the collateral requirements for its cards to
remain competitive. After experiencing declining profitability as a result
of increased origination costs and increased charge-offs, however, the Bank
de-emphasized the issuance of partially secured credit cards in favor of
processing credit cards for others. Through its Key Operations Center,
Inc. subsidiary, the Bank offers credit card processing services to a
variety of bank and non-bank partners. Using the underwriting and
servicing expertise gained from its partially secured credit card
portfolio, the Bank concentrates on servicing the subprime sector and
believes that its processing activities can provide noninterest income
without the credit risk that comes with direct lending. See "Business --
Credit Card Processing."
. SMALL BUSINESS LENDING. The Bank offers a full range of commercial loans
including term loans, lines of credit, asset-based financing and SBA
guaranteed loans. At June 30, 1998, the Company's small business loan
portfolio totaled $39.2 million. Management believes that the consolidation
in the Mid-Atlantic banking industry has created significant opportunities
for a community-oriented bank that can offer prompt and responsive service
to the small business customer. In order to reach out to this customer
base, the Bank has placed a commercial loan officer in each of its
branches. For the past two years, the Bank has been the largest originator
of SBA guaranteed loans in the SBA Baltimore Region. Management believes
that the Bank's SBA lending expertise gives it an additional advantage in
reaching the small business borrower who is not being served by larger
banks while allowing the Bank to reduce its credit risk through SBA
guarantees. The Bank also profits from sales of the guaranteed portion of
the loan in the secondary market. See "Business --Lending Activities."
. SUBPRIME AUTOMOBILE LENDING. The Bank began offering automobile financing
to subprime borrowers in 1988 and currently serves the subprime automobile
loan market throughout metropolitan Baltimore and Washington, D.C. and
Northern Virginia. At June 30, 1998, the Company's subprime automobile loan
portfolio totaled $23.4 million. The Bank mainly originates its automobile
loans through automobile dealers who take the application from the customer
and send it to the Bank for approval. The Bank competes in this area
through marketing and responsive service while using disciplined pricing
and underwriting procedures to control credit risk. The Bank is evaluating
an extension of its business into automobile leasing to increase financing
opportunities for the Bank. See "Business --Lending Activities."
(ii)
<PAGE>
. MORTGAGE BANKING. The Bank originates FHA/VA and conventional loans for
resale in the secondary market. For the six months ended June 30, 1998,
the Company originated $53.3 million in mortgage loans held for sale.
The Bank seeks to minimize credit and interest rate risk while maximizing
profitability by promptly selling loans on an individual loan basis. The
Bank does not service these loans after the sale. See "Business -- Lending
Activities."
To date, the Company's business strategies have yielded the following
results:
. STRONG NET INTEREST MARGIN - The Company has consistently achieved
superior net interest margins as compared to those reported by most other
commercial banks. The Company's net interest margin for the six months
ended June 30, 1998 was 7.35%, and for the years ended December 31, 1997
and 1996 was 8.11% and 8.78%, respectively. These strong net interest
margins are a direct result of the higher interest rates earned on credit
card loans, subprime automobile loans, residential construction and
development loans and small business lending.
. DIVERSIFIED REVENUE SOURCES - Unlike most commercial banks which depend on
net interest income for substantially all of their revenues, the Bank's
noninterest income has contributed over 25% of revenues during each of the
last five years and for the six months ended June 30, 1998. For the six
months ended June 30, 1998, noninterest income amounted to $4.2 million
and equaled 30% of total revenue up from 27% of total revenue in 1996.
This diversification of revenue sources is due to the Company's emphasis
on credit card lending and processing and the origination and sales of
residential mortgages and the guaranteed portions of SBA loans.
. INCREASED PROFITABILITY - The Company's return on average assets and
return on average equity have consistently improved from those recorded for
the year ended December 31, 1996. For the six months ended June 30, 1998,
annualized returns on average assets and average equity were 1.35% and
15.35%, respectively, as compared to 0.83% and 9.98%, respectively for 1996
(as adjusted for the one-time SAIF special assessment).
. STABLE, EXPERIENCED MANAGEMENT - The Bank's President, David H. Wells,
Jr., and its Executive Vice President, W. Benton Knight, have extensive and
successful experience in managing both the traditional and non-traditional
operations of the Bank. Mr. Wells and Mr. Knight joined the Bank in 1981
and 1984, respectively, and have served in executive positions at the Bank
for 17 and 14 years, respectively. The Bank's Vice Presidents and Division
Managers responsible for residential construction and development lending,
credit card lending and processing, small business lending, subprime
automobile lending, residential mortgage lending and retail banking have
combined experience of 128 years.
The Company's business strategies for the future include:
. EXPANSION IN NORTHERN VIRGINIA MARKET. The Company intends to use a
portion of the net proceeds from the Offerings to charter a separate bank
to serve the Northern Virginia market. The Bank currently serves this
market through its Leesburg branch. The Company believes that chartering
a separate bank with a local board of directors and management is the best
way to create the type of entrepreneurial, community-oriented organization
through which the Company can expand its presence in this growing market.
. DEVELOPMENT OF EXISTING FRANCHISE. The capital raised in the
Offerings will help the Bank to continue growing its existing business
lines and activities and expand its branch network. The Bank recently
opened a branch in Cockeysville, Maryland which will help it to better
serve this market. The Bank will consider additional branches in attractive
markets.
(iii)
<PAGE>
. SHARPEN COMMUNITY BANKING FOCUS. Management believes that the
consolidation in the Mid-Atlantic banking industry continues to create
significant opportunities for the Bank. Mergers and acquisitions have
removed numerous community-oriented competitors from the Bank's market.
The Company intends to further refine and develop the personalized services
and community-focused identity that distinguish the Bank from its super-
regional competitors.
. PROMOTE ENTREPRENEURIAL CULTURE. The Company will continue to promote
the entrepreneurial culture which has historically been one of the Bank's
greatest strengths. The Company continues to believe that by incentivizing
experienced and motivated managers, it can successfully grow its existing
businesses and identify and develop new opportunities in community banking
and specialty finance.
The Company's executive offices are located at 7F Gwynns Mill Court, Owings
Mills, Maryland 21117 and its telephone number is (410) 363-7050.
RISK FACTORS
See "Risk Factors" beginning on page 1 of the Prospectus for a discussion
of certain factors that should be considered by prospective investors, including
the risks related to the Company's lending specialties, risks related to the
proposed Virginia bank and branch expansion, the absence of a prior market for
the Common Stock, substantial competition in the financial services industry,
recent stock market volatility, dependence on key personnel, control of the
Company, geographic concentration, technology risks and the Year 2000, industry
risks related to construction and development lending, ability to make dividend
payments, government regulations and interest rate risk.
(iv)
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
COMMON STOCK OFFERED IN THE OFFERINGS:
COMMUNITY OFFERING......................... Up to _________ shares
PUBLIC OFFERING............................ _______ shares plus any shares which are not sold in the Community Offering
COMMON STOCK TO BE OUTSTANDING
AFTER THE OFFERINGS........................... _________ shares
USE OF PROCEEDS............................... The Company intends to use approximately one-third of the net proceeds to charter
and capitalize a new bank subsidiary in Northern Virginia. The Company intends to
use the remaining two-thirds of the proceeds to expand its existing business and
franchises and enter into other complementary businesses.
DILUTION...................................... On completion of the Offering, there will be an immediate dilution to investors in
the Offering of the net tangible book value per share of Common Stock. See
"Dilution."
DIVIDENDS..................................... Since 1988, the Company has paid semi-annual cash dividends on its Common Stock.
Following the Offering, the Company expects to pay quarterly dividends at an annual
rate equal to $____ per share. The first quarterly dividend is expected to be
declared during the first quarter of 1999.
RISK FACTORS.................................. Prospective investors in the Common Stock should read carefully the information
discussed under the heading "Risk Factors."
NASDAQ NATIONAL MARKET SYMBOL................. "KCCO"
</TABLE>
(v)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE COMMUNITY OFFERING
HOW MANY SHARES CAN I BUY IN THE COMMUNITY OFFERING?
You must order at least 100 shares. The maximum purchase is $_______.
HOW DO I SUBSCRIBE FOR SHARES?
You may subscribe for shares by completing and returning the enclosed stock
order form along with your payment to our Stock Information Center at 7F Gwynns
Mill Court, Owings Mills, Maryland 21117 before _:__ p.m. on ____day, _____ __,
1998. The Company will only accept payment by check or money order. No cash
payments will be accepted.
TO WHOM SHOULD I MAKE MY CHECK OR MONEY ORDER?
Your check or money order should be made payable to "_______, As Escrow Agent
for Key Capital Corporation." The Escrow Agent will not release your funds to
the Company until the shares are issued.
HOW MUCH PAYMENT AM I REQUIRED TO ENCLOSE?
Your payment must equal $12 times the number of shares you wish to order.
Example: If you want to order 1000 shares, you will need to send a check
or money order for $12,000.
WHAT WILL THE FINAL PRICE PER SHARE BE?
The final price per share will be between $10 and $12. If the final price is
less than $12 per share, the Company will send you additional shares for the
difference between $12 and the final price with cash paid in lieu of fractional
shares.
HOW AND WHEN WILL THE FINAL PRICE BE DETERMINED?
The Company and Ryan, Beck will determine the final price at the start of the
firm commitment Public Offering that is expected to take place following the
close of the Community Offering. Purchasers in the Community Offering will pay
the same price per share as purchasers in the Public Offering.
WHEN WILL THE PUBLIC OFFERING TAKE PLACE?
The Public Offering is expected to take place promptly after the close of the
Community Offering. If the Public Offering does not take place within 60 days
after the close of the Community Offering, the Company will cancel the Community
Offering and return all funds to subscribers.
WHAT IF THERE ARE NOT ENOUGH SHARES TO FILL ALL THE ORDERS IN THE COMMUNITY
OFFERING?
The Company will allocate shares among subscribers in its sole discretion.
WHERE CAN I GET MORE INFORMATION?
In order to make an informed investment decision, you should read this entire
document. You should read the section titled "Risk Factors" especially closely.
This section contains important information about the particular risks involved
in an investment in the Common Stock. In addition, you should contact:
STOCK INFORMATION CENTER
KEY CAPITAL CORPORATION
7F GWYNNS MILLS COURT
OWINGS MILLS, MARYLAND 21117
(410) 363-7050
(vi)
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes consolidated financial data for the Company
and its subsidiaries for the periods indicated. Data for the six months ended
June 30, 1998 and 1997 is unaudited but includes all adjustments (all of which
are of a normal recurring nature) which management believes are necessary for a
fair statement of the results for these periods. The Company's results of
operations for the six months ended June 30, 1998 and 1997 do not necessarily
indicate what the Company's results of operations will be for the entire fiscal
year.
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- ---------- --------- --------- --------- --------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net Interest Income........... $ 9,646 $ 10,079 $ 19,875 $ 20,246 $ 18,641 $ 16,842 $ 14,950
Provision for Loan Losses..... 2,545 3,845 7,623 7,883 3,812 3,124 2,925
Noninterest Income............ 4,218 4,475 9,085 7,623 7,036 6,646 5,765
Noninterest Expense........... 8,355 7,888 16,688 18,950 16,685 14,947 12,830
Net Income.................... 1,858 1,727 2,835 1,246 3,166 3,605 3,195
SHARE DATA:
Net Income Per Share:
Basic...................... $ 2.29 $ 2.13 $ 3.50 $ 1.54 $ 3.91 $ 4.45 $ 3.94
Diluted.................... 2.25 2.10 3.44 1.52 3.87 4.44 3.93
Cash Dividends Declared
Per Common Share........... 0.30 0.25 0.55 0.55 0.55 0.375 0.375
Book Value per Common
Share...................... 30.59 27.26 28.62 25.31 24.29 20.31 17.61
Weighted Average Basic
Common Shares
Outstanding................ 811,505 810,637 811,039 810,331 810,324 810,324 810,324
FINANCIAL CONDITION DATA:
Total Assets.................. $277,688 $258,777 $268,477 $253,038 $237,936 $203,984 $199,831
Loans Receivable, net......... 192,640 196,298 193,654 200,193 183,928 157,845 142,351
Allowance for Loan Losses
and Other Reserves (1)...... 8,300 8,386 8,024 8,254 5,658 5,267 4,362
Total Deposits................ 243,467 228,070 235,760 226,513 212,285 182,502 181,352
Total Stockholders' Equity.... 24,882 22,114 23,168 20,509 19,685 16,456 14,273
PERFORMANCE RATIOS:
Return on Average Assets (2).. 1.35% 1.36% 1.10% 0.51% 1.43% 1.79% 1.68%
Return on Average Equity (2).. 15.35 16.38 12.95 6.16 17.30 23.83 24.82
Net Interest Margin (3)....... 7.35 8.42 8.11 8.78 8.90 8.85 8.27
Net Interest Spread (4)....... 6.62 7.90 7.52 8.13 8.33 8.46 7.93
Dividend Payout Ratio......... 13.10 11.74 15.71 35.71 14.07 8.43 9.52
Noninterest Income to
Total Revenues (5).......... 30.42 30.75 31.37 27.35 27.40 28.29 27.83
Noninterest Income to
Average Assets.............. 3.07 3.51 3.52 3.13 3.18 3.29 3.02
Noninterest Expense to
Average Assets.............. 6.09 6.19 6.46 7.79 7.54 7.40 6.73
Efficiency Ratio (6).......... 60.27 54.20 57.63 68.00 64.98 63.64 61.94
</TABLE>
(vii)
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- -------------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL RATIOS:
Average Equity to Average
Assets..................... 8.82% 8.28% 8.48% 8.32% 8.28% 7.49% 6.75%
Leverage Ratio................ 8.73 8.45 8.61 8.13 8.26 8.08 7.16
Total Risk-Based Capital
Ratio...................... 13.45 12.94 13.19 12.30 11.41 13.66 13.05
ASSET QUALITY RATIOS:
Allowance for Loan Losses
and Other Reserves to
Gross Loans................ 4.13% 4.10% 3.98% 3.96% 2.98% 3.23% 2.97%
Non-Performing Loans to
Gross Loans................ 2.52 2.61 2.41 2.37 3.28 2.47 2.10
Non-Performing Assets to
Gross Loans Plus Other
Non-Performing Assets (7).. 3.61 4.06 3.79 3.81 4.05 4.72 4.17
Allowance for Loan Losses
and Other Reserves to
Non-Performing Loans....... 163.97 157.13 165.00 166.95 90.98 130.63 141.67
Net Loan Charge-offs to
Average Loans (2).......... 2.47 3.64 3.88 2.67 1.93 1.60 2.25
</TABLE>
- ------------------------
(1) Includes $199,000 in non-refundable dealer reserves at June 30, 1998.
(2) Ratios for the six months ended June 30, 1998 and 1997 have been
annualized.
(3) Net interest margin is net interest income divided by average interest-
earning assets. Ratios for the six months ended June 30, 1998 and 1997
have been annualized.
(4) Net interest spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities. Ratios for the six months ended June 30, 1998 and 1997 have
been annualized.
(5) Total revenues equals net interest income plus noninterest income.
(6) Efficiency ratio equals noninterest expense divided by the sum of net
interest income and noninterest income.
(7) Non-performing assets equal non-performing loans plus other non-performing
assets.
(viii)
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, investors should
carefully consider the following risk factors in deciding whether to purchase
the Common Stock.
CREDIT RISKS RELATED TO LENDING SPECIALTIES
Like any company engaged in the business of lending money, the Company
faces the risk that its loans will not be paid back. Because the Company has
historically specialized in certain riskier types of lending, however, its risk
of loss may be even greater than that faced by other banks. The Company's
riskier lending activities include credit card lending, subprime automobile
lending, residential construction and development lending and small business
lending.
. CREDIT CARD LENDING. A significant portion of the Company's business
has been issuing partially secured credit cards to subprime borrowers.
Subprime borrowers are borrowers who would not be able to obtain a
credit card through other traditional sources because of their limited
credit history, poor repayment history, high debt-to-income ratios or
other reasons. As of June 30, 1998, the Company had $41.0 million in
outstanding credit card balances which equaled 20% of the loan
portfolio. Partially secured credit card loans to subprime borrowers
equaled $31.0 million of the Company's $41.0 million in total credit
card outstandings. Although the Company receives a higher rate of
return on these loans, the risk of late payments or non-payment is
greater because of the high risk associated with these borrowers. The
risk of credit card lending may increase with an economic downturn or
recession when these borrowers may be disproportionately affected by
increases in the unemployment rates. The Company attempts to reduce
these risks through its underwriting procedures and has established
reserves in amounts which it believes are sufficient to cover probable
losses in these portfolios. The Company cannot assure you, however,
that these procedures and reserves will adequately protect the Company
against losses.
. SUBPRIME AUTOMOBILE LENDING. As of June 30, 1998, the Bank had $23.4
million in subprime automobile loans outstanding which equaled 12% of
the loan portfolio. The Company originates automobile loans to
borrowers who have not been able to obtain financing through
traditional sources because of their limited credit history, poor
repayment history, high debt-to-income ratios or for other reasons.
Although the Company receives high yields on these loans, there are
significant risks associated with subprime automobile lending. These
risks include: loan defaults; delinquencies; increased costs in
underwriting; loan administration and collection; and inability to
sell repossessed automobiles at a price sufficient to recoup the loan
amount. The risk with this type of lending may increase with an
economic downturn or recession when unemployment rates increase.
While the Company uses underwriting criteria designed to reduce these
credit risks and has established reserves in amounts which it believes
are sufficient to cover probable losses in these portfolios, the
Company cannot assure you that these procedures will protect the
Company against losses.
. CONSTRUCTION LENDING. As of June 30, 1998, the total outstanding
balances on the Company's residential construction loans equaled $48.7
million, net of loans in process, and comprised 24% of the Company's
total loan portfolio. Residential construction loans have higher
interest rates and shorter terms than permanent residential mortgage
loans. Construction lending, however, has a higher degree of risk
than lending on completed properties because of the uncertainty of the
value of the property upon the completion of construction. In
addition, the Company is exposed to the risk that delays will increase
construction costs so much that the completed house cannot be sold at
a profit. The risks associated with residential construction lending
are significantly affected by local economic conditions, the supply
and demand for new homes, the success of the surrounding development
and changes in local government regulations such as zoning, building
codes and building moratoriums.
1
<PAGE>
. DEVELOPMENT LENDING. As of June 30, 1998, outstanding development
loans totaled $18.4 million, net of loans in process, and comprised 9%
of the Company's total loan portfolio. Borrowers use development
loans to finance the acquisition of raw land and to subdivide it into
building lots. While development loans also feature shorter terms and
higher yields than permanent residential mortgages, development loans
expose the Bank to greater risk of loss than residential mortgages,
and are even considered riskier than residential construction loans.
In addition to the risks inherent in lending on properties whose value
depends on the successful completion of the project, development loans
are generally outstanding for longer periods than construction loans
and expose the Bank to additional risk from delays in obtaining
necessary permits. Future and existing development loans may be
adversely affected by delays in receiving required government
approvals, changing government building codes and regulations and
local zoning laws, enforcement of environmental regulations and
wetlands preservation laws, a slow down of the local economy, supply
and demand for newly built homes or potential building moratoriums and
municipal and county anti-growth policies.
. SMALL BUSINESS LENDING. At June 30, 1998, the Company had $39.2
million in small business loans which equaled 19% of the portfolio.
Commercial business lending generally involves greater credit risk
than one-to four-family mortgage lending. The repayment of commercial
loans depends on the quality of the borrower's management and a number
of economic and other factors which induce business failures and
depreciate the value of business assets pledged to secure the loan,
including competition, insufficient capital, product obsolescence,
changes in the cost of production, environmental hazards, weather,
changes in laws and regulations and general changes in the
marketplace.
INDUSTRY RISKS RELATED TO CONSTRUCTION AND DEVELOPMENT LENDING
The Company does a significant portion of its lending to builders and
developers. Real estate development has historically been a cyclical business.
During periods of low interest rates and high employment, housing demand and
construction activity increase. If housing demand falters for any reason, the
supply of newly built homes and homes under construction can quickly exceed
demand. Builders are then forced to discount prices which cuts into their
profits and jeopardizes their ability to repay their loans. When new home
construction slows down, developers cannot sell their finished lots and are
forced to carry properties for longer than planned. If a builder or developer
does not have the capital to carry their inventory during a period of slow
sales, they are likely to default on their loans. The real estate development
industry is also undergoing structural changes. Large publicly traded
homebuilders have become a more significant factor in what had been a fragmented
industry. Because of the scale on which they operate, these homebuilders
generally need larger loans than the Bank can make. To date, these large
homebuilders have preferred to purchase finished lots from other developers
rather than to develop land themselves. A significant portion of the Bank's
development loan customers sell developed lots to these large homebuilders. The
Company cannot assure investors that cyclical trends will not cause
delinquencies in the construction and development portfolio or that structural
changes in the real estate industry will not reduce the market for its
construction and development loans.
RISKS RELATED TO PROPOSED VIRGINIA BANK SUBSIDIARY AND BRANCH EXPANSION
The Company intends to use a portion of the net proceeds from the Offerings
to charter and capitalize a new banking subsidiary in Northern Virginia into
which it will fold its existing Virginia branch and operations. It is
anticipated that chartering the new bank will require at least six months and an
initial capitalization of $6.0 to $7.0 million. Until the Company's application
for permission to organize the new bank is approved, the funds set aside by the
Company for this purpose will be invested in short-term investments. Due to
start-up costs and initial capital expenditures, new banks customarily have
losses during their initial period of operation. The new bank will be subject
to the risks inherent in any new business enterprise and there can be no
assurance that the new bank will be profitable
2
<PAGE>
after opening. Until the new bank is profitable, it will reduce the
profitability of the Company as a whole. As a result, the Company's returns on
assets and equity will also be reduced.
The Bank recently opened a new branch in Cockeysville, Maryland and the
Company may open additional branches following the Offerings. Opening new
branches will require the Company to incur significant expense. The Company
cannot assure investors that the Bank will be able to integrate any new branches
successfully into the current operations of the Bank. If new branches are not
successfully integrated, the Bank's profits will be reduced. In addition, the
Company cannot assure you that the Bank will actually experience any further
asset growth, or that the Bank will experience any favorable results if such
growth occurs.
NO PRIOR MARKET FOR THE COMMON STOCK; NO ASSURANCE OF ACTIVE AND LIQUID TRADING
MARKET
Prior to the Offerings, there has been no public market for the Common
Stock. The Company has applied for quotation of the Common Stock on the Nasdaq
National Market. In order to be approved for quotation, at least three broker-
dealers must be willing to make a market in the Common Stock. Ryan, Beck has
advised the Company that it intends to make a market in the Common Stock
following the completion of the Offerings as long as the volume of trading
activity and certain other market-making considerations justify it doing so.
While the Company hopes to obtain commitments from at least two other broker-
dealers to act as market makers, the Company has no assurance that three broker-
dealers will make a market in the Common Stock. The development of a liquid
public market depends on the participation of willing buyers and sellers, which
is not within the control of the Company or any market maker. The Company
cannot assure investors that an active and liquid trading market for the Common
Stock will develop or that, if developed, it will continue. Nor is there any
assurance that anyone purchasing shares will be able to sell them at or above
the purchase price. See "Market for the Common Stock."
SUBSTANTIAL COMPETITION IN THE FINANCIAL SERVICES INDUSTRY
The Bank faces substantial competition in all phases of its operations from
a variety of different competitors. The Bank competes for loans and deposits
with other banks and financial institutions, including many which have
substantially greater resources, name recognition and market presence than the
Bank. Many of these competitors offer services which the Bank does not offer.
The Bank seeks to compete against larger banking institutions by emphasizing its
local ownership and orientation. The Bank, however, must also compete with
other community banks which attempt to compete on the same basis. In the
specialty lending area, the Bank faces intense competition from non-bank lenders
which are not subject to the same regulatory oversight as the Bank. Because of
the high yields offered by these products, new competitors are continually
attracted to these lines of business including major companies that are able to
make substantial investments in technology and sales networks. These
competitors may seek to compete aggressively on the basis of pricing in order to
gain market share. This competition may result in a reduction in the Company's
profit margins on these loans and even lead the Company to de-emphasize certain
products or services.
RECENT STOCK MARKET VOLATILITY
The market for publicly traded stocks, including the stocks of banks and
bank holding companies, has recently been volatile with very wide price swings.
The fluctuations in trading prices may be unrelated to the operating performance
of particular companies whose shares are traded. The purchase price of the
Common Stock in the Offerings will be determined through negotiation with Ryan,
Beck, as the underwriter. After the Offerings, the trading price of the Common
Stock will be determined by the marketplace, and may be influenced by many
factors, including prevailing interest rates, investor perceptions of the
Company and the banking industry and general industry and economic conditions.
Due to possible continued market volatility and to other factors, including the
Risk Factors discussed in this Prospectus, the Company cannot assure you that,
following the Offerings, the trading price of the Common Stock will be at or
above the initial offering price. See "-- No Prior Market for the Common Stock;
No Assurance of Active and Liquid Trading Market."
3
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have depended largely on the
efforts of its President and Chief Executive Officer, David H. Wells, Jr. and
its Executive Vice President, W. Benton Knight. Neither Mr. Wells nor Mr.
Knight has an employment contract with the Company or the Bank and neither the
Company nor the Bank have key-man life insurance policies on Mr. Wells or Mr.
Knight. The loss of Mr. Wells' or Mr. Knight's services for any reason could
have a material adverse effect on the Company and the Bank.
CONTROL OF THE COMPANY
Under the Maryland General Corporation Law, two-thirds of the Company's
outstanding shares must approve any merger, consolidation or share exchange
involving the Company. Amendments to the Company's Articles of Incorporation
also require a two-thirds vote. Because of these provisions, the holders of
one-third of the Company's outstanding Common Stock would be able to prevent
most business combinations involving the Company even if the proposed business
combination was favored by a majority of the shares outstanding. The Board of
Directors currently controls over 50% of the outstanding stock and is expected
to control ____% of the Common Stock following the Offering. If the Board of
Directors voted together as a group, they would be able to prevent most
acquisitions of the Company. In addition, the Maryland General Corporation Law
restricts business combinations with stockholders who have not been approved by
the Board of Directors in advance and limits the voting rights of larger
stockholders unless their voting rights have been approved by a vote of the
stockholders. See "Description of Capital Stock -- Certain Voting
Requirements." These provisions may discourage or prevent a future takeover
attempt in which stockholders might otherwise receive a premium for their shares
over then current market prices.
GEOGRAPHIC CONCENTRATION
Substantially all of the Company's construction, development, subprime
automobile, small business and mortgage loans are to customers in Central
Maryland and Northern Virginia. The Company's growth and profitability depend
on economic conditions in these areas. Unfavorable changes in economic
conditions affecting these areas such as cutbacks in the federal and local
government workforce or downturns in the service, technology and manufacturing
industries may have an adverse impact on the Company's loan portfolio and on its
operations in general.
TECHNOLOGY RISKS AND YEAR 2000 PROBLEM
The financial services industry has undergone continual technological
change and banks are increasingly dependent on computers in their operations.
In addition, many of the products and services which their customers demand can
only be offered if a bank invests in sophisticated computers and software. The
banking industry's emphasis on technology favors larger banks which have more
resources to invest in technological improvements. In order to compete with
these larger banks, the Bank must continually evaluate and adopt these new
technologies. There can be no assurance that the Bank will successfully
implement new technologies or market these new products to its customers.
Because of its dependence on technology, the banking industry is also
vulnerable to computer programming defects, the most notorious of which is the
Year 2000 problem. The "Year 2000 Problem" refers to the inability of some
computer systems to recognize the year 2000. Many existing computer programs
and systems were originally programmed with six digit date fields that use only
two digits to identify the calendar year. These systems may not operate
properly when the Year 2000 comes. Because of the prevalence of computers in
the financial services industry and throughout the economy, there is substantial
uncertainty about the extent to which the Year 2000 Problem will affect the
industry. The Company has devoted extensive efforts to addressing the Year 2000
Problem and believes that it has complied with the directives of federal bank
regulators in this area. Although the Bank presently believes that, with
planned modifications to existing software and conversion to new software, the
Year 2000 Problem will not have a material adverse impact on the operations of
the Bank, there can be no assurance that this will be the case. The Company is
surveying its loan customers regarding their Year 2000 readiness. For a
discussion of the expected costs,
4
<PAGE>
contingency planning and other aspects of the Year 2000 problem, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Planning."
ABILITY TO MAKE DIVIDEND PAYMENTS
The Company is a legal entity separate and distinct from the Bank. Because
the Company's principal business activity is owning the Bank, the Company's
payments of dividends on the Common Stock will generally be funded from
dividends received by the Company from the Bank. Maryland law limits the
aggregate amount of cash dividends that the Bank may pay to the Company, its
sole shareholder. The Bank's ability to make dividend payments to the Company
is subject to the Bank's continuing profitable operations and there can be no
assurance that future earnings of the Bank will support sufficient dividend
payments to the Company.
GOVERNMENT REGULATIONS
The Company is subject to extensive regulation and supervision. This
regulation and supervision is primarily intended to protect depositors in the
Bank, not stockholders of the Company. The Company is subject to regulation by
the Board of Governors of the Federal Reserve System. The Bank, as a Maryland
chartered bank, is subject to supervision by the FDIC and the Division of
Financial Regulation of the Maryland Department of Labor, Licensing &
Regulation. Recently enacted, proposed and future legislation and regulations
have had, will continue to have, or may have a material effect on the business,
operations and prospects of the Company. Some of these regulations may increase
the Company's cost of doing business and place other financial institutions in a
stronger competitive position. The Company is unable to predict how its business
and earnings will be affected by any fiscal or monetary policies, or new federal
or state legislation or regulations, in the future. See "Supervision and
Regulation."
INTEREST RATE RISK
The Bank's profitability largely depends on its net interest income, which
is the difference between the interest income it receives from its interest-
earning assets and the interest it must pay on its interest-bearing liabilities.
Fluctuations in the level of interest rates may reduce the amount of loans
originated by the Bank and, thus, the amount of loan and commitment fees, as
well as the value of the Bank's investment securities and other interest-earning
assets. Moreover, variations in interest rates also can result in the flow of
funds away from depository institutions into other investments, such as stocks
and bonds.
USE OF PROCEEDS
The Company estimates that its net proceeds from the sale of the Common
Stock will be approximately $_____ million after deducting underwriting fees and
estimated offering expenses of $______ at the maximum offering price of $12.00
per share. At the minimum offering price of $10.00 per share, net proceeds
would be $____ million after deducting underwriting fees and estimated offering
expenses.
The Company intends to use approximately one-third of the net proceeds to
charter and capitalize a new bank subsidiary in Northern Virginia. The Company
intends to use the remaining two-thirds of the net proceeds to expand its
existing businesses and franchises in Maryland and to expand into other
complementary businesses. Until the net proceeds are used for these purposes,
the net proceeds may be invested in short-term debt securities or deposits.
Although the Company does not currently anticipate any significant change in
this allocation of net proceeds, the allocation may vary as necessary to respond
to changing circumstances. Accordingly, the Company's management will have
broad discretion in the application of the net proceeds.
5
<PAGE>
MARKET FOR THE COMMON STOCK
Prior to the Offerings, there has been no public market for the Common
Stock and only isolated privately negotiated sales of the Common Stock have
occurred. During the twelve months ended June 30, 1998, sales of the Common
Stock took place at prices ranging from $_____ to $_____, as adjusted for the
__-for-1 stock split which the Company effected through the payment of a stock
dividend on __________, 1998. Because of the illiquid nature of the market,
those transactions may not represent the true value of the Common Stock.
The Company has applied to have the Common Stock quoted on the Nasdaq
National Market under the symbol "KCCO." In order for the Common Stock to be
quoted on the Nasdaq National Market, at least three broker-dealers must be
willing to make a market in the Common Stock. Ryan, Beck has advised the
Company that it intends to use its best efforts to make a market in the Common
Stock and to encourage other securities firms to do the same, but it has no
obligation to do so. Making a market involves maintaining bid and asked
quotations for the Common Stock and standing ready, as principal, to buy and
sell the Common Stock in reasonable quantities at those quoted prices. There
can be no assurance that an active and liquid trading market for the Common
Stock will develop or that the Common Stock will be quoted on the Nasdaq
National Market as contemplated.
DIVIDENDS
The Company has paid semi-annual cash dividends on its Common Stock since
1988. Cash dividends declared per share during each full quarter for the last
four fiscal years and the current year to date are presented below:
<TABLE>
<CAPTION>
QUARTER ENDED 1998 1997 1996 1995 1994
------------- ------ ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
March 31 $ -- $ -- $ -- $ -- $ --
June 30 0.30 0.25 0.30 0.275 0.125
September 30 -- -- -- -- --
December 31 0.30 0.25 0.275 0.25
</TABLE>
Beginning in 1999, the Company expects to pay dividends at an annual rate
equal to $_____ per share. Dividends will be paid quarterly rather than semi-
annually. The first quarterly dividend is not expected to be declared until
the first quarter of 1999.
Dividends are declared by the Board of Directors in its sole discretion and
there can be no assurance that the Company will be legally or financially able
to make such payments. Payment of dividends may be limited by Federal and state
regulations which restrict a bank's and bank holding company's right to pay
dividends (or to make loans or advances to affiliates which could be used to pay
dividends). Generally, a bank or bank holding company is prohibited from paying
dividends unless it has sufficient net (or retained) earnings and capital as
determined by its regulators. See "Supervision and Regulation -- Regulation of
the Company -- Dividends and Distributions" and "Supervision and Regulation --
Regulation of the Bank -- Dividend Limitations."
DILUTION
Purchasers of Common Stock in the Offerings will experience immediate
dilution in net tangible book value (stockholders' equity less intangible
assets) per share from the initial public offering price. "Net tangible book
value per share" is calculated by dividing the difference between the total
amount of tangible assets and the total amount of liabilities by the number of
shares of Common Stock outstanding. At June 30, 1998, the net tangible book
value of the Common Stock was $_____ per share. Assuming the sale of _____
shares of Common Stock expected to be sold in the Community Offering and the
Public Offering, the pro forma tangible book value per share at June 30, 1998
would have been $_____ and $_____ at the minimum and maximum price per share,
respectively. This would represent an
6
<PAGE>
immediate increase in tangible book value of $_____ and $_______, respectively,
to existing stockholders and an immediate dilution to new investors of $_____
and $_____ per share.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------- -------
<S> <C> <C>
Initial public offering price per share........................... $ $
Net tangible book value per share before Offering.............
Increase per share attributable to new investors..............
------- -------
Pro forma net tangible book value per share after Offering........
------- -------
Dilution per share to new investors............................... $ $
======= =======
</TABLE>
CAPITALIZATION
The following table shows the capitalization of the Company, at June 30,
1998, on both an actual basis and as adjusted for the issuance of ______ shares
of Common Stock offered in the Offerings at the minimum and maximum prices of
$10.00 and $12.00 per share and the use of the estimated net proceeds as
described in "Use of Proceeds." Investors should read this table along with the
Company's Consolidated Financial Statements and accompanying notes which are
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------
ACTUAL AS ADJUSTED (1)
-------- -------------------------
MINIMUM MAXIMUM
------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity:
Common Stock, $1.00 par value, 20,000,000 shares authorized;
813,370 shares issued and outstanding....................... $ 813 $ $
Additional paid-in capital.................................... 786
Retained earnings............................................. 23,330
Accumulated other comprehensive income, net................... (47)
------- ------------- ---------
Total stockholders' equity............................... $24,882 $ $
======= ============= =========
Capital ratios:
Total risk-based capital ratio................................ 13.45% % %
Tier 1 risk-based capital ratio............................... 12.17
Leverage ratio................................................ 8.73
- -------------------------
</TABLE>
(1) Assumes in each case no exercise of the over-allotment option which is
expected to be granted to the Underwriter in the Public Offering. See "The
Offerings -- Public Offering."
7
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for the
Company and its subsidiaries for each of the periods indicated. Data for the
six months ended June 30, 1998 and 1997 is unaudited but includes all
adjustments (all of which are of a normal recurring nature) which management
believes are necessary for a fair statement of the results for these periods.
Certain ratio data for the six months ended June 30, 1998 and 1997 has been
annualized. The Company's results of operations for the six months ended
June 30, 1998 do not necessarily indicate what the Company's results of
operations will be for the entire fiscal year.
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- ------------ --------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net Interest Income.................. $ 9,646 $ 10,079 $ 19,875 $ 20,246 $ 18,641 $ 16,842 $ 14,950
Provision for Loan Losses............ 2,545 3,845 7,623 7,883 3,812 3,124 2,925
Noninterest Income................... 4,218 4,475 9,085 7,623 7,036 6,646 5,765
Noninterest Expense.................. 8,355 7,888 16,688 18,950 16,685 14,947 12,830
Net Income........................... 1,858 1,727 2,835 1,246 3,166 3,605 3,195
SHARE DATA:
Net Income Per Share:
Basic............................ $ 2.29 $ 2.13 $ 3.50 $ 1.54 $ 3.91 $ 4.45 $ 3.94
Diluted.......................... 2.25 2.10 3.44 1.52 3.87 4.44 3.93
Cash Dividends Declared
Per Common Share................. 0.30 0.25 0.55 0.55 0.55 0.375 0.375
Book Value per Common
Share............................ 30.59 27.26 28.62 25.31 24.29 20.31 17.61
Weighted Average Basic
Common Shares
Outstanding...................... 811,505 810,637 811,039 810,331 810,324 810,324 810,324
Weighted Average Diluted
Common Shares
Outstanding...................... 826,514 823,915 824,142 820,429 817,352 812,321 812,321
FINANCIAL CONDITION DATA:
Total Assets......................... $277,688 $258,777 $268,477 $253,038 $237,936 $203,984 $199,831
Loans Receivable, net................ 192,640 196,298 193,654 200,193 183,928 157,845 142,351
Allowance for Loan Losses
and Other Reserves (1)............. 8,300 8,386 8,024 8,254 5,658 5,267 4,362
Total Deposits....................... 243,467 228,070 235,760 226,513 212,285 182,502 181,352
Total Stockholders' Equity........... 24,882 22,114 23,168 20,509 19,685 16,456 14,273
PERFORMANCE RATIOS:
Return on Average Assets (2)......... 1.35% 1.36% 1.10% 0.51% 1.43% 1.79% 1.68%
Return on Average Equity (2)......... 15.35 16.38 12.95 6.16 17.30 23.83 24.82
Net Interest Margin (3).............. 7.35 8.42 8.11 8.78 8.90 8.85 8.27
Net Interest Spread (4).............. 6.62 7.90 7.52 8.13 8.33 8.46 7.93
Dividend Payout Ratio................ 13.10 11.74 15.71 35.71 14.07 8.43 9.52
Noninterest Income to
Total Revenues (5)................. 30.42 30.75 31.37 27.35 27.40 28.29 27.83
Noninterest Income to
Average Assets..................... 3.07 3.51 3.52 3.13 3.18 3.29 3.02
Noninterest Expense to
Average Assets..................... 6.09 6.19 6.46 7.79 7.54 7.40 6.73
Efficiency Ratio (6)................. 60.27 54.20 57.63 68.00 64.98 63.64 61.94
(table continued on following page)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- ----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL RATIOS:
Average Equity to Average
Assets............................ 8.82% 8.28% 8.48% 8.32% 8.28% 7.49% 6.75%
Leverage Ratio....................... 8.73 8.45 8.61 8.13 8.26 8.08 7.16
Total Risk-Based Capital
Ratio............................. 13.45 12.94 13.19 12.30 11.41 13.66 13.05
ASSET QUALITY RATIOS:
Allowance for Loan Losses
and Other Reserves to
Gross Loans....................... 4.13% 4.10% 3.98% 3.96% 2.98% 3.23% 2.97%
Non-performing Loans to
Gross Loans....................... 2.52 2.61 2.41 2.37 3.28 2.47 2.10
Non-Performing Assets to
Gross Loans Plus Other
Non-Performing Assets (7)......... 3.61 4.06 3.79 3.81 4.05 4.72 4.17
Allowance for Loan Losses
and Other Reserves to
Non-Performing Loans............. 163.97 157.13 165.00 166.95 90.98 130.63 141.67
Net Loan Charge-offs to
Average Loans..................... 2.47 3.64 3.88 2.67 1.93 1.60 2.25
- -------------------------
</TABLE>
(1) Includes $199,000 in non-refundable dealer reserves at June 30, 1998.
(2) Ratios for the six months ended June 30, 1998 and 1997 have been
annualized.
(3) Net interest margin is net interest income divided by average interest-
earning assets. Ratios for the six months ended June 30, 1998 and 1997
have been annualized.
(4) Net interest spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities. Ratios for the six months ended June 30, 1998 and 1997 have
been annualized.
(5) Total revenues equals net interest income plus noninterest income.
(6) Efficiency ratio equals noninterest expense divided by the sum of net
interest income and noninterest income.
(7) Non-performing assets equals non-performing loans plus other non-performing
assets.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist investors in understanding
the financial condition and results of operations of the Company. The
information contained in this section should be read along with the Consolidated
Financial Statements and accompanying Notes contained elsewhere in this
Prospectus. The data presented for the six-month periods ended June 30, 1998
and 1997, are derived from the unaudited interim financial statements of the
Company and include, in the opinion of management, all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the data for such
periods.
OVERVIEW
The Company's operating strategy has historically involved the development
of profitable niche products that offer attractive rates of return. While this
strategy entails additional credit risk, the Company believes that its
experience in these areas as well as its disciplined pricing and reserve
practices allow it to manage these risks. Currently, the Company concentrates
on five principal business lines:
. RESIDENTIAL CONSTRUCTION AND DEVELOPMENT LENDING. The Bank has
focused on residential construction and development lending since its
founding. At June 30, 1998, the total outstanding balances on the Bank's
construction and development loans approximated $67.1 million, net of loans
in process. In addition to serving Central Maryland, the Bank makes
development and construction loans in Northern Virginia through its
Leesburg office and in Delaware. Since residential construction and
development loans generally have relatively short terms and bear floating
rates of interest, they reduce the Company's exposure to the risk that
increases in market interest rates will make these loans unprofitable.
These loans are repaid as the lots or houses are sold which helps limit the
Bank's exposure to an individual borrower or project. The Company believes
that development and construction lending are areas in which its expertise
and local orientation give it an advantage over larger banks. See
"Business -- Lending Activities."
. CREDIT CARD LENDING AND OPERATIONS. At June 30, 1998, the Bank had a
$41.0 million portfolio of partially secured and unsecured credit card
loans to customers around the country and expects that credit card lending
will continue to contribute to the Company's future profitability. See
"Business --Lending Activities." Over the past several years, the high
returns on partially secured lending to subprime borrowers have attracted
many new competitors into this market. Many of these competitors have
offered credit cards to subprime borrowers on much easier terms than the
Bank and the Bank reduced the collateral requirements for its cards to
remain competitive. After experiencing declining profitability as a result
of increased origination costs and increased charge-offs, however, the Bank
de-emphasized the issuance of partially secured credit cards in favor of
processing credit cards for others. Through its Key Operations Center,
Inc. subsidiary, the Bank offers credit card processing services to a
variety of bank and non-bank partners. Using the underwriting and
servicing expertise gained from its partially secured credit card
portfolio, the Bank concentrates on servicing the subprime sector and
believes that its processing activities can provide noninterest income
without the credit risk that comes with direct lending. See "Business --
Credit Card Processing."
. SMALL BUSINESS LENDING. The Bank offers a full range of commercial
loans including term loans, lines of credit, asset-based financing and SBA
guaranteed loans. At June 30, 1998, the Company's small business loan
portfolio totaled $39.2 million. Management believes that the
consolidation in the Mid-Atlantic banking industry has created significant
opportunities for a community-oriented bank that can offer prompt and
responsive service to the small business customer. In order to reach out
to this customer base, the Bank has placed a commercial loan officer in
each of its branches. For the past two years, the Bank has been the
largest originator of SBA guaranteed loans in the SBA
10
<PAGE>
Baltimore Region. Management believes that the Bank's SBA lending expertise
gives it an additional advantage in reaching the small business borrower
who is not being served by larger banks while allowing the Bank to reduce
its credit risk through SBA guarantees. The Bank also profits from sales of
the guaranteed portion of the loan in the secondary market. See "Business
--Lending Activities."
. SUBPRIME AUTOMOBILE LENDING. The Bank began offering automobile
financing to subprime borrowers in 1988 and currently serves the subprime
automobile loan market throughout metropolitan Baltimore and Washington,
D.C. and Northern Virginia. At June 30, 1998, the Company's subprime
automobile loan portfolio totaled $23.4 million. The Bank mainly
originates its automobile loans through automobile dealers who take the
application from the customer and send it to the Bank for approval. The
Bank competes in this area through marketing and responsive service while
using disciplined pricing and underwriting procedures to control credit
risk. The Bank is evaluating an extension of its business into automobile
leasing to increase financing opportunities for the Bank. See "Business --
Lending Activities."
. MORTGAGE BANKING. The Bank originates FHA/VA and conventional loans
for resale in the secondary market. For the six months ended June 30,
1998, the Company originated $53.3 million in mortgage loans held for sale.
The Bank seeks to minimize credit and interest rate risk while maximizing
profitability by promptly selling loans on an individual loan basis. The
Bank does not service these loans after the sale. See "Business -- Lending
Activities."
Since 1995, competition and the tightening of credit standards by the
Company to control the level of net charge-offs have reduced the balances in the
partially secured credit card and subprime automobile loans while balances in
small business and residential development and construction lending have
increased significantly. Although this shift and the general decline in market
interest rates have reduced portfolio yields and narrowed the Company's net
interest margin, the Company has continued to maintain higher than peer margins
and returns on assets and equity. The Company's net interest margin for the six
months ended June 30, 1998 was 7.35% (annualized) compared to 8.42% (annualized)
for the six months ended June 30, 1997. Net interest margins for the years
ended December 31, 1997, 1996 and 1995 were 8.11%, 8.78% and 8.90%,
respectively. Annualized returns on average assets for the six months ended
June 30, 1998 and 1997 were 1.35% and 1.36%, respectively, and for the years
ended December 31, 1997, 1996 and 1995 were 1.10%, 0.51% and 1.43%,
respectively. Annualized returns on average equity for the six months ended
June 30, 1998 and 1997 were 15.35% and 16.38%, respectively. For the years
ended December 31, 1997, 1996 and 1995, the Company's returns on average equity
were 12.95%, 6.16% and 17.30%, respectively. The Company's returns on average
assets and average equity for the year ended December 31, 1996 were adversely
affected by a one-time special assessment imposed on all SAIF-insured
institutions. The special assessment resulted in an after-tax charge to the
Company of $775,000. Without this special assessment, the Company's returns on
average assets and average equity would have been 0.83% and 9.98%, respectively
for the year ended December 31, 1996.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997 AND
1996
At June 30, 1998, the Company's total assets were $277.7 million, a $9.2
million, or 3.4%, increase from $268.5 million at December 31, 1997, and a $24.7
million, or 9.7% increase from $253.0 million at December 31, 1996. The
Company's asset growth since the end of the last fiscal year was due mainly to a
$6.8 million, or 143.1%, increase in mortgage loans held for sale to $11.6
million from $4.8 million. The Company has substantially increased its mortgage
banking activities during the most recent six months. For the six months ended
June 30, 1998, the Company originated $53.3 million in mortgage loans held for
sale and sold $46.5 million in such loans. This compares to originations of
$17.8 million in the 1997 six-month period and sales of $15.2 million in such
loans in the 1997 period. Also contributing to the increase in assets was a $4.2
million increase in cash on hand and due from banks and short-term investments
as the Company increased its liquidity for funding anticipated loan originations
and construction and development loan draws.
11
<PAGE>
The increase in assets between December 31, 1997 and December 31, 1996
occurred primarily in the Company's portfolio of investment securities available
for sale which increased by $11.0 million, or 74.4%, to $25.8 million at
December 31, 1997 from $14.8 million at December 31, 1996. The Company
maintains the investment securities portfolio primarily for liquidity purposes.
Short-term investments increased $7.9 million, or 110.9%, to $15.0 million at
December 31, 1997 from $7.1 million at December 31, 1996. The increase in
investment securities available for sale and short-term investments between the
periods reflects anticipated funding needs as well as the increased level of
liquid assets required for the Bank to operate as a state non-member bank.
Over the past two fiscal years and interim period, the Company's loan
portfolio has declined from $200.2 million at December 31, 1996 to $193.7
million at December 31, 1997 and $192.6 million at June 30, 1998. The decline
in the loan portfolio is due to a reduction in the partially secured credit card
portfolio. The partially secured credit card portfolio has declined from $43.8
million at December 31, 1996 to $36.0 million at December 31, 1997 and $31.0
million at June 30, 1998. Also contributing to the decline in the loan
portfolio was a decline in indirect automobile loans from a total of $29.9
million at December 31, 1996 to $24.3 million at December 31, 1997 and to $23.4
million at June 30, 1998. This decline was a direct result of tightening of the
Company's credit standards in October 1996 which has reduced new loan
originations. During this period, the Company focused its portfolio lending
activities on residential construction and development lending. The Company's
portfolio of these loans grew from $54.4 million at December 31, 1996 to $60.6
million at December 31, 1997 and $67.1 million at June 30, 1998. The Company
has also devoted a significant portion of its portfolio lending activities to
small business lending. During the years ended December 31, 1996 and 1997 and
the six months ended June 30, 1998, the Company originated $13.4 million, $14.6
million and $3.3 million, respectively, in these loans.
The Company funded its asset growth from several sources. Since December
31, 1996, deposits have grown from $226.5 million to $235.8 million at December
31, 1997 and $243.5 million at June 30, 1998. The bulk of deposit growth has
been in certificates which have grown from $149.1 million at December 31, 1996
to $162.7 million at December 31, 1997 and $174.2 million at June 30, 1998. In
addition, during the six months ended June 30, 1998, the Company obtained $2.0
million in advances from the FHLB of Atlanta to match fund a long-term
commercial loan.
Stockholders' equity grew by $2.7 million, or 13.0%, from $20.5 million at
December 31, 1996 to $23.2 million at December 31, 1997 and grew by an
additional $1.7 million, or 7.4%, to $24.9 million during the six months ended
June 30, 1998. The growth in stockholders' equity was due to the growth in
retained earnings which rose $2.4 million, or 12.4%, between December 31, 1996
and 1997 and rose $1.6 million, or 7.4%, during the six months ended June 30,
1998. Stockholders' equity as a percentage of total assets was 8.11% at
December 31, 1996, 8.63% at December 31, 1997 and 8.96% at June 30, 1998.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1997 AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
GENERAL. For the six months ended June 30, 1998, the Company's earnings
rose to $1.9 million ($2.25 per diluted share) compared to $1.7 million ($2.10
per diluted share) for the six months ended June 30, 1997. The improvement in
earnings was primarily attributable to a lower provision for loan losses which
more than offset declines due to decreases in net interest income, higher
noninterest expenses and lower noninterest income.
For the year ended December 31, 1997, the Company reported net income of
$2.8 million ($3.44 per diluted share) compared to $1.2 million ($1.52 per
diluted share) for the year ended December 31, 1996 and $3.2 million ($3.87 per
diluted share) for the year ended December 31, 1995. Net income for 1996 was
adversely affected by a one-time nonrecurring after-tax expense of $775,000 to
help recapitalize SAIF. Without this one-time expense, net income would have
been $2.0 million ($2.46 per diluted share). The improvement in net income
during the 1997 fiscal year as compared to fiscal year 1996 was principally the
result of a reduction in noninterest expense due to lower federal deposit
insurance premiums and advertising expense relating to the Bank's de-emphasis on
the originating of partially secured credit card loans. The decline in net
income between fiscal years 1996 and 1995 was principally due to a higher
12
<PAGE>
provision for loan losses and an increase in noninterest expense resulting from
an increase in advertising expense related to the Bank's partially secured
credit card lending program and the one-time SAIF special assessment during
1996.
NET INTEREST INCOME. The primary component of the Company's net income is
its net interest income. Net interest income is the difference between the
income earned on interest-earning assets and the interest paid on the deposits
and borrowings used to fund them. Net interest income is determined by the
spread between the yields earned on the Company's interest-earning assets and
the rates paid on interest-bearing liabilities as well as the relative amounts
of such assets and liabilities. Net interest income, divided by average
interest-earning assets, is the Company's net interest margin.
13
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rates (change in
rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by changes in volume) have been allocated between changes in volume
and changes in rate in proportion to the absolute values of each.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------- ----------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996 1996 VS. 1995
-------------------------------- ----------------------------- --------------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------- NET ------------------ NET ------------------- NET
AVERAGE AVERAGE INCREASE/ AVERAGE AVERAGE INCREASE/ AVERAGE AVERAGE INCREASE/
VOLUME RATE DECREASE VOLUME RATE DECREASE VOLUME RATE DECREASE
------------------- ----------- ------- -------- -------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans (net of unearned
income)
Permanent one-to-
four-family
residential...... $ (81) $(124) $(205) $ (142) $(185) $ (327) $ (688) $ (44) $ (732)
Residential
construction and
development...... 598 5 603 114 308 422 348 (590) (242)
Commercial loans...... 73 39 112 1,200 (448) 752 1,508 (301) 1,207
Consumer:
Indirect automobile (451) (6) (457) (339) (303) (642) 2,200 67 2,267
Other consumer
loans............. 7 57 64 (43) 6 (37) (93) (146) (239)
Credit card........... (725) (61) (786) (501) (154) (655) 671 (898) (227)
Loans held for sale... 362 1 363 59 (4) 55 67 24 91
Mortgage-backed
securities
available for sale...... (56) 15 (41) (105) (87) (192) (196) (86) (282)
Interest-bearing bank
balances................ 203 (40) 163 87 3 90 185 (62) 123
Treasury notes and
agencies held
to maturity............ 310 (11) 299 641 91 732 23 (46) (23)
Other earning assets.... 1 -- 1 3 1 4 7 1 8
----- ----- ----- ------ ----- ------ ------ ------- ------
Total interest
income............ 241 (125) 116 974 (772) 202 4,032 (2,081) 1,951
----- ----- ----- ------ ----- ------ ------ ------- ------
Interest Expense:
Savings................. 2 (7) (5) (26) (12) (38) (11) (80) (91)
Interest-bearing demand
and money
market accounts....... (10) 4 (6) 4 (19) (15) (23) (107) (130)
Certificates of deposit. 518 53 571 1,269 (189) 1,080 1,067 46 1,113
Deposits
collateralizing credit
card
loans................. (42) 3 (39) (148) (375) (523) (80) (453) (533)
Other borrowed funds.... 26 2 28 57 12 69 (13) -- (13)
----- ----- ----- ------ ----- ------ ------ ------- ------
Total interest
expense........... 494 55 549 1,156 (583) 573 940 (594) 346
----- ----- ----- ------ ----- ------ ------ ------- ------
Change in net interest
income $(253) $(180) $(433) $ (182) $(189) $ (371) $3,092 $(1,487) $1,605
===== ===== ===== ====== ===== ====== ====== ======= ======
</TABLE>
14
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth the average balances of the Company's assets
and liabilities and includes the average yield on interest-earning assets and
average cost of interest-bearing liabilities for the periods indicated. These
average yields and costs are derived by dividing each category of income or
expense by the average balance of the related assets or liabilities,
respectively, for the periods presented. Interim period data has been
annualized. Average balances are derived from month-end balances. Management
does not believe that the use of month-end balances instead of average daily
balances has caused any material difference in the information presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans (net of unearned income)
(1):
Permanent one- to four-family
residential................... $29,559 $ 1,267 8.57% $ 31,352 $ 1,472 9.39%
Residential construction and
development................... 63,680 3,883 12.20 53,857 3,280 12.18
Commercial loans............... 37,903 2,259 11.92 36,677 2,147 11.71
Consumer:
Indirect automobile......... 23,650 2,292 19.38 28,312 2,749 19.42
Other consumer loans........ 2,471 220 17.81 2,361 156 13.21
Credit card.................... 42,864 3,632 16.95 51,404 4,418 17.19
------- ------ ------- ------
Total......................... 200,127 13,553 13.54 203,963 14,222 13.95
------- ------ ------- ------
Loans held for sale................ 12,293 430 7.00 1,932 67 6.94
Mortgage-backed securities
available for sale................ 1,423 31 4.36 4,139 72 3.48
Interest-bearing bank balances..... 19,079 434 4.55 10,323 271 5.25
Treasury notes and agencies held
to maturities..................... 28,566 859 6.01 18,259 560 6.13
Other earning assets............... 816 29 7.11 779 28 7.19
------- ------ ------- ------
Total earning assets.......... 262,304 15,336 11.69 239,395 15,220 12.72
------- ------ ------- ------
Allowance for loan losses.......... (8,103) (8,259)
Other assets....................... 20,223 23,590
------- -------
Total assets.................. $274,424 254,726
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Deposits
Savings..................... $14,923 $ 222 2.98% $ 14,779 $ 227 3.07%
Interest-bearing demand and
money market accounts...... 19,436 269 2.77 20,165 275 2.73
Certificates of deposit..... 167,039 4,987 5.97 149,780 4,416 5.90
Deposits collateralizing
credit card loans.......... 21,921 151 1.38 27,882 190 1.36
------- ------ ------- ------
Total interest-bearing
deposits................. 223,319 5,629 5.04 212,606 5,108 4.81
Other borrowed funds............ 1,186 61 10.29 671 33 9.84
------- ------ ------- ------
Total interest-bearing
liabilities.............. 224,505 5,690 5.07 213,277 5,141 4.82
Demand deposits.................... 14,454 14,242
Other liabilities.................. 11,248 6,125
Stockholders' equity............... 24,217 21,082
------- -------
Total liabilities and
stockholders' equity......... $274,424 $ 254,726
======= =======
Interest rate spread (average
yield less average rate).......... 6.62% 7.90%
====== ======
Net interest income (interest
income less interest expense)..... $9,646 $10,079
====== ======
Net interest margin (net interest
income/total earning
assets).......................... 7.35% 8.42%
====== ======
</TABLE>
- ----------
(1) Includes nonaccrual loans.
15
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ------------------------------ ----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans (net of unearned income)(1):
Permanent one- to four-family
residential................... $ 30,612 $ 2,750 8.98% $ 32,138 $ 3,077 9.57% $ 39,364 $ 3,809 9.68%
Residential construction and
development................... 55,307 6,820 12.33 54,344 6,398 11.77 51,551 6,640 12.88
Commercial loans............... 37,879 4,536 11.97 28,150 3,784 13.44 17,128 2,577 15.05
Consumer:
Indirect automobile......... 26,838 5,212 19.42 28,540 5,854 20.51 17,814 3,587 20.14
Other consumer loans........ 2,419 335 13.85 2,727 372 13.64 3,287 611 18.59
Credit card.................... 49,146 8,441 17.18 52,046 9,096 17.48 48,405 9,323 19.26
-------- ------- -------- -------- -------- -------
Total.......................... 202,201 28,094 13.89 197,945 28,581 14.44 177,549 26,547 14.95
-------- ------- -------- -------- -------- -------
Loans held for sale................ 3,036 222 7.31 2,233 167 7.48 1,277 76 5.95
Mortgage-backed securities
available for sale................ 3,912 111 2.84 6,863 303 4.41 11,063 585 5.29
Interest-bearing bank balances..... 14,524 727 5.01 12,763 637 4.99 9,163 514 5.61
Treasury notes and agencies held
to maturities..................... 20,659 1,276 6.18 10,117 544 5.38 9,706 567 5.84
Other earning assets............... 782 56 7.16 739 52 7.04 644 44 6.83
-------- ------- -------- -------- -------- -------
Total earning assets.......... 245,114 30,486 12.44 230,660 30,284 13.13 209,402 28,333 13.53
------- -------- -------
Allowance for loan losses.......... (8,222) (6,475) (5,092)
Other assets....................... 21,392 19,016 16,831
-------- -------- --------
Total assets.................. $258,284 $243,201 $221,141
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Deposits
Savings...................... $ 14,739 $ 457 3.10% $ 15,585 $ 495 3.18% $ 15,896 586 3.69%
Interest-bearing demand and
money market
accounts................... 20,231 561 2.77 20,094 576 2.87 20,795 706 3.40
Certificates of deposit...... 153,538 9,153 5.96 132,252 8,073 6.10 114,809 6,960 6.06
Deposits collateralizing
credit card loans........... 26,243 359 1.37 32,574 882 2.71 34,629 1,415 4.09
-------- ------- -------- -------- -------- -------
Total interest-bearing
deposits................ 214,751 10,530 4.90 200,505 10,026 5.00 186,129 9,667 5.19
Other borrowed funds.......... 823 81 9.84 200 12 6.00 423 25 5.91
-------- ------- -------- -------- -------- -------
Total interest-bearing
liabilities.............. 215,574 10,611 4.92 200,705 10,038 5.00 186,552 9,692 5.20
Demand deposits.................... 14,104 15,835 9,905
Other liabilities.................. 6,709 6,417 6,383
Stockholders' equity............... 21,897 20,244 18,301
-------- -------- --------
Total liabilities and
stockholders' equity......... $258,284 $243,201 $221,141
======== ======== ========
Interest rate spread (average
yield less average rate).......... 7.52% 8.13% 8.33%
==== ==== ====
Net interest income (interest
income less interest
expense)........................ $19,875 $ 20,246 $18,641
======= ======== =======
Net interest margin (net interest
income/total earning
assets).......................... 8.11% 8.78% 8.90%
==== ==== ====
- ----------
</TABLE>
(1) Includes nonaccrual loans.
16
<PAGE>
The Company's net interest income for the six months ended June 30, 1998
was $9.6 million compared to $10.1 million during the six months ended June 30,
1997, a decline of $433,000, or 4.3%. The reduction in the Company's net
interest income was driven by a $549,000, or 10.7%, increase in interest expense
which offset a $116,000, or 0.8% increase in interest income. Average loans
outstanding decreased by $3.8 million, or 1.9%, between the periods and the
average yield declined to 13.54% during the six months ended June 30, 1998
compared to a 13.95% yield during the six months ended June 30, 1997. This 41
basis point reduction in yield was primarily due to a $8.5 million, or 16.6%,
decline in average credit card outstandings to $42.9 million with a 16.95%
average yield for the 1998 period from $51.4 million with a 17.19% average yield
for the 1997 period. The Company also experienced a $4.7 million, or 16.5%,
decline in average indirect automobile loans to $23.7 million with a 19.38%
yield for the 1998 period from $28.3 million with a 19.42% average yield for the
1997 period. By contrast, the increase in loan volume consisted of a $9.8
million or 18.2% increase in residential construction and development loans, to
$63.7 million with a yield of 12.20% during the 1998 period from $53.9 million
with an average yield of 12.18% during the 1997 period. The cost of interest-
bearing liabilities increased to 5.07% during the 1998 period from 4.81% during
the 1997 period primarily as a result of an increase in certificates of deposit
to $167.0 million at an average cost of 5.97% during the 1998 period from $149.8
million at an average cost of 5.90% during the 1997 period and a reduction of
$6.0 million in deposits collateralizing credit card loans at an average cost of
1.38% during the 1998 period. As a result of these factors, the Company's net
interest margin decreased from an annualized 8.42% during the 1997 period to an
annualized 7.35% during the six months ended June 30, 1998. An increase in
average mortgage loans held for sale of $10.4 million with an average yield of
7.00% during the 1998 period along with an increase of $8.8 million in interest-
bearing bank balances and an increase of $10.3 million in treasury notes and
agencies held to maturity contributed to a $22.9 million increase in interest-
earning assets to $262.3 million for the 1998 period from $239.4 million for the
1997 period.
Net interest income for the year ended December 31, 1997 totaled $19.9
million, a $371,000, or 1.8%, decrease from the year ended December 31, 1996.
The decline in net interest income reflects an increase in interest expense
attributable to an increase in funding from certificates of deposit which helped
increase overall interest expense by $573,000, or 5.70%, and offset a $202,000,
or 0.7%, increase in interest income. The $6.3 million, or 19.4%, decrease in
average deposits collateralizing credit card loans during the period contributed
to the increased use of certificates for funding purposes. As partially secured
credit card loans decline, the deposits collateralizing such loans are expected
to also decline. Since the Bank pays lower rates on these deposits than on its
other deposits, the Bank's cost of funds is expected to increase. The average
volume of certificates of deposit increased $21.3 million, or 16.1%, to $153.5
million primarily as the result of deposits from the Bank's branch offices in
Eldersburg and Leesburg which opened in 1996. Although the average volume of
interest-earning assets increased by $14.5 million, or 6.3% between the periods,
a significant portion of this increase ($10.5 million) occurred in the
investment securities portfolio which has a lower yield than the loan portfolio.
In addition, yields on the loan portfolio declined by 55 basis points putting
additional pressure on the Company's net interest margin which declined to 8.11%
during 1997 from 8.78% during 1996. The decline in portfolio yields was due to a
decrease of $2.9 million, or 5.6%, to $49.1 million in credit card loans with an
average yield of 17.18% during 1997 and a decrease of $1.7 million, or 6.0%, to
$26.8 million in indirect automobile loans with an average yield of 19.42%
during 1997. Average commercial loans grew by $9.7 million or 34.6% to $37.9
million in 1997. However, the average yield on commercial loans decreased to
11.97% in 1997 from 13.44% in 1996 primarily as a result of reduced accretion of
discounts on purchased SBA loans.
Net interest income for 1996 increased $1.6 million to $20.2 million, or
8.6%, over 1995 as interest income increased by $2.0 million, or 6.9%, compared
to a $346,000, or 3.6%, increase in interest expense. The increase in interest
income was principally the result of growth in the average volume of loans which
increased $20.4 million, or 11.5%, to $197.9 million during 1996. Commercial
loans grew by $11.0 million, or 64.4%, to $28.2 million and indirect automobile
loans grew by $10.7 million or 60.2% to $28.5 million during 1996. Credit card
loans grew by $3.6 million, or 7.5%, to $52.0 million during 1996. Partially
offsetting these increases was a $7.2 million, or 18.4%, decrease to $32.1
million in residential mortgage loans. This increase was partially offset by a
51 basis point decline in the yield on the loan portfolio, due to lower rates
caused by competitive pressures in the Company's credit card loans and reduced
accretion of the discount on purchased SBA loans. The increase in interest
expense was driven by a $14.2 million, or 7.7%, increase in the volume of
interest-bearing liabilities which was moderated by a 20 basis point decline in
the rate
17
<PAGE>
paid on such liabilities primarily as a result of a reduction in the average
rate paid on deposits collateralizing credit card loans to 2.71% in 1996 from
4.09% in 1995. As a result of these factors, the Company's net interest margin
for 1996 eased to 8.78% from 8.90% in the prior year.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses for the
six months ended June 30, 1998 was $2.5 million compared to $3.8 million in the
prior period. For the year ended December 31, 1997, the Company provided $7.6
million for loans losses compared to $7.9 million and $3.8 million in provisions
during the years ended December 31, 1996 and 1995. The Company charges
provisions against income in an amount determined by management to be sufficient
to maintain the allowance for loan losses at an amount deemed adequate for the
risks inherent in the loan portfolio. During 1996 and 1997, loan loss
provisions were increased in response to increased charge-offs and delinquencies
in the Company's partially secured credit card and automobile loan portfolios.
These trends, however, reversed in late 1997, due to tightened underwriting
standards and lower balances in these portfolios, leading to lower provisions in
1998. See "Business -- Non-Performing Assets and Allowance for Loan Losses."
NONINTEREST INCOME. The Company has developed various sources of fee
income to supplement its net interest income. The following table sets forth
the Company's noninterest income for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
------------------ --------------------------------
1998 1997 1997 1996 1995
------ ---------- ---------- ------------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service fees on deposits...................... $ 239 $ 178 $ 408 $ 323 $ 300
Credit card processing income................. 675 140 316 52 108
Credit card fees, service charges and
related income............................. 2,514 3,212 6,191 5,700 5,780
Gain on sale of SBA loans..................... 238 237 544 483 75
Gain on sale of mortgage loans held for sale.. 347 299 756 322 85
Other operating income........................ 205 409 870 743 688
------ ------ ------ ------ ------
Total noninterest income............ $4,218 $4,475 $9,085 $7,623 $7,036
====== ====== ====== ====== ======
</TABLE>
Noninterest income for the six months ended June 30, 1998 declined
$257,000, or 5.7%, compared to the prior year due mainly to a $698,000, or
21.7%, decrease in credit card fees, service charges and related income and a
$204,000, or 50.0%, reduction in other operating income. The declines in these
categories of noninterest income more than offset a $535,000, or 382.1%, rise in
credit card processing income. The declines in credit card fees, service
charges and related income (which includes annual fees, interchange fees,
premiums on credit life insurance and late charges) and the increase in
processing income reflect the Company's change in emphasis from credit card
issuance to credit card processing.
For the year ended December 31, 1997, the Company reported noninterest
income of $9.1 million, an increase of $1.5 million, or 19.2%, over the $7.6
million in noninterest income reported during the year ended December 31, 1996.
The increase in noninterest income during the 1997 fiscal year is primarily
attributable to a $491,000, or 8.6%, increase in credit card fees, service
charges and related income and a $434,000, or 134.8%, increase in gains on sales
on mortgage loans held for sale. The increase in credit card fees, service
charges and related income was due primarily to increased cardholder activity
while the increase in gains on sales of mortgage loans reflects the Company's
increased mortgage banking activity in the more favorable interest rate
environment of 1997. The Company also experienced a $264,000, or 507.7%
increase in credit card processing income as the Company began focusing on this
activity as an alternative to credit card issuance.
Noninterest income for 1996 increased by $587,000, or 8.3%, over the prior
year as the result of increases in gains on sales of SBA and mortgage loans.
Gain on sales of SBA loans increased $408,000, or 544.0%, due to a
18
<PAGE>
substantial increase in SBA loan originations. The Company generally sells the
guaranteed portion of its SBA loans. Gain on sales of mortgage loans increased
$237,000, or 278.8%, as the Company significantly expanded its mortgage banking
activities during the year.
NONINTEREST EXPENSE. The following table sets forth the Company's
noninterest expense for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
---------------- -----------------------------
1998 1997 1997 1996 1995
------ ------- ------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits.............. $3,653 $3,340 $ 6,952 $ 6,514 $ 6,473
Occupancy, (net)............................ 787 764 1,545 1,450 1,200
Professional services....................... 998 589 1,494 1,092 864
Credit card related expenses................ 937 1,197 2,584 2,443 2,220
Data processing............................. 224 210 402 359 345
Advertising................................. 190 511 733 2,618 1,710
Deposit insurance premiums.................. 80 18 136 1,818 457
Loss on sale of real estate and investment
securities............................... 84 69 443 44 64
Provision for REO losses.................... 45 -- 64 30 600
Other....................................... 1,357 1,190 2,335 2,582 2,752
------ ------ ------- ------- -------
Total noninterest expense......... $8,355 $7,888 $16,688 $18,950 $16,685
====== ====== ======= ======= =======
</TABLE>
For the six months ended June 30, 1998, noninterest expense increased
$467,000, or 5.9%, compared to the prior year period primarily due to a
$409,000, or 69.4%, increase in professional services expense and a $313,000,
or 9.4%, increase in salaries and employee benefits expense. The increase in
professional services expense includes approximately $200,000 in increased legal
fees attributable to a legal challenge to the use of the Bank's name as well as
other increased professional service fees related to the expansion of the Bank's
operations. The increase in salaries and benefits expense was attributable to
increased staffing in the lending area. Noninterest expense was also affected
by a $167,000, or 14.0%, increase in other noninterest expense which includes
increases in a variety of miscellaneous expense categories. Also contributing
to the increase in noninterest expense was a $62,000, or 344.4%, increase in
federal deposit insurance premiums. Deposit insurance expense was reduced in
the prior year period by a credit for the overpayment of premiums during the
fourth quarter of 1996. The increase in these expense categories were partially
offset by $321,000, or 62.8%, decrease in advertising expense and a $260,000, or
21.7%, decline in credit card related expenses. Credit card related expenses
consist of a variety of expenses attributable to credit card operations such as
postage, equipment, embossing, etc. The declines in both of these expense
categories were related to the Company's decision to de-emphasize partially
secured credit card issuance which had required significant marketing expense.
Total noninterest expenses are also expected to increase in future periods due
to chartering and operating the Virginia bank, future branching, product
expansion and the increased cost of operating as a public company.
Total noninterest expense declined $2.3 million, or 11.9%, to $16.7 million
for the year ended December 31, 1997 compared to $19.0 million for the prior
year. The decline in noninterest expense was primarily attributable to a $1.9
million, or 72.0%, reduction in advertising expense and a $1.7 million, or 92.5%
decline in premiums for federal deposit insurance. The declines in these
expense categories were more than sufficient to offset a $438,000, or 6.7%,
increase in salaries and employee benefit expense, a $402,000, or 36.8%,
increase in professional services expense, a $399,000, or 906.8%, increase in
loss on sale of real estate and investment securities and a $141,000, or 5.8%,
increase in credit card related expense. Advertising expense fell to $733,000
compared to $2.6 million during 1996 as the result of the reduced costs
resulting from the Company's decision to de-emphasize the origination of
partially secured credit card loans. Federal deposit insurance expense declined
to $136,000 during 1997 compared to $1.8 million during 1996. The lower deposit
insurance premium during 1997 was attributable to the imposition of a one-time
special assessment of $1.3 million on the Bank during 1996. Like all SAIF-
insured institutions, the Bank was required to pay a special
19
<PAGE>
assessment to the FDIC to help recapitalize the SAIF. As a result of the SAIF
recapitalization, the Bank's deposit insurance assessment rate declined from 23
basis points during 1996 to 6.4 basis points during 1997. Salaries and employee
benefit expense for 1997 totaled $7.0 million compared to $6.5 million during
1996, reflecting increased staffing in the Company's lending operations.
Professional services expense increased to $1.5 million for 1997 compared to
$1.1 million in 1996 due to increased expense for outside collections and legal
services. The loss on real estate and investment securities for 1997 was
$443,000 compared to $44,000 in 1996. Approximately $256,000 of the loss on
investment securities was recognized when management established a plan to sell
certain mutual funds included in investments available for sale. Other
noninterest expense for 1997 was $2.3 million compared to $2.6 million for 1996.
The decrease in other expense reflects decreases in a variety of other expense
items.
Noninterest expense for the year ended December 31, 1996 increased $2.3
million, or 13.6%, over the prior year principally due to a $1.4 million, or
297.8%, increase in federal deposit insurance premiums attributable to the
special assessment described above. Also contributing to the increase in
noninterest expense was a $908,000, or 53.1%, increase in advertising expense
related primarily to the Company's credit card marketing efforts, a $250,000, or
20.8%, increase in occupancy expense due to the opening of three new branch
offices, a $228,000, or 26.4%, increase in professional services expense due to
legal and collection expenses, and a $223,000, or 10.0%, increase in credit card
related expense due to higher card volumes. The increases in these expense
categories offset a $170,000, or 6.2%, decrease in other expense and a $570,000
decrease in provisions for loan losses on other real estate owned. During 1995,
the Company made $600,000 in provisions for REO losses.
INCOME TAXES. The Company provided $1.1 million for income taxes in both
the six months ended June 30, 1998 and 1997 despite higher net income during the
1998 period. The proportionately lower income tax expense during 1998 was due
to the recognition of tax benefits related to the Company's investments in
federal agency securities that are exempt from state taxation. The Company
provided $1.8 million for income taxes during 1997 compared to a $210,000 tax
benefit during 1996 and a $2.0 million expense during 1995. The tax benefit
recorded during 1996 was attributable to the recapture of approximately $700,000
in provisions for deferred taxes related to pre-1987 bad debt tax provisions.
The Company determined that these provisions were no longer required after
enactment of the Tax Reform Act of 1996 which eliminated the requirement for
recapture into income of pre-1987 excess bad debt reserves upon a conversion
from a thrift charter.
SENSITIVITY TO MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
monitors and manages its inherent risk exposure.
The Company's profitability is affected by fluctuations in interest rates.
A sudden and sustained change in interest rates may adversely impact the
Company's earnings to the extent that the yields on interest-sensitive assets
and interest-sensitive liabilities do not change at the same speed, to the same
extent, or on the same basis. The Company monitors the impact of changes in
interest rates between assets and liabilities through the use of a model which
generates estimates of the change in the Company's market value of its portfolio
equity ("MVPE") over a range of interest rate scenarios. MVPE is the computed
discounted cash flows, adjusted for amortization, prepayments and decay factors,
of the Bank's assets, liabilities and off-balance-sheet-contracts. The base
MVPE is shocked through +400 basis points to estimate the Bank's sensitivity to
-
rate exposure. The following tables sets for the Bank's MVPE sensitivity
through a +400 basis points rate shock in terms of both dollar and percent
-
change from base MVPE at June 30, 1998.
20
<PAGE>
<TABLE>
<CAPTION>
MARKET VALUE OF PORTFOLIO EQUITY
CHANGE IN INTEREST RATES ----------------------------------------
IN BASIS POINTS (RATE SHOCK) DOLLAR AMOUNT PERCENT CHANGE FROM BASE
- ------------------------------ ------------- ------------------------
(IN THOUSANDS)
<S> <C> <C>
+ 400....................... $44,605 14.64%
+ 300....................... 43,384 11.50
+ 200....................... 42,163 8.36
+ 100....................... 40,536 4.18
Base........................ 38,909 0.00
- 100....................... 37,738 (3.01)
- 200....................... 36,567 (6.02)
- 300....................... 35,331 (9.20)
- 400 34,094 (12.37)
</TABLE>
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling requires the making of certain
assumptions which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. Accordingly, although the
MVPE measurements provide an indication of the Company's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Company's MVPE and will differ from actual results.
YEAR 2000 PLANNING
The "Year 2000 Problem" refers to the inability of some computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit date fields that used only two digits to
identify the calendar year. With the impending millennium, these programs and
computers may recognize "00" as the year 1900 rather than the year 2000.
Like most financial service providers, the Bank and its operations may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware, and equipment both within and outside the
Bank's direct control and with which the Bank electronically or operationally
interfaces (e.g. third party vendors providing data processing, information
system management, maintenance of computer systems, and credit bureau
information) are likely to be affected by this problem. If computer systems are
not adequately changed to identify the Year 2000, many computer applications
could fail or create erroneous results. As a result, many calculations which
rely on the date field information, such as interest, payment or due dates and
other operating functions, will generate results which could be significantly
misstated, and the Bank would experience a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
In addition, equipment such as telephones, copiers, vaults and elevators
may be controlled by "embedded" computer chips which may also be affected by the
Year 2000 problem. When the Year 2000 arrives, systems, including some of those
with embedded chips, may not work properly because of the way they store date
information. They may not be able to deal with the date 01/01/00, and may not
be able to deal with operational "cycles" such as "do X every 100 days." Thus,
even noninformation technology systems may affect the normal operations of the
Bank upon the arrival of the Year 2000.
Under certain circumstances, failure to adequately address the Year 2000
Problem could adversely affect the viability of the Bank's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
the Bank's products, services and competitive condition.
21
<PAGE>
The Company has been assessing possible effects of the Year 2000 problem in
connection with its technology investments and operations. A Year 2000 plan has
been approved by the board of directors and a management committee has been
examining Year 2000 issues for the past 18 months. Management does not expect
the cost of addressing the Year 2000 issues to exceed $200,000.
The committee has reviewed all of the Company's internal hardware and
software and assessed its outside vendors and is taking appropriate steps to
ensure that these systems and vendors are Year 2000 compliant. The Company has
replaced a portion of the computers used by the Bank and is hiring consultants
for Year 2000 review and contingency planning. The Company and the Bank have
also undergone examinations by state and federal banking regulators to assess
their Year 2000 readiness and received satisfactory ratings.
The Company relies on separate outside data processors for the Bank and for
its Key Operations credit card processing subsidiary. The Company has done
compliance testing with both data processors. Management is preparing a written
assessment of the Bank's data processor. Key Operations will begin converting
to a new data processor in the fall of 1998. The Company has tested all other
systems material to its operations and believes that they are now Year 2000
compliant. The Company is in the process of contacting its small business loan
customers to determine their Year 2000 readiness. The Company is also in the
process of developing a contingency plan.
The Year 2000 problem creates risk for the Company from unforeseen problems
in its own computer systems and from third parties. Such failures of the
Company and/or third parties' computer systems could have a material impact on
the Company's ability to conduct business.
LIQUIDITY AND CAPITAL RESOURCES
The principal business activity of the Company is the Bank. The Company
also engages in limited lending activities funded with borrowings. The
Company's principal sources of liquidity are cash on hand and dividends received
from the Bank. The Bank is subject to various regulatory restrictions on the
payment of dividends.
The Bank's principal sources of funds for investments and operations are
net income, deposits from its primary market area, principal and interest
payments on loans, interest received on investment securities and proceeds from
maturing investment securities. Its principal funding commitments are for the
origination or purchase of loans and the payment of maturing deposits. Deposits
are considered a primary source of funds supporting the Bank's lending and
investment activities.
In the normal course of its business, the Bank makes commitments to lend
money to customers, including commitments to make future advances on residential
construction and development loans and to extend credit on credit cards. At
June 30, 1998, the Company had approximately $109.0 million in such lending
commitments. The Company anticipates that it will be able to fund these
commitments from cash on hand, other liquid assets and loan repayments. In
addition to its lending commitments, the Company expects that it will need to
make certain capital commitments in connection with the chartering of a new
banking subsidiary in Northern Virginia. The new bank will require an initial
capitalization of $6.0 to $7.0 million which the Company will fund out of the
net proceeds from the Offerings.
The Bank's most liquid assets are cash and cash equivalents, which are cash
on hand, amounts due from financial institutions, federal funds sold, repurchase
agreements, and any other investment with an original maturity of 90 days or
less. The levels of such assets are dependent on the Bank's operating financing
and investment activities at any given time. The variations in levels of cash
and cash equivalents are influenced by deposit flows and anticipated future
deposit flows.
The Bank's cash and cash equivalents, as of June 30, 1998, totaled
$26.2 million, an increase of $4.0 million or 18.2% from the December 31, 1997
total of $22.2 million. The increase in cash and cash equivalents during the six
22
<PAGE>
months ended June 30, 1998 was principally driven by deposit growth. Cash and
cash equivalents as of December 31, 1997 were $22.2 million, an increase of
$8.2 million (58.2%) from the December 31, 1996 total of $14.0 million.
The Bank may draw on a $26.0 million line of credit from the FHLB of
Atlanta. Borrowings under the line are secured by a lien on the Bank's
residential mortgage loans. As of June 30, 1998, $2.0 million was outstanding
under this line of credit.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about segments in interim financial
reports issued to shareholders. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. Earlier application
is encouraged. Management will adopt the provision of SFAS No. 131 as
necessary.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred as derivatives),
and for hedging activities. SFAS No. 133 requires that an entity reorganize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It is effective for all
fiscal quarters or fiscal years beginning after June 15, 1999. Initial
application of this Statement should be as of the beginning of an entity's
fiscal quarter on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of SFAS No. 133. Earlier application is
encouraged, but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of SFAS No. 133. It should not be applied retroactively
to financial statements of prior periods. Management has not determined when it
will adopt the provisions of SFAS No. 133 but believes that it will not have a
material effect on the Company's financial position or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, nearly all of the Company's assets and liabilities are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
BUSINESS
The Company was incorporated and became the holding company for the Bank
in 1990. The principal business of the Company is the Bank. The Bank was
originally founded as federally chartered savings association in 1961. In 1976,
the Bank converted from the mutual to the stock form in one of the first such
conversions undertaken by a federal thrift. In 1996, the Bank converted to a
Maryland trust company charter (although the Company does not exercise trust
powers) and the Company became a registered bank holding company. The Bank's
deposits are insured to applicable limits by the SAIF administered by the FDIC
and it is a member of the FHLB of Atlanta. The Bank currently operates from
seven branch offices in suburban Baltimore and one branch office in Leesburg,
Virginia. In addition, the Bank's credit card processing subsidiary, Key
Operations Center, Inc., maintains offices in Havre de Grace, Maryland.
23
<PAGE>
The Bank engages in various types of lending primarily in Central Maryland
and Northern Virginia, which include construction, development, small business,
automobile subprime lending, and mortgage banking. The Bank also operates a
nationwide credit card lending operation, which issues both partially secured
and unsecured credit cards to borrowers.
The Company has been organized along profit center lines with each profit
center run by a senior officer who is given substantial responsibility for their
business area and who is compensated based on the profitability of their
division. The Company currently concentrates on five main business lines:
. RESIDENTIAL CONSTRUCTION AND DEVELOPMENT LENDING. The Bank has focused
on residential construction and development lending since its
founding. At June 30, 1998, the total outstanding balances on the
Bank's construction and development loans approximated $67.1 million,
net of loans in process. In addition to serving Central Maryland, the
Bank makes development and construction loans in Northern Virginia
through its Leesburg office and in Delaware. Since residential
construction and development loans generally have relatively short
terms and bear floating rates of interest, they reduce the Company's
exposure to the risk that increases in market interest rates will make
these loans unprofitable. These loans are repaid as the lots or houses
are sold which helps limit the Bank's exposure to an individual
borrower or project. The Company believes that development and
construction lending are areas in which its expertise and local
orientation give it an advantage over larger banks. See "Business --
Lending Activities."
. CREDIT CARD LENDING AND OPERATIONS. At June 30, 1998, the Bank had a
$41.0 million portfolio of partially secured and unsecured credit card
loans to customers around the country and expects that credit card
lending will continue to contribute to the Company's future
profitability. See "Business --Lending Activities." Over the past
several years, the high returns on partially secured lending to
subprime borrowers have attracted many new competitors into this
market. Many of these competitors have offered credit cards to
subprime borrowers on much easier terms than the Bank and the Bank
reduced the collateral requirements for its cards to remain
competitive. After experiencing declining profitability as a result of
increased origination costs and increased charge-offs, however, the
Bank de-emphasized the issuance of partially secured credit cards in
favor of processing credit cards for others. Through its Key
Operations Center, Inc. subsidiary, the Bank offers credit card
processing services to a variety of bank and non-bank partners. Using
the underwriting and servicing expertise gained from its partially
secured credit card portfolio, the Bank concentrates on servicing the
subprime sector and believes that its processing activities can
provide noninterest income without the credit risk that comes with
direct lending. See "Business --Credit Card Processing."
. SMALL BUSINESS LENDING. The Bank offers a full range of commercial
loans including term loans, lines of credit, asset-based financing and
SBA guaranteed loans. At June 30, 1998, the Company's small business
loan portfolio totaled $39.2 million. Management believes that the
consolidation in the Mid-Atlantic banking industry has created
significant opportunities for a community-oriented bank that can offer
prompt and responsive service to the small business customer. In order
to reach out to this customer base, the Bank has placed a commercial
loan officer in each of its branches. For the past two years, the Bank
has been the largest originator of SBA guaranteed loans in the SBA
Baltimore Region. Management believes that the Bank's SBA lending
expertise gives it an additional advantage in reaching the small
business borrower who is not being served by larger banks while
allowing the Bank to reduce its credit risk through SBA guarantees.
The Bank also profits from sales of the guaranteed portion of the loan
in the secondary market. See "Business --Lending Activities."
. SUBPRIME AUTOMOBILE LENDING. The Bank began offering automobile
financing to subprime borrowers in 1988 and currently serves the
subprime automobile loan market throughout metropolitan Baltimore and
Washington, D.C. and Northern Virginia. At June 30, 1998, the
Company's subprime
24
<PAGE>
automobile loan portfolio totaled $23.4 million. The Bank mainly
originates its automobile loans through automobile dealers who take
the application from the customer and send it to the Bank for
approval. The Bank competes in this area through marketing and
responsive service while using disciplined pricing and underwriting
procedures to control credit risk. The Bank is evaluating an extension
of its business into automobile leasing to increase financing
opportunities for the Bank. See "Business --Lending Activities."
. MORTGAGE BANKING. The Bank originates FHA/VA and conventional loans
for resale in the secondary market. For the six months ended June 30,
1998, the Company originated $53.3 million in mortgage loans held for
sale. The Bank seeks to minimize credit and interest rate risk while
maximizing profitability by promptly selling loans on an individual
loan basis. The Bank does not service these loans after the sale. See
"Business -- Lending Activities."
The Company's and the Bank's executive offices are located at 7F Gwynns
Mill Court, Owings Mills, Maryland and their telephone number is (410) 363-7050.
MARKET AREA
The Bank currently conducts its commercial banking operations through seven
branch offices serving suburban Baltimore and one branch office in Leesburg,
Virginia. From these offices the Bank serves its customers, the majority of
whom own businesses or reside in the areas surrounding the branch offices
located in Central Maryland and Northern Virginia. The Bank's primary market
areas for deposits are the areas surrounding the Bank's branch offices in
Baltimore, Harford and Anne Arundel counties in Maryland and Loudoun County in
Northern Virginia. The Bank's primary market areas for loan originations are the
Central Maryland counties of Baltimore, Anne Arundel, Howard, Harford, Carroll,
Charles, Montgomery, Frederick, Prince Georges and Northern Virginia. During
the 1990s, the primary market areas for loan originations of the Bank have been
characterized by high economic growth and development and strong employment,
which has enabled the Bank to maintain a high volume of lending in its business
lines of residential construction and development lending, small business
lending, subprime automobile lending and residential mortgage lending. In
addition to the traditional commercial banking activities, the Bank also has a
nationwide credit card operation in which the Bank markets its partially secured
and unsecured credit cards to potential borrowers in all 50 states.
The Central Maryland economy depends on manufacturing, service industries,
wholesale/retail trade, technology and communications industries, and federal
and local government. The diversification of the regional economy followed a
decline in the manufacturing industry, which previously dominated the economy.
Similar to national trends, most of the job growth in the Bank's market area has
come from service-related industries. The median household income in each of the
counties in the Bank's Central Maryland market area exceeds the national median
household income of $33,482, according to Maryland Department of Business &
Economic Development statistics. In Baltimore County, there are 19,334
businesses, six of which are Fortune 500 companies, and over 300,000 workers.
Baltimore County currently maintains 36 percent of the regional manufacturing
base. The population of Baltimore County is 713,600 residents, and is expected
to grow by approximately 20,000 residents by the year 2000, according to U.S.
Bureau of the Census. As in Baltimore County, the U.S. Bureau of the Census
projects continued population growth by the year 2000 as follows: Anne Arundel
County, 4.3%, Carroll County, 7.2%, Charles County, 10.9%, Frederick County,
15.9%, Harford County, 8.4%, Howard County, 16.3%, Montgomery County, 6.1%,
and Prince Georges County, 5.6%. According to the Maryland Department of
Business & Economic Development, there are 11,042 businesses and over 138,000
workers in Anne Arundel County, and 3,396 businesses and 34,617 workers, with
approximately 14% of those workers employed in manufacturing jobs, in Carroll
County. Harford and Howard counties have over 4,100 and 6,100 businesses,
respectively, with workforces in excess of 41,900 and 88,300, respectively,
according to Maryland Department of Business & Economic Development statistics.
25
<PAGE>
The Bank's branch office is and the proposed new bank will be located in
Loudoun County, Virginia, one of the fastest growing counties in the United
States. According to census figures, the 1997 population of Loudoun county was
approximately 133,000 persons, an increase of 55% since 1990 compared to
population growth of 9% in the Washington, D.C. metropolitan area as a whole
during the same period. Among counties with more that 10,000 residents, Loudoun
County's 7.7% growth rate for 1996-97 ranked eighth in the nation. This county
is experiencing significant growth as a result of the expansion of the Dulles
International Airport technology corridor and the influx of "high-tech"
companies from Fairfax County. The Loudoun County market is predominately
residential with a healthy mix of retail, service activities and light industry.
Loudoun County is the fastest growing area of Northern Virginia. Several
large high-tech companies such as MCI/WorldCom, America Online and Alcatel Data
Networks currently have or plan to build their headquarters in Loudoun County,
giving rise to accelerated residential building and retail development in the
area. More than 4,000 housing sites are in various stages of future development
in the area.
LENDING ACTIVITIES
GENERAL. The Bank concentrates its portfolio lending activities primarily
in the areas of residential construction and development lending, commercial
lending and indirect automobile lending. Although the Bank originates
residential mortgage loans, substantially all of these originations are sold
into the secondary market on an individual loan, servicing released basis. The
Bank maintains a significant portfolio of partially secured and unsecured credit
card loans but is not aggressively pursuing new partially secured credit card
issuance at the current time.
The overall size of the Company's loan portfolio has remained relatively
stable since December 31, 1996 after experiencing significant growth during each
of the three preceding years. Since December 31, 1996, however, the composition
of the loan portfolio has shifted as construction and development lending and
commercial lending have assumed greater importance in the Company's lending
activities. At June 30, 1998, construction and development loans (net of loans
in process) totaled $67.1 million, or 33.30% of the portfolio, compared to
$60.6 million (30.02% of the portfolio), at December 31, 1997 and $54.4 million
(26.04% of the portfolio) at December 31, 1996. Commercial loans (which include
the unsold portions of SBA loans) have grown from $35.2 million (16.85% of
portfolio) at December 31, 1996 to $39.2 million (19.47% of portfolio) at
June 30, 1998. The increases in both of these portfolios reflect the Company's
efforts to gain market share among the small and medium-sized borrowers who are
not being served by the super-regional banks that have acquired many of the
Company's community bank competitors as well as continuing favorable economic
conditions that have led to an increase in loan demand during this period. The
growth in these portfolios has been partially offset by declines in the
partially secured credit card and indirect automobile loan portfolios. The
Company's partially secured credit card portfolio has decreased from
$43.8 million, or 20.96%, of the portfolio at December 31, 1996 to $31.0
million, or 15.37%, of the portfolio at June 30, 1998. The attrition in this
portfolio reflects the Company's strategic decision to de-emphasize this product
in the face of declining margins for subprime credit cards in general. The
indirect subprime automobile loan portfolio declined from $29.9 million (14.34%
of portfolio) at December 31, 1996 to $23.4 million (11.63% of portfolio) at
June 30, 1998 as the result of the adoption of tighter underwriting standards
after the Company experienced an unacceptable level of charge-offs in this
portfolio.
26
<PAGE>
Set forth below is selected data relating to the composition of the Bank's
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, -------------------------------------------------------
1998 1997 1996 1995
----------------- ----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Permanent one- to
four-family
residential (1)........ $ 28,188 13.99% $ 30,208 14.95% $ 32,357 15.50% $ 32,663 17.18%
Residential construction
and development (2).... 67,072 33.30 60,643 30.02 54,368 26.04 58,576 30.82
Commercial loans........... 39,214 19.47 38,129 18.87 35,179 16.85 21,637 11.38
Consumer loans:
Indirect automobile...... 23,429 11.63 24,251 12.01 29,931 14.34 22,433 11.80
Other consumer loans..... 2,531 1.26 2,506 1.25 1,486 0.71 3,016 1.59
Credit card loans:
Partially secured by
savings accounts....... 30,957 15.37 35,969 17.80 43,761 20.96 39,782 20.93
Unsecured................ 10,025 4.98 10,315 5.11 11,681 5.60 11,970 6.30
-------- ------ -------- ------ -------- ------ -------- ------
201,416 100.00% 202,021 100.00% 208,763 100.00% 190,077 100.00
====== ====== ====== ======
Less:
Unearned loan fees....... 476 343 316 491
Nonrefundable dealer
reserves............... 199 -- -- --
Allowance for loan losses 8,101 8,024 8,254 5,658
-------- -------- -------- --------
Loans receivable, net.... $192,640 $193,654 $200,193 $183,928
======== ======== ======== ========
<CAPTION>
AT DECEMBER 31,
------------------------------------
1994 1993
----------------- ------------------
AMOUNT % AMOUNT %
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Real estate mortgage:
Permanent one- to
four-family
residential (1)........ $ 37,570 22.96% $ 44,110 29.98%
Residential construction
and development (2).... 48,170 29.44 36,036 24.49
Commercial loans........... 13,208 8.07 9,336 6.34
Consumer loans:
Indirect automobile...... 11,969 7.32 5,443 3.70
Other consumer loans..... 3,293 2.01 3,191 2.17
Credit card loans:
Partially secured by
savings accounts....... 38,214 23.35 35,573 24.17
Unsecured................ 11,209 6.85 13,453 9.14
-------- ------ -------- ------
163,633 100.00% 147,142 100.00%
====== ======
Less:
Unearned loan fees....... 521 429
Nonrefundable dealer
reserves............... -- --
Allowance for loan losses 5,267 4,362
-------- --------
Loans receivable, net $157,845 $142,351
======== ========
</TABLE>
- --------------------------
(1) Does not include loans held for sale.
(2) Presented net of loans in process of $58,042, $51,899, $45,605, $37,579,
$31,250 and $20,220 at June 30, 1998 and December 31, 1997, 1996, 1995,
1994 and 1993, respectively.
27
<PAGE>
LOAN MATURITY SCHEDULE
The following table sets forth certain information at December 31, 1997
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their contractual terms to maturity, including scheduled repayments of
principal. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less. The
table does not include any estimate of prepayments which significantly shorten
the average life of mortgage loans and may cause the Bank's repayment experience
to differ from that shown below.
<TABLE>
<CAPTION>
DUE WITHIN DUE OVER ONE DUE OVER
ONE YEAR TO FIVE YEARS FIVE YEARS TOTAL
---------- ------------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate mortgage:
Permanent one- to four-family residential.. $ 2,245 $10,592 $17,371 $ 30,208
Residential construction and development... 37,936 22,582 125 60,643
Commercial loans............................. 10,682 14,429 13,018 38,129
Consumer loans............................... 1,582 24,966 209 26,757
Credit card loans............................ 46,284 -- -- 46,284
------- ------- ------- --------
Total................................... $98,729 $72,569 $30,723 $202,021
======= ======= ======= ========
</TABLE>
The following table sets forth at December 31, 1997, the dollar amount of
all loans due one year or more after December 31, 1997 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATE ADJUSTABLE RATES
------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Real estate mortgage:
Permanent one- to four-family residential.. $21,338 $ 6,625
Residential construction and development... -- 22,707
Commercial loans............................. 2,100 25,347
Consumer loans............................... 24,994 181
Credit card loans............................ -- --
------- -------
Total................................. $48,432 $54,860
======= =======
</TABLE>
28
<PAGE>
RESIDENTIAL CONSTRUCTION AND DEVELOPMENT LENDING. The Bank offers
residential construction and development financing to small and medium sized
builders and developers in Central Maryland, Northern Virginia and Delaware.
Historically, the Bank has not lent to individuals for construction of houses to
be occupied by the borrower. Construction and development lending to builders
and developers has been a principal business focus of the Bank since its
founding in 1961. Management believes that its market knowledge and ability to
quickly respond to financing requests give it a competitive advantage in serving
this market. The Bank was one of the first financial institutions in Maryland
to structure construction and development loans as revolving lines of credit
rather than closed-end financings. This structure provides the builder/developer
with a financing commitment for an entire project while limiting the Bank's
exposure to the amount necessary to finance a single phase of the project. The
revolving line of credit also reduces documentation costs since it is not
necessary to prepare new loan documentation for each phase of the project.
Construction loans are made for up to 12-month terms to builders in amounts
equal to 80% or less of the estimated value of the property upon completion.
Substantially all of the Company's construction loans bear floating rates of
interest tied to the prime rate. Such loans are secured by the property under
construction. In addition, the Bank generally obtains guarantees from the
borrower. Construction loans may be structured as either term loans or lines of
credit. In either case, proceeds are only disbursed after certification by in-
house personnel that specified stages of construction have been completed.
Generally, the Bank finances construction of houses for which the builder
already has a binding sales contract with a pre-qualified borrower. For larger
single-family subdivisions, the Bank will finance a model home and a limited
number of houses for which the builder does not have pre-existing sales
contracts. In all cases, however, the Bank limits the number of unsold houses
which it will finance. For townhouse developments the first block of 4-to-6
units will be financed before sales contracts have been signed but any
additional units must be pre-sold. Generally, the Bank has a limit of $400,000
on the value of an individual house on which it will finance construction. The
Bank's current largest commitment on any construction loan is $4.6 million. In
limited circumstances, the Company may make construction loans that do not meet
the lending criteria of the Bank due to loan-to-value ratios or other
considerations. At June 30, 1998, the Company had approximately $1.7 million
and the Bank had $47.0 million in construction loans, net of loans in process.
Development loans are extended to finance the acquisition and development
of unimproved land into building lots and subdivisions. Typically, development
loans are made for a term of 18 to 24 months to developers. Loan amounts are
limited to 75% or less of the value of the property upon completion. Loans bear
floating rates of interest tied to the prime rate. The Bank requires guarantees
from borrowers for nearly all development loans. Development loans may also be
structured as either term loans or lines of credit. Regardless of the structure
of the loan, however, proceeds are only disbursed after certification by in-
house personnel that specified stages of the development are completed.
Currently, the largest funding commitment on a development loan is $2.0 million.
In limited circumstances, the Company may make development loans that do not
meet the Bank's lending criteria due to loan-to-value ratios or other
considerations. At June 30, 1998, the Company had approximately $200,000 and
the Bank had approximately $18.2 million in development loans, net of loans in
process.
Construction lending is generally considered to carry a higher level of
risk than permanent mortgage financing because of the uncertainty of both
completion and of the value of the collateral upon completion. Repayment of
such loans is also dependent on the successful completion of the project and can
be adversely affected by market conditions and other factors not within the
control of the Bank or the borrower. The Bank seeks to control its risks by
tying the amount advanced to the completion of construction and monitoring
subcontractors to ensure that loan proceeds are applied appropriately. In
addition, the Bank concentrates on construction of moderately priced homes which
can usually be sold more easily than more expensive houses.
Because of their longer term, development loans carry greater risk than
construction loans. While the Bank does not extend development financing unless
the developer has received an initial governmental approval of the project, a
significant amount of time may be required to obtain all necessary remaining
permits. During this period, the Bank is exposed to the risk that changing
market conditions or governmental requirements may affect the economic viability
29
<PAGE>
of the project or that building moratoriums may be imposed. The Bank controls
these risks by only extending development financing to developers with
substantial financial resources or with whom it has had previous experience. In
addition, a substantial portion of the Bank's development lending involves
developments for which the developer has pre-existing purchase commitments from
a homebuilding firm.
CREDIT CARD LENDING. The Bank became involved in credit card lending in
1982 when it first introduced its secured credit card. Since that time, the
Bank has marketed credit cards to subprime borrowers across the nation. Although
the Bank has de-emphasized partially secured credit card issuance as a business
line, credit card balances continue to represent a substantial portion of the
portfolio and are expected to continue to be a significant contributor to future
income. At June 30, 1998, the Bank's total outstanding credit lines under
credit cards were $59.7 million of which $41.0 million was outstanding. The
Bank maintains approximately 55,000 credit card accounts in partially secured
and unsecured accounts held by the Bank. For partially secured credit cards,
the Bank requires the customer to maintain a minimum deposit of $350 in the
Bank. The Bank does not pay interest on the account unless the customer
maintains a balance of $750 or more. The line of credit under the card is equal
to 150% of the amount of the deposit up to a maximum of $3,000. The Bank
currently charges an annual percentage rate of 19.4% and an annual fee of $35 on
partially secured cards and an annual percentage rate of 17.9%, for unsecured
credit cards.
In addition to income from interest on outstanding balances and annual fees
charged to cardholders, the Bank recognizes income from merchant processing fees
and interchange fees in connection with credit card transactions. When a credit
customer uses a credit card to purchase goods or services, the participating
merchant deposits the transaction ticket with a merchant processing bank which
deducts a merchant processing fee from the amount credited to the participating
merchant's account. The merchant processing bank then forwards the transaction
to the issuer bank which deducts an interchange fee from the amount credited to
the merchant processor bank.
The Company intends to maintain partially secured credit card portfolio
volume primarily through portfolio purchases but continues to seek to originate
unsecured credit card loans. In addition, the Company intends to use its credit
card expertise to grow its processing business. See " -- Credit Card
Processing."
COMMERCIAL LENDING. The Bank offers a full range of commercial lending
services including lines of credit, working capital loans, term loans for
acquisition or improvement of assets, financing of receivables and other asset-
based lending. The Bank's commercial loan customers are generally borrowers
with less than $2.0 million in sales and are diversified as to industry. The
Bank's average commercial loan is approximately $100,000. The Bank initially
built its commercial loan portfolio with performing pools of SBA and small
business loans purchased at a discount from the RTC or FDIC. Such loans were
primarily originated by banks and thrifts in California, Connecticut and
Maryland. At June 30, 1998, the Bank had approximately $4.7 million in such
loans in portfolio.
The Bank is continuing to expand its commercial lending activities beyond
SBA lending. In particular, the Bank expects to expand its asset-based
financing which consists primarily of receivables financing. Commercial lending
exposes the Bank to various risks which include the quality of the borrower's
management and a number of economic and other factors which induce business
failures and depreciate the value of business assets pledged to secure the loan,
including competition, insufficient capital, product obsolescence, changes in
the cost of production, environmental hazards, weather, changes in laws and
regulations and general changes in the marketplace. Receivables financing
exposes the Bank to the additional risk that in order to recover on its
collateral, the Bank will be required to collect on the receivable from
customers of the borrower.
Approximately half of the Bank's commercial lending activities involve the
origination of loans guaranteed by the SBA. During the years ended December 31,
1997 and 1996, the Bank originated $14.6 million and $13.4 million,
respectively, in SBA loans making it the largest SBA lender in the SBA Baltimore
District for those two years.
Under the SBA's 7(a) Loan Guaranty Program in which the Bank participates,
the SBA guarantees loans of up to $750,000. For loans of $100,000 or less, the
guarantee amount is 80% of the loan amount and for larger loans,
30
<PAGE>
the guarantee is 75% of the loan amount. The maximum loan term varies with the
purpose of the loan and can range up to 25 years for loans for acquisitions of
fixed assets. The average term of the Bank's SBA loans, however, is seven years.
Interest may be fixed or floating. The maximum permissible interest rate on
loans of seven years or more is limited to 275 basis points over the lowest
prime lending rate published in the Wall Street Journal on the first day of each
calendar quarter. For loans of less than seven years, the maximum interest rate
is 225 basis points over the lowest published prime rate. The SBA charges a fee
for the guarantee which may be passed on to the borrower. In the event of
default by the borrower, any losses resulting therefrom are shared pari passu
between the Bank and the SBA. If the SBA establishes that any resulting loss is
attributable to substantial deficiencies in the manner in which the loan was
originated, documented or funded by the Bank, the SBA may seek recovery of funds
from the Bank.
The Bank participates in the SBA's Preferred Lender Program pursuant to
which the Bank is qualified to approve a loan with an SBA guarantee without
submitting an application to the SBA for credit review. The Bank is required to
notify the SBA of the approved loan along with the submission of pertinent SBA
documents. The Preferred Lender Program is the SBA's highest designation and
has the most stringent requirements.
The Bank's practice has been to sell the guaranteed portions of the SBA
loans which it originates into the secondary market and retain the unguaranteed
portion in its portfolio. The Bank continues to service the loan for investors.
At June 30, 1998, the Bank was servicing $39.0 million in SBA loans for
investors and had approximately $17.4 million in commercial loans in portfolio
which were originated as SBA loans.
CONSUMER LENDING. The Bank's current principal consumer lending focus is
the origination of automobile loans through arrangements with dealers. Although
the Bank has engaged in indirect subprime automobile lending since 1988, this
lending did not represent a major business line until 1994 when the Bank sought
to significantly expand this business. From 1994 to 1996, the indirect
automobile loan portfolio grew from approximately $11.9 million to $29.9 million
as the Bank implemented new underwriting parameters and increased the number of
dealerships with which it had relationships. As a result of adverse trends in
the portfolio, however, the Bank tightened its underwriting standards in the
fourth quarter of 1996. This tightening reduced originations and led to a
shrinkage of the portfolio as existing loans have run off. At June 30, 1998,
the Bank had $23.4 million in such loans outstanding or 90.3% of its consumer
loan portfolio. The Bank's automobile lending involves subprime borrowers
seeking financing for the purchase of a new or used car. Currently, the Bank
will generally not finance purchases of cars more than seven years old or with
excessive mileage or lend to first-time buyers.
Indirect automobile loans are initiated by the dealers who transmit a
completed credit application to the Bank. The Bank performs a credit evaluation
of the borrower and confirms the loan value of the collateral and, if the Bank's
underwriting requirements are met, advises the dealer that the application is
accepted. Prior to funding the loan, the Bank will verify employment, insurance
and residence information and that the representations in the application and
sales contract are correct. The Bank withholds a portion of the proceeds of the
loan from the dealer as a reserve for losses.
The Bank currently has relationships with nearly 200 dealers in the
Washington-Baltimore area of which 50 to 60 are currently active. The indirect
automobile loan market is extremely competitive and exposes the Bank to
significant credit risks as well as risks of loss from misrepresentations
regarding borrowers or collateral. The Bank seeks to control these risks by
thoroughly investigating dealers prior to entering into a relationship and
confirming data with borrowers prior to funding.
In order to increase available financing alternatives, the Bank is
considering an expansion into indirect automobile finance leasing. Payments on
the lease would be structured to allow the Bank to recoup the depreciation of
the vehicle based on pre-determined residual value of the vehicle at the end of
the lease term plus an imputed interest component.
31
<PAGE>
PERMANENT ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. The Bank's
residential mortgage lending activities consist primarily of the origination of
loans for resale in the secondary market. Approximately 75% of the loans
originated by the Bank are either partially guaranteed by the VA or insured by
the FHA. Loans are originated by the Bank's commissioned loan officers who call
on realtors and builders throughout Central Maryland and Northern Virginia. The
majority of the Bank's residential mortgage originations involve first-time home
buyers and the average loan amount is approximately $108,000. Loans are sold on
an individual loan basis with servicing released. The Bank has generally sold
mortgages to private investors rather than to the FNMA or FHLMC.
CREDIT ADMINISTRATION
The Bank's lending activities are subject to written policies approved by
the Board of Directors to ensure proper management of credit risk. Loans are
subject to a well defined credit process that includes credit evaluation of
borrowers, establishment of lending limits and application of lending
procedures, including the holding of adequate collateral and the maintenance of
compensating balances, as well as procedures for on-going identification and
management of credit deterioration. The Bank regularly reviews its portfolio to
identify potential underperforming credits, estimate loss exposure and to
ascertain compliance with the Bank's policies. For significant problem loans,
management review consists of evaluation of the financial strengths of the
borrower and the guarantor, the related collateral, and the effects of economic
conditions.
Decisions on loan applications are based upon assessments of the
borrower's ability to repay the loan, the viability of the loan and the adequacy
of the value of the property that will secure the loan. Construction and
development loans of $750,000 or less must be approved by an internal loan
committee consisting of the President, the Senior Vice President for
Construction Lending and a director. If a construction or development loan
exceeds $750,000 (or the Bank's total exposure to the borrower would exceed
$1.25 million), the loan must be approved by a committee consisting of the
members of the internal loan committee and three additional directors.
Commercial loans of up to $100,000 must be approved by the Senior Vice President
for Commercial Lending and the Chairman, President or Executive Vice President
of the Bank. Commercial loans between $100,000 to $250,000 must be approved by
the Senior Vice President for Commercial Lending and any two of the Chairman,
President and Executive Vice President, and loans between $250,000 and $750,000
must be approved by a majority of the Board Loan Committee, consisting of four
directors. All commercial loans in excess of $750,000 must be approved by
either the Executive Committee or the Board of Directors.
The Bank's legal lending limit is currently $5.0 million. Loans made to
officers, directors or principal shareholders are approved pursuant to credit
administration policies in place for comparable loans to the general public and
are reviewed on a regular basis by the Board of Directors of the Bank.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Due to the risks inherent in the Bank's lending activity, the Bank has
established stringent collection procedures for efficient recovery of overdue
payments or defaults by borrowers under the Bank's various loan programs. The
Bank personally contacts any borrower who is five days overdue in his or her
payment on an automobile loan. Generally, the Bank will repossess the
automobile after 60 days. After repossession, the Bank encourages borrowers to
become current on their loans and to redeem their repossessed automobile.
Historically, about 25% of the borrowers will redeem their repossessed
automobiles. If the borrower does not redeem, the Bank will resell the
repossessed automobile either at auction or through selected dealers.
The Bank has established similar collections procedures for credit card
customers who are sent notices 15 and 30 days after their accounts become
delinquent. After 45 days, the customer is contacted by telephone. The Bank
pursues deficiency judgments against both credit card and automobile loan
customers. The Bank also has collection procedures for delinquency or default
on construction, development and small business loans, which include a telephone
32
<PAGE>
call to the borrower from the loan officer or a collection specialist between
five and 29 days after the payment was due. If these collection procedures fail,
the matter is referred for appropriate legal action within 60 days.
For loans other than credit card loans, the Company generally stops
accruing interest after borrowers have been past due 90 days or more unless the
loan is well-secured and in the process of collection. Unsecured credit cards
accrue interest up to 155 days, and partially secured credit cards accrue up to
180 days. After the 180/th/ day, the deposit of a borrower for a partially
secured credit card will revert to the Bank.
The following table sets forth the amount of the Bank's nonaccrual loans
and accruing loans 90 days or more past due at the dates indicated. At each of
the dates indicated, the Bank did not have any troubled debt restructurings
within the meaning of Statement of Financial Accounting Standards No. 15.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, -------------------------------------------
1998 1997 1996 1995 1994 1993
--------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:(1)
Real estate mortgage:
Permanent one- to four-family residential.. $1,658 $1,294 $ 654 $ 265 $ 244 $1,022
Residential construction and
development............................ 1,202 1,385 1,425 4,492 2,257 1,117
Commercial loans............................. 894 122 365 104 497 --
Consumer loans............................... 87 212 260 98 48 37
Credit card loans(2)......................... 94 298 417 24 -- --
------ ------ ------ ------ ------ ------
Total...................................... $3,935 $3,311 $3,121 $4,983 $3,046 $2,176
====== ====== ====== ====== ====== ======
Accruing loans which are contractually past
due 90 days or more:
Real estate mortgage:
Permanent one- to four-family residential.. $ -- $ -- $ -- $ -- $ -- $ --
Residential construction and
development............................... -- -- -- -- -- --
Commercial loans............................. -- -- -- -- -- --
Consumer loans............................... -- -- -- -- -- --
Credit card loans (2)........................ 1,127 1,552 1,823 1,236 986 903
------ ------ ------ ------ ------ ------
Total...................................... $1,127 $1,552 $1,823 $1,236 $ 986 $ 903
====== ====== ====== ====== ====== ======
Total nonperforming loans...................... $5,062 $4,863 $4,944 $6,219 $4,032 $3,079
====== ====== ====== ====== ====== ======
Percentage of total loans...................... 2.52% 2.41% 2.37% 3.28% 2.47% 2.10%
====== ====== ====== ====== ====== ======
Other nonperforming assets (3)................. $2,269 $2,895 $3,114 $1,513 $3,841 $3,170
====== ====== ====== ====== ====== ======
Non-performing assets to total loans
plus other non-performing assets............. 3.61% 3.79% 3.81% 4.05% 4.72% 4.17%
====== ====== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) Other than credit card loans, loans are considered nonaccrual loans after
they have been past due 90 days or more. Payments received on a nonaccrual
loan are either applied to the outstanding principal balance or recorded as
interest income, depending on management's assessment of the collectibility
of the loan.
(2) The Bank has deposits partially securing the outstanding balance of these
loans.
(3) Other nonperforming assets includes real property acquired by the Bank
through foreclosure or personal property such as automobiles acquired
through repossession. This property is carried at the lower of its fair
value less estimated selling costs or the principal balance of the related
loan, whichever is lower.
During 1995, the Company's nonperforming loans increased primarily as the
result of two construction loans with an aggregate amount outstanding of $1.9
million that were placed on nonaccrual. These loans involved separate borrowers
in Harford County and the Company believes that the weaknesses in these loans
related to the individual circumstances of the borrowers rather than to economic
or market considerations.
33
<PAGE>
During the six months ended June 30, 1998, gross interest income of
$300,000 would have been recorded on loans accounted for on a nonaccrual basis
if the loans had been current throughout this period. Interest on such loans
included in income during the period amounted to $73,000.
Loans which are not currently classified as nonaccrual, 90 days past due or
restructured but where known information about possible credit problems of
borrowers causes management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and may result in
disclosure as nonaccrual, 90 days past due or restructured amounted to $500,000
at June 30, 1998.
Transactions in the allowance for credit losses during the last five fiscal
years and most recent interim periods were as follows:
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses
beginning of period....... $ 8,024 $ 8,254 $ 8,254 $ 5,658 $ 5,267 $ 4,362 $ 3,458
-------- -------- -------- -------- -------- -------- --------
Charge-offs:
Real estate mortgage:
Permanent one- to
four-family
residential........... $ 128 $ 183 $ 333 $ 90 $ 11 $ 308 $ 383
Residential construction
and development....... 123 49 619 882 908 268 335
Commercial loans.......... 61 371 713 297 835 229 51
Consumer loans............ 1,893 2,078 4,652 2,365 172 301 339
Credit card loans........ 3,555 4,825 9,002 7,412 5,257 4,816 4,920
-------- -------- -------- -------- -------- -------- --------
Total loans
charged-off......... 5,760 7,506 15,319 11,046 7,183 5,922 6,028
-------- -------- -------- -------- -------- -------- --------
Recoveries:
Real estate mortgage:
Permanent one- to
four-family
residential........... 2 10 132 63 35 82 176
Residential construction
and development....... 112 3 105 259 256 256 148
Commercial loans.......... 51 26 72 206 200 139 5
Consumer loans (1)........ 1,331 1,338 2,837 1,250 213 422 451
Credit card loans (2)..... 1,797 2,415 4,320 3,981 3,058 2,601 2,062
-------- -------- -------- -------- -------- -------- --------
Total recoveries...... 3,293 3,792 7,466 5,759 3,762 3,500 2,842
-------- -------- -------- -------- -------- -------- --------
Net charge-offs....... 2,467 3,714 7,853 5,287 3,421 2,422 3,186
-------- -------- -------- -------- -------- -------- --------
Provision for loan losses... 2,544 3,846 7,623 7,883 3,812 3,124 2,925
-------- -------- -------- -------- -------- -------- --------
Valuation allowance related
to acquired loans......... -- -- -- -- -- 203 1,165
-------- -------- -------- -------- -------- -------- --------
Allowance for loans losses,
end of period............. 8,101 8,386 8,024 8,254 5,658 5,267 4,362
Non-refundable dealer
reserves................... 199 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Allowance for loan losses
and other reserves, end
of period................. $ 8,300 $ 8,836 $ 8,024 $ 8,254 $ 5,658 $ 5,267 $ 4,362
======== ======== ======== ======== ======== ======== ========
Loans (net of premiums and
discounts)
Period-end balance........ 200,741 204,684 201,678 208,447 189,586 163,112 146,713
Average balance during
period.................. 200,127 203,963 202,201 197,945 177,549 151,494 141,825
Allowance and other reserves
as percentage of
period-end loan balance... 4.13% 4.10% 3.98% 3.96% 2.98% 3.23% 2.97%
Percent of average loans:
Provision for loan losses. 2.54% 3.77% 3.77% 3.98% 2.15% 2.06% 2.06%
Net charge-offs........... 2.47% 3.64% 3.88% 2.67% 1.93% 1.60% 2.25%
</TABLE>
- -------------------------
(1) Recoveries primarily consist of amounts realized from repossession and sale
of vehicles securing the loans.
(2) Recoveries primarily consist of an offset against the deposit pledged by
the borrower to partially secure the credit card.
34
<PAGE>
The Company's net charge-offs increased during the past three fiscal years
primarily due to increased charge-offs in its partially secured credit card and
consumer loan portfolios. The charge-offs in the partially secured card
portfolio came after the Company attempted to meet competition by reducing
collateral requirements for the cards. The Company requires a deposit for its
partially secured credit cards which is applied against any default. As charge-
offs for these credit cards increase, so do the recoveries from the collateral.
The increase in charge-offs in the consumer loan portfolio was principally the
result of the expansion of indirect automobile lending and the Company's attempt
to meet competition. In response to the unacceptable performance of this
portfolio, management tightened its underwriting criteria and reduced the
average amount advanced per vehicle. The Company also ceased lending to first-
time buyers.
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ----------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Permanent one- to four-family
residential...................... $ 423 13.99% $ 453 14.95% $ 485 15.50%
Residential construction and
development...................... 1,800 33.30 1,639 30.02 1,594 26.04
Commercial loans.................... 1,247 19.47 988 18.87 1,056 16.85
Consumer loans...................... 1,709 12.89 1,890 13.25 2,245 15.05
Credit card loans................... 3,121 20.35 3,054 22.91 2,874 26.56
------ ------ ------ ------ ------ ------
Total allowance for loan losses
and other reserves............. $8,300 100.00% $8,024 100.00% $8,254 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Permanent one- to four-family
residential..................... $ 483 17.18% $ 564 22.96% $ 662 29.98%
Residential construction and
development...................... 1,561 30.82 1,620 29.44 1,193 24.49
Commercial loans.................... 617 11.38 747 8.07 273 6.34
Consumer loans...................... 889 13.39 369 9.33 344 5.87
Credit card loans................... 2,108 27.23 1,967 30.20 1,890 33.32
------ ------ ------ ------ ------ ------
Total allowance for loan losses
and other reserves............. $5,658 100.00% $5,267 100.00% $4,362 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
35
<PAGE>
CREDIT CARD PROCESSING
Through its Key Operations subsidiary, the Bank offers credit card
processing services to banks and non-bank lenders and marketers. Key Operations
generally maintains customer files and transmits card payments and charges. for
its bank clients. The Bank receives a monthly fee per account for these
services while the participating bank retains ownership of the receivables and
other fees generated by the credit card relationship. In the typical processing
arrangement with a non-bank lender, the Bank serves as the issuing bank for the
credit card and performs the same record-keeping services and may retain a
portion of the receivables and other fees generated by the relationship in
addition to receiving a service fee. The Bank also purchases credit card
portfolios from other community banks from time to time. At June 30, 1998, Key
Operations was processing 118,763 credit card accounts including 54,746 accounts
for the Bank. Credit card processing revenue increased to $675,000 for the six
months ended June 30, 1998 from $140,000 in the 1997 period.
The Company believes it will be able to grow its processing business
through processing arrangements with other community banks and partnership
arrangements with non-bank lenders. By growing its card business in this
manner, the Bank believes that it can create more predictable revenues without
the credit risk normally associated with the credit card issuances.
INVESTMENT SECURITIES
The Bank maintains a substantial portfolio of investment securities to
provide liquidity as well as a source of earnings. The Bank's investment
securities portfolio consists primarily of U.S. Treasury securities as well as
securities issued by U.S. government agencies including mortgage-backed
securities. The Bank has also invested in certain mutual funds which invest in
adjustable-rate mortgage loans but is phasing out these investments through
sales.
The following table shows the composition of the investment portfolio by
major category at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, -------------------------
1998 1997 1996 1995
-------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. government and federal agency securities.. $21,994 $21,099 $ 5,986 $ 992
Adjustable-rate mortgage mutual fund........... 4,007 4,707 8,811 8,844
Mortgage-backed securities:
FHLMC...................................... 1,776 1,930 2,785 4,060
FNMA....................................... 2,394 3,308 2,871 4,336
Asset-backed securities........................ 1,001 -- -- --
------- ------- ------- -------
Total.................................... $31,172 $31,044 $20,453 $18,232
======= ======= ======= =======
</TABLE>
36
<PAGE>
The following table sets forth the scheduled maturities, market values and
average yields for the Bank's investment securities and mortgage-backed
securities portfolio at June 30, 1998.
<TABLE>
<CAPTION>
ONE YEAR ONE TO FIVE TO MORE THAN
OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL INVESTMENT PORTFOLIO
---------------- ----------------- ----------------- ----------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE BOOK MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
------ -------- ------- -------- ------- -------- ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and federal
agency securities........ $ -- --% $21,995 6.06% $ -- -- % $ -- -- % $21,995 $21,994 6.06%
Adjustable-rate mortgage
mutual funds............. 4,253 4.72 -- -- -- -- -- -- 4,253 4,007 4.72
Mortgage-backed securities:
FHLMC................... 25 6.69 871 6.00 -- -- 903 6.07 1,799 1,776 6.05
FNMA.................... 257 5.00 2,147 6.56 -- -- -- -- 2,404 2,394 6.39
Asset-backed securities.... -- -- -- -- -- -- 1,000 6.35 1,000 1,001 6.35
------ ------- ----- ------ ------- -------
Total................ $4,535 4.75 $25,013 6.10 $ -- -- $1,903 6.22 $31,451 $31,172 5.91
====== ======= ===== ====== ======= =======
</TABLE>
37
<PAGE>
At June 30, 1998, the Bank had no investments in securities of a single
issuer (other than the U.S. government securities and securities of federal
agencies and government-sponsored enterprises) which aggregated more than 10% of
stockholders' equity.
DEPOSITS AND SOURCES OF FUNDS
The funds needed by the Bank to make loans come from deposit accounts
solicited from the communities surrounding its branch offices. Consolidated
total deposits were $235.8 million as of December 31, 1997. In addition, the
Bank may borrow up to $26.0 million under a line of credit from the FHLB of
Atlanta.
DEPOSITS. The Bank's deposit products include regular savings accounts
(statements), money market deposit accounts, interest-bearing and non-interest-
bearing checking accounts, IRA accounts and certificates of deposit accounts.
The Bank varies service charges, terms and interest rates to target specific
markets. Other products and services for deposit customers include automated
teller machines, safe deposit boxes, money orders and travelers checks, night
depositories, wire transfers and telephone banking.
At June 30, 1998, approximately $21.0 million of deposits were collateral
for partially secured credit cards. The Bank does not pay interest on funds
deposited as collateral for the partially secured credit cards unless the
deposit exceeds $750. The rate of interest paid on deposits exceeding $750 is
3.00%. For the six months ended June 30, 1998, the average rate paid on these
funds was 1.38%. The Company has recently de-emphasized its partially secured
credit card lending, which is expected to result in a reduction in the balance
of these savings accounts. Since the interest rates paid on these deposits are
lower than on other savings deposits, the Company's overall cost of funds is
expected to increase as the trend to de-emphasize the secured credit card
lending continues.
The following table sets forth for the periods indicated the average
balances outstanding and average interest rates for each major category of
deposits.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ----------------------------------------------------------
JUNE 30, 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings....................... $ 14,923 2.98% $ 14,739 3.10% $ 15,585 3.18% $ 15,896 3.69%
Interest-bearing demand and
money market accounts...... 19,436 2.77 20,231 2.77 20,094 2.87 20,795 3.40
Certificates of deposit....... 167,039 5.97 153,538 5.96 132,252 6.10 114,809 6.06
Deposits collateralizing
credit card loans........... 21,921 1.38 26,243 1.37 32,574 2.71 34,629 4.09
-------- -------- -------- --------
Total interest-bearing
deposits............. 223,319 5.04 214,751 4.90 200,505 5.00 186,129 5.19
Demand deposits............... 14,454 14,104 15,835 9,905
-------- -------- -------- --------
Total average deposits... $237,773 4.73 $228,855 4.60 $216,340 4.63 $196,034 4.93
======== ======== ======== ========
</TABLE>
38
<PAGE>
The Bank obtains deposits principally through its network of seven
branches. The Bank does not solicit brokered deposits. The Bank's principal
deposit funding source are certificates of deposit which the Bank offers in
maturities of up to 61 months. At June 30, 1998, the Bank had approximately
$18.5 million in certificates of deposit and other time deposits of $100,000 or
more. The following table provides information as to the maturity of all time
deposits of $100,000 or more at June 30, 1998.
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Three months or less........... $ 2,178
Over three through six months.. 1,292
Over six through 12 months..... 1,262
Over 12 months................. 13,757
-------
Total...................... $18,489
=======
</TABLE>
BORROWINGS. In addition to deposits, the Bank from time to time obtains
advances from the FHLB of Atlanta of which it is a member. FHLB of Atlanta
advances may only be used to provide funds for residential housing finance. The
Bank's only advance outstanding matures in 2008 and bears a 5.51% fixed rate of
interest until 2003 when it may be converted to a floating-rate obligation at
the option of the FHLB of Atlanta. The FHLB advance is secured by a floating
lien on the Bank's residential first mortgage loans and various federal
government and agency securities. The Bank also obtains funds through reverse
repurchase agreements with securities dealers but is not currently party to any
such agreements.
At June 30, 1998, the Company had $1.5 million in borrowings under various
notes payable to directors and 5% stockholders and their related interests.
These borrowings were used to finance loans at the holding company level. The
notes are unsecured, bear interest rates of 9.0% to 10.0% and mature in 1998,
1999 and 2000. These loans replaced a line of credit from a commercial bank at
a higher rate of interest. The Company intends to pay these notes as they
mature. See "Management -- Certain Relationships and Related Transactions."
The following table sets forth certain information regarding short-term
borrowings by the Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances............................. $2,000 $ -- $ -- $ -- $ --
Notes payable............................. 1,500 1,000 1,000 -- --
Weighted average rate paid on:
FHLB advances............................. 5.51% --% --% --% --%
Notes payable............................. 9.70 9.60 9.60 -- --
Maximum amount of borrowings outstanding
at any month end:
FHLB advances............................. $2,000 $ -- $ -- $ -- $ --
Notes payable............................. 1,500 1,000 1,000 -- --
Approximate average amounts outstanding:
FHLB advances............................. $2,000 $ -- $ -- $ -- $ --
Notes payable............................. 1,500 1,000 1,000 -- --
Approximate weighted average rate paid on:
FHLB advances............................. 5.51% --% --% --% --%
Notes payable............................. 9.70 9.60 9.60 -- --
</TABLE>
39
<PAGE>
COMPETITION
The Bank faces intense competition in each of its business lines from a
variety of other financial services providers including many which have
substantially greater resources than the Bank. As a community bank, the Bank
must compete against other banks, thrifts and credit unions for deposits and
must increasingly compete against alternative investment vehicles such as stock,
bonds and mutual funds for funds. The Bank seeks to meet its competition by
offering competitive rates and customer convenience. The Bank competes for
construction and development loans primarily with other community banks. The
Bank competes on the basis of its substantial expertise in this area, long-
standing relations with builders and developers and its reputation for
responsive service. In competing for commercial loan customers, the Bank faces
competition not just from other banks, but increasingly from nontraditional
lenders such as commercial finance companies and national credit card issuers.
The Bank seeks to compete against these firms with its SBA lending expertise,
array of services, personal service and convenience. In the area of credit card
issuance and processing, the Bank must compete against a variety of bank and
non-bank lenders including organizations that are not subject to the same
regulatory restrictions as the Bank. The Bank seeks to compete in this area on
the basis of its expertise in the subprime area and its accessability to a
variety of partners. In indirect automobile lending, the Bank must compete
against banks and finance companies and other specialty lenders. The Bank
competes in this area principally through its relations with dealers and fast
and responsive service. In the area of mortgage banking, the Bank competes
against numerous other mortgage banking companies primarily on the basis of its
relations with realtors, builders and other parties involved in the home-buying
process.
EMPLOYEES
At June 30, 1998, the Bank had 259 full-time equivalent employees. The
Company does not currently have any employees.
PROPERTIES
The following table shows the location and certain additional information
regarding the offices of the Company and its subsidiaries at June 30, 1998.
<TABLE>
<CAPTION>
YEAR OWNED OR YEAR OWNED OR
LOCATION OPENED LEASED LOCATION OPENED LEASED
- --------------------------- ------ -------- ---------------------------- ------- --------
<S> <C> <C> <C> <C> <C>
ADMINISTRATIVE OFFICES:
Executive Offices 1997 Leased Perry Hall Branch 1976 Leased
7F Gwynns Mill Court 8639 Belair Road
Owings Mills, MD 21117 Baltimore, MD 21236
Residential Lending 1998 Leased Ellicott City Branch 1983 Owned
9D Gwynns Mill Court 9450 Baltimore National Pike
Owings Mills, MD 21117 Ellicott City, MD 21042
Consumer Lending 1982 Leased Eldersburg Branch 1996 Owned
8607 Liberty Road 1438 Liberty Road
Randallstown, MD 21133 Eldersburg, MD 21784
Key Operations Center 1986 Owned Bel Air Branch 1996 Owned
626 Revolution Street 203 N. Main Street
Havre de Grace, MD 21078 Bel Air, MD 21014
BRANCH OFFICES:
Randallstown Branch 1961 Owned Leesburg Branch 1996 Leased
8601 Liberty Road 1031 Edwards Ferry Road, NE
Randallstown, MD 21133 Leesburg, VA 20176
Jumpers Hole Branch 1979 Owned Cockeysville Branch 1998 Leased
8108 Jumpers Hole Road 9940 York Road
Pasadena, MD 21122 Cockeysville, MD 21030
</TABLE>
40
<PAGE>
LEGAL PROCEEDINGS
On May 20, 1997, KeyCorp, a $67 billion bank holding company headquartered
in Cleveland, Ohio, filed a suit against the Bank in the United States District
Court for the Northern District of Ohio, Eastern Division, alleging that the
Bank's use of the name " Key Bank and Trust" and the Bank's use of its service
mark infringes on the trademarks of KeyCorp. In response, the Bank filed a
counterclaim asserting that KeyCorp has infringed upon the Bank's name and
service mark, and has petitioned to cancel KeyCorp's federally registered mark.
In their respective actions, both the Bank and KeyCorp seek monetary damages
equal to three times the other's profits since the first use of the name, as
well as other monetary and consequential damages. The case is still pending.
The Bank believes that the claims by KeyCorp are without merit and it intends to
vigorously defend this suit and pursue its counterclaim.
In the ordinary course of its business, the Bank is involved in various
other legal actions. None of the foregoing litigation is expected to have a
material effect on the operations of the Bank.
SUPERVISION AND REGULATION
REGULATION OF THE COMPANY
GENERAL. The Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956 (the "BHCA"). As such, the Company is
registered with the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and subject to Federal Reserve Board regulation,
examination, supervision and reporting requirements. As a bank holding company,
the Company furnishes the Federal Reserve Board with annual and quarterly
reports of its operations at the end of each period and furnishes such
additional information as the Federal Reserve Board may require pursuant to the
BHCA. The Company may also be inspected by Federal Reserve Board examiners.
Under the BHCA, a bank holding company must obtain the prior approval of
the Federal Reserve Board before (i) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (ii) acquiring all or substantially all of
the assets of another bank or bank holding company; or (iii) merging or
consolidating with another bank holding company.
Effective September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency of 1994 (the "Riegle-Neal Act") amended provisions of the
BHCA and authorized the Federal Reserve Board to approve an application of an
adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than such holding company's home state, without regard to
whether the transaction is prohibited by the laws of any state. The Federal
Reserve Board may not approve the acquisition of a bank that has not been in
existence for a minimum of five years (regardless of any longer minimum period
specified by the statutes of the host state). The Reigle-Neal Act also
prohibits the Federal Reserve Board from approving such an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Reigle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state wide concentration
limit contained in the Reigle-Neal Act. Under Maryland law, a bank holding
company is prohibited from acquiring control of any bank if the bank holding
company would control more than 30% of the total deposits of all depository
institutions in the State of Maryland unless waived by the Commissioner of
Financial Regulation (the "Commissioner").
Additionally, beginning on June 1, 1997, the federal banking agencies may
approve interstate merger transactions without regard to whether such
transaction is prohibited by the law of any state, unless the home state of one
of the
41
<PAGE>
banks opted out of the Reigle-Neal Act by adopting a law, which applies equally
to all out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Such a law must have been enacted after the date of
enactment of the Reigle-Neal Act and prior to June 1, 1997. The State of
Maryland did not pass such a law during this period. Interstate acquisitions of
branches are permitted only if the law of the state in which the branch is
located permits such acquisitions. Interstate mergers and branch acquisitions
will also be subject to the nationwide and statewide insured deposit
concentration amounts described above.
The BHCA also prohibits, with certain exceptions, a bank holding company
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of a company that is not a bank or a bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The activities of the Company are subject to these legal
and regulatory limitations under the BHCA and the Federal Reserve Board's
regulations thereunder. Even if a specific activity has previously been
approved by the Federal Reserve Board, the Federal Reserve Board may still order
a holding company or its subsidiaries to terminate any activity, or to terminate
its ownership or control of any subsidiary, when it has reasonable cause to
believe that the continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that holding company.
CAPITAL ADEQUACY. The Federal Reserve Board requires bank holding
companies to maintain specified minimum ratios of capital to total assets and
capital to risk-weighted assets. See "Regulation of the Bank -- Capital
Adequacy."
DIVIDENDS AND DISTRIBUTIONS. The Federal Reserve Board can prohibit the
payment of dividends by bank holding companies if such payment would constitute
an unsafe or unsound practice. The Federal Reserve Board has stated that a bank
holding company should pay cash dividends only to the extent that the company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earning retention that is consistent with the company's capital needs,
asset quality, and overall financial condition.
Bank holding companies must notify the Federal Reserve Board of any
purchase or redemption of their outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such transactions during the preceding 12 months, is
equal to 10% or more of the bank holding company's consolidated net worth. The
Federal Reserve Board may disapprove such a purchase or redemption if it
determines that the proposal would violate any law, regulation, Federal Reserve
Board order, directive, or any condition imposed by, or written agreement with,
the Federal Reserve Board. Bank holding companies whose capital ratios exceed
the thresholds for "well capitalized" banks on a consolidated basis are exempt
from the foregoing requirement if they were rated composite 1 or 2 in their most
recent inspection and are not the subject of any unresolved supervisory issues.
REGULATION OF THE BANK
GENERAL. As a state-chartered bank with deposits insured by the FDIC but
which is not a member of the Federal Reserve System (a "state non-member bank"),
the Bank is supervised by the Commissioner and the FDIC. The Commissioner and
FDIC regularly examine the operations of the Bank, including its capital
adequacy, reserves, loans, investments and management practices. These
examinations are for the protection of the Bank's depositors and not its
stockholders. In addition, the Bank must furnish quarterly and annual call
reports to the Commissioner and FDIC. The FDIC has the power to remove officers
and directors and to issue cease-and-desist orders to prevent a bank from
engaging in unsafe or unsound practices or violating laws or regulations
governing its business.
The Bank's deposits are insured by the FDIC to the legal maximum of
$100,000 for each insured depositor. The Federal Reserve Board and the FDIC
regulate reserve requirements and disclosure requirements in connection with
personal and mortgage loans and savings deposit accounts. In addition, the Bank
is subject to numerous federal and
42
<PAGE>
state laws and regulations which impose specific restrictions and procedural
requirements for the establishment of branches, investments, interest rates on
loans, credit practices, the disclosure of credit terms and discrimination in
credit transactions.
CAPITAL ADEQUACY. The Federal Reserve Board and the FDIC have established
guidelines with respect to the maintenance of appropriate levels of capital by
bank holding companies and state non-member banks, respectively. The
regulations impose two sets of capital adequacy requirements: minimum leverage
rules, which require bank holding companies and banks to maintain a specified
minimum ratio of capital to total assets, and risk-based capital rules, which
require the maintenance of specified minimum ratios of capital to "risk-
weighted" assets.
The Federal Reserve Board and the FDIC require bank holding companies and
state non-member banks, respectively, to maintain a minimum leverage ratio of
"Tier 1 capital" (as defined in the risk-based capital guidelines discussed in
the following paragraphs) to total assets of 3.0%. Although setting a minimum
3.0% leverage ratio, the capital regulations state that only the strongest bank
holding companies and banks, with composite examination ratings of 1 under the
rating system used by the federal bank regulators, would be permitted to operate
at or near such minimum level of capital. All other bank holding companies and
banks must maintain a leverage ratio of at least 1% to 2% above the minimum
ratio, depending on the assessment of an individual organization's capital
adequacy by its primary regulator. Any bank or bank holding company
experiencing or anticipating significant growth is expected to maintain capital
well above the minimum levels. In addition, the Federal Reserve Board has
indicated that whenever appropriate, and particularly when a bank holding
company is growing, seeking to engage in new activities or otherwise facing
unusual or abnormal risks, it will consider, on a case-by-case basis, the level
of an organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the Federal Reserve Board and the FDIC
require bank holding companies and state non-member banks, respectively, to
maintain minimum regulatory capital levels based upon a weighting of their
assets and off-balance sheet obligations according to risk. Risk-based capital
is composed of two elements: Tier 1 capital and Tier 2 capital. Tier 1 capital
consists primarily of common stockholders' equity, certain perpetual preferred
stock (which must be noncumulative with respect to banks), and minority
interests in the equity accounts of consolidated subsidiaries; less all
intangible assets, except for certain purchased mortgage servicing rights and
credit card relationships. Tier 2 capital consists of, subject to certain
limitations, the allowance for losses on loans and leases; perpetual preferred
stock that does not qualify as Tier 1 capital and long-term preferred stock with
an original maturity of at least 20 years from issuance; hybrid capital
instruments, including mandatory convertible debt securities; subordinated debt
and intermediate-term preferred stock; and net unrealized gains on equity
securities.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total risk-
weighted assets. The risk-based capital regulations require all banks and bank
holding companies to maintain a minimum ratio of total capital (Tier 1 capital
plus Tier 2 capital) to total risk-weighted assets of 8%, with at least 4% as
Tier 1 capital. For the purpose of calculating these ratios: (i) Tier 2 capital
is limited to no more than 100% of Tier 1 capital; and (ii) the aggregate amount
of certain types of Tier 2 capital is limited. In addition, the risk-based
capital regulations limit the allowance for loan losses includable as capital to
1.25% of total risk-weighted assets.
FDIC regulations and guidelines additionally specify that state non-member
banks with significant interest rate risk may be required to maintain higher
risk-based capital ratios. The federal banking agencies, including the FDIC,
have proposed a system for measuring and assessing a bank's interest rate risk.
The federal banking agencies, including the FDIC, have stated their intention to
propose a rule establishing an explicit capital charge for interest rate risk
based upon the level of a bank's measured interest rate risk exposure after more
experience has been gained with the proposed measurement process. Federal
Reserve Board regulations do not specifically take into account interest rate
risk in measuring the capital adequacy of bank holding companies.
43
<PAGE>
The FDIC has issued regulations which classify state non-member banks by
capital levels and which authorize the FDIC to take various prompt corrective
actions to resolve the problems of any bank that fails to satisfy the capital
standards. Under such regulations, a well-capitalized bank is one that is not
subject to any regulatory order or directive to meet any specific capital level
and that has or exceeds the following capital levels: a total risk-based capital
ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of
5%. An adequately capitalized bank is one that does not qualify as well-
capitalized but meets or exceeds the following capital requirements: a total
risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a
leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest composite
examination rating. A bank not meeting these criteria is treated as
undercapitalized, significantly undercapitalized, or critically undercapitalized
depending on the extent to which the bank's capital levels are below these
standards. A state non-member bank that falls within any of the three
undercapitalized categories established by the prompt corrective action
regulation will be subject to severe regulatory sanctions. As of June 30, 1998,
the Bank was "well-capitalized" as defined by the FDIC's regulations.
BRANCHING. With the approval of the Commissioner, Maryland banks may
establish branches within the State of Maryland without geographic restriction
and may establish branches in other states by any means permitted by the laws of
such state or by federal law. The Reigle-Neal Act authorizes the FDIC to
approve interstate branching de novo by state banks, only in states which
specifically allow for such branching. Pursuant to the Reigle-Neal Act, the
appropriate federal banking agencies have adopted regulations which prohibit any
out-of-state bank from using the interstate branching authority primarily for
the purpose of deposit production. These regulations are designed to ensure
that interstate branches operated by an out-of-state bank in a host state are
also helping to meet the credit needs of the communities which they serve.
DIVIDEND LIMITATIONS. Maryland banks may only pay dividends from undivided
profits or, with the prior approval of the Commissioner, their surplus in excess
of 100% of required capital stock. The Maryland Financial Institutions Code
further restricts a Maryland bank from declaring a stock dividend on its shares
of capital stock unless its surplus is equal to at least 20% of the outstanding
capital stock as increased. If the surplus fund does not equal the amount of
capital stock, the Maryland bank shall annually transfer to surplus at least 10%
of its net earnings until the surplus is 100% of its capital stock as increased.
In addition, the Bank is prohibited by federal statute from paying dividends or
making any other capital distribution that would cause the Bank to fail to meet
its regulatory capital requirements. Further, the FDIC is authorized to
prohibit the payment of dividends by a state non-member bank when it determines
such payment to be an unsafe and unsound banking practice.
DEPOSIT INSURANCE. The Bank pays assessments based on a percentage of its
insured deposits to the FDIC for insurance of its deposits by the SAIF. Under
the Federal Deposit Insurance Act, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions to maintain the designated reserve
ratio of the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
Under the risk-based deposit insurance assessment system adopted by the
FDIC, the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- "well capitalized,
adequately capitalized or undercapitalized." Within each capital group,
institutions are assigned to one of three subgroups on the basis of supervisory
evaluations by the institution's primary supervisory authority and other
information the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund.
For a period of time, institutions with SAIF-assessable deposits, like the
Bank, were required to pay higher deposit insurance premiums than institutions
with deposits insured by the Bank Insurance Fund ("BIF") also administered by
the FDIC. In order to recapitalize the SAIF and address the premium disparity,
the Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on institutions with SAIF-assessable deposits based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based
44
<PAGE>
on the amount of their SAIF-assessable deposits as of March 31, 1995. As a
result of the special assessment the Bank incurred a pre-tax expense of
$1,263,000 during the 1996 fiscal year.
The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings is zero and institutions in the lowest risk
assessment classification are assessed at the rate of 0.27% of insured deposits.
Until December 31, 1999, however, SAIF member institutions will be required to
pay assessments to the FDIC at the rate of 6.5 basis points to help fund
interest payments on certain bonds issued by FICO, an agency of the federal
government established to finance takeovers of insolvent thrifts. During this
period, BIF members will be assessed for these obligations at the rate of 1.3
basis points. After December 31, 1999, both BIF and SAIF members will be
assessed at the same rate for FICO payments.
TRANSACTIONS WITH AFFILIATES. A state non-member bank or its subsidiaries
may not engage in "covered transactions" with any one affiliate in an amount
greater than 10% of such bank's capital stock and surplus. All such
transactions with all affiliates are limited to an amount equal to 20% of
capital stock and surplus. All such transactions must also be on terms
substantially the same, or at least as favorable, to the bank or subsidiary as
those provided to a non-affiliate. The term "covered transaction" includes the
making of loans, purchase of assets, issuance of a guarantee and similar other
types of transactions. An affiliate of a state non-member bank is any company
or entity which controls, is controlled by, or is under common control with the
state non-member bank. In a holding company context, the parent holding company
of a state non-member bank (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the state non-member
bank. The BHCA further prohibits a depository institution from extending credit
to or offering any other services, or fixing or varying the consideration for
such extension of credit or service, on the condition that the customer obtain
some additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain limited
exceptions.
LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. Loans
to directors, executive officers and principal stockholders of a state non-
member bank must be made on substantially the same terms as those prevailing for
comparable transactions with persons who are not executive officers, directors,
principal stockholder or employees of the Bank unless the loan is made pursuant
to a compensation or benefit plan that is widely available to employees and does
not favor insiders. Loans to any executive officer, director and principal
stockholder together with all other outstanding loans to such person and
affiliated interests generally may not exceed 15% of the bank's unimpaired
capital and surplus for loans that are not fully secured and an additional 10%
of the bank's unimpaired capital and surplus for loans that are fully secured by
readily marketable collateral. All loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Loans to directors,
executive officers and principal stockholders, and their respective affiliates,
in excess of the greater of $25,000 or 5% of capital and unimpaired surplus (up
to $500,000) must be approved in advance by a majority of the board of directors
of the bank with any "interested" director not participating in the voting.
State non-member banks are prohibited from paying the overdrafts of any of their
executive officers or directors. In addition, loans to executive officers must
be made on terms no more favorable than those offered other borrowers and are
restricted as to type, amount and terms of credit.
45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information about the directors, executive officers and
significant employees of the Company and the Bank including their name, age,
positions with the Company and the Bank, the year they first became a director
of the Company or the Bank and the year their current term as director of the
Company expires. Each director of the Company (other than Mr. Knight who first
became a director in 1998) has been a director of the Company since its
incorporation in 1990. Directors of the Company are divided into three classes
with one class elected by stockholders annually for a three-year term.
<TABLE>
<CAPTION>
POSITIONS WITH THE DIRECTOR CURRENT TERM
NAME AGE(1) COMPANY AND BANK SINCE (2) TO EXPIRE
- ---- ------ ------------------ --------- ------------
<S> <C> <C> <C> <C>
Bernard Dackman 71 Chairman of the Board and 1961 2000
Director of the Company
and the Bank
David H. Wells, Jr. 48 President, Chief Executive 1985 1999
Officer and Director of the
Company and the Bank
W. Benton Knight 49 Director and Vice President of 1998 2001
the Company, Executive Vice
President of the Bank
Irwin R. Cohen 74 Director of the Company 1961 2001
and the Bank
Joel Dackman 46 Director of the Company 1985 2001
and the Bank
Jan Cohen Feldman 43 Director of the Company 1985 2000
and the Bank
Philip Glazer 72 Director and Vice President of 1961 2001
the Company and the Bank
Marc S. Rosen 44 Director of the Company 1985 2001
and the Bank
Morton Shapiro 70 Director of the Company 1961 1999
and the Bank
Richard D. Sussman 43 Director of the Company 1985 2000
and the Bank
Seymour Sussman 73 Director of the Company 1961 1999
and the Bank
Ejner J. Johnson, Jr. 40 Director of the Bank 1997 --
J. Joseph McAleer, IV 32 Director of the Bank 1997 --
Steven M. Rosen 40 Director of the Bank 1997 --
Alan R. Silver 41 Director of the Bank 1997 --
- -------------------------
</TABLE>
(1) At June 30, 1998.
(2) Includes service as director of the Bank.
46
<PAGE>
Set forth below is information concerning the Company's and the Bank's
directors. Unless otherwise stated, all directors have held the positions
indicated for at least the past five years.
BERNARD DACKMAN is the Chairman of the Board of Directors of the Company
and the Bank and has served in those capacities since their founding in 1990 and
1961, respectively. Mr. Dackman also serves as the Chairman of the Executive
Committee and serves on the Compensation Committee of the Bank, as well as on
the Board of Directors of Key Operations Center, Inc. Mr. Dackman is a partner
with the law firm of Dackman, Heyman & Margolies, LLP in Baltimore, Maryland.
Mr. Dackman is the father of Joel Dackman.
DAVID H. WELLS, JR. has been President of the Bank since 1985 and President
of the Company since 1990. He also serves on the Board of Directors of Key
Operations Center, Inc. Mr. Wells joined the Bank in 1981 after serving six
years as Deputy Director of the Maryland Division of Savings and Loans. Mr.
Wells, who is also an attorney, is a member of the Board of Directors of
America's Community Bankers and also serves on the Strategic Planning and Audit
and Finance Committees of that organization. Mr. Wells is also a member of the
Board of Directors of the Maryland Bankers' Association and serves on its
Government Relations Committee. Mr. Wells served as Chairman of the Maryland
League of Financial Institutions from 1988 to 1990.
W. BENTON KNIGHT is the Vice President and Treasurer of the Company and
Executive Vice President and Chief Financial Officer of the Bank which he joined
in 1984. Mr. Knight also serves on the Board of Directors of Key Operations
Center, Inc. Prior to joining the Bank, Mr. Knight, who is a Certified Public
Accountant, was manager of regulatory and SEC reporting for Mercantile
Bancshares in Baltimore, Maryland.
IRWIN R. COHEN is President and Chief Executive Officer of R/C Theaters,
Reisterstown, Maryland with which he has been affiliated since 1942. Mr. Cohen,
who is also an attorney, is Chairman of the Loan Committee and serves on the
Executive Committee and Compensation Committee. Mr. Cohen is the father of Jan
Cohen Feldman.
JOEL DACKMAN is a self-employed Certified Public Accountant in Baltimore,
Maryland. Mr. Dackman is Chairman of the Audit Committee and a member of the
Loan Committee. Mr. Dackman is the son of Bernard Dackman.
JAN COHEN FELDMAN is a legal assistant with ICMA Retirement Corporation, a
pension fund management business located in Washington, D.C. Ms. Feldman serves
on the Board of Directors of Key Operations Center, Inc. and is a member of the
Community Reinvestment Committee of the Bank. Ms. Feldman is the daughter of
Irwin R. Cohen.
PHILIP GLAZER is the Vice Chairman of the Board of Directors of the Company
and the Bank. Mr. Glazer serves as Chairman of the Board of Directors of Key
Operations Center, Inc. and is a member of the Executive Committee and Community
Reinvestment Committee of the Bank. Mr. Glazer is retired.
MARC S. ROSEN is a partner with the law firm of Scanlan, Rosen & Shar, LLC,
Baltimore, Maryland. Prior to forming his own law firm in 1990, Mr. Rosen was
associated with the law firm of Whiteford, Taylor & Preston in Baltimore,
Maryland. Mr. Rosen serves on the Executive Committee and the Compensation
Committee of the Bank.
MORTON SHAPIRO is an attorney and real estate investor. He is President of
Paul Shapiro and Sons, Inc., a real estate and property management firm in
Baltimore, Maryland. Mr. Shapiro is a member of the Board of Directors of the
Property Owners Association of Greater Baltimore. Mr. Shapiro serves on the
Audit Committee of the Bank.
RICHARD D. SUSSMAN is an attorney with Northwestern Loan Company, a pawn
brokerage in Baltimore, Maryland. Prior to joining Northwestern, Mr. Sussman
was associated with the law firm of Weinberg & Green in Baltimore, Maryland.
Mr. Sussman, who serves on the Bank's Loan Committee, is the son of Seymour
Sussman.
47
<PAGE>
SEYMOUR SUSSMAN is the President of Northwestern Loan Company, a pawn
brokerage in Baltimore, Maryland. Mr. Sussman serves on the Executive Committee
and Compensation Committee of the Bank. Mr. Sussman, who is the father of
Richard Sussman, also serves on the Board of Directors of Valley Bank of
Maryland (formerly Baltimore Savings and Loan Association, F.A.), Owings Mills,
Maryland.
EJNER J. JOHNSON, JR. is Senior Vice President for fixed-income securities
sales in the Baltimore office of Prudential Securities, Inc., a securities
broker-dealer. Mr. Johnson serves on the Board of Directors of Key Operations
Center, Inc, as well as on the Community Reinvestment Committee of the Bank.
J. JOSEPH MCALEER IV, is a principal in the firm of Monaghan, Tilghman &
Hoyle, an insurance agency in Baltimore, Maryland. Prior to joining Monaghan,
Tilghman & Hoyle in 1994, he was a Vice President with the Warner Companies, a
financial and estate planning firm in Timonium, Maryland. Mr. McAleer serves on
the Commercial Loan Committee of the Bank.
STEVEN M. ROSEN is a real estate attorney with the firm of Abramhoff,
Neuberger & Linder, LLP in Baltimore, Maryland. Mr. Rosen serves on the Loan
Committee of the Bank.
ALAN R. SILVER is a Certified Public Accountant with the accounting firm of
Silver & Silver, P.A in Owings Mills, Maryland. Mr. Silver is the President of
Worthington Woods Homeowners Association and sits on the Board of Directors of
Adat Chaim, Inc. Mr. Silver serves on the Audit Committee and Commercial Loan
Committee of the Bank.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following sets forth information with respect to executive officers of
the Bank who do not serve on the Boards of Directors of the Company or the Bank.
<TABLE>
<CAPTION>
NAME AGE(1) POSITIONS WITH THE BANK
- ------------------------ ------ -----------------------------------------------------------------------
<S> <C> <C>
William F. Ariano, Jr. 49 Vice President/Division Manager of Residential Lending
Robert M. Bouza 63 Senior Vice President
Ross L. Brown 41 Senior Vice President/Division Manager of Commercial Lending
Judith A. Frank 50 Vice President/Branch Administration/Division Manager of Retail Banking
George Harrison 39 Vice President/Division Manager of Consumer Lending
Thomas J. Juranich 48 Senior Vice President/President of Key Operations Center, Inc.
George G. Wachter 55 Senior Vice President/Division Manager of Construction Lending
- -------------------------
</TABLE>
(1) At June 30, 1998.
WILLIAM F. ARIANO, JR. has been the Vice President of the Bank in charge of
Residential Mortgage Lending since 1997. Prior to joining the Bank, Mr. Ariano
was a Senior Loan Originator with B.F. Saul Mortgage Company in Baltimore,
Maryland.
ROBERT M. BOUZA has been the Senior Vice President of the Bank since 1992.
Mr. Bouza served as President of Key Operations Center, Inc. from 1982 to 1997.
ROSS L. BROWN has been the Senior Vice President of the Bank in charge of
Small Business Lending since 1997 and previously had served as a Vice President
in this capacity since 1991. Mr. Brown was named Financial Services Advocate of
the Year by the Baltimore District of the Small Business Administration in 1996.
Prior to joining the Bank, Mr. Brown was a Vice President in the small business
lending division of Signet Bank in Baltimore, Maryland.
48
<PAGE>
JUDITH A. FRANK has been the Vice President of the Bank in charge of branch
administration since 1996 and an Assistant Vice President in this capacity since
1992. Prior to joining the Bank, Mrs. Frank had served in this capacity with
Sharon Savings Bank, FSB in Baltimore, Maryland.
GEORGE J. HARRISON has been the Vice President of the Bank in charge of
consumer lending since 1996. Prior to joining the Bank, Mr. Harrison ran three
branch offices of Sun Star Acceptance, the sub-prime automobile lending
subsidiary of NationsBank, and worked as Asset Remarketing Manager for both
NationsBank and Maryland National Bank.
THOMAS J. JURANICH became the President of Key Operations Center, Inc. in
1997 after having served as Vice President of that company since 1991. Mr.
Juranich is also a Vice President of the Bank. Prior to joining the Bank, Mr.
Juranich worked in branch administration for Long Island Savings Bank and in the
credit card division of Chemical Bank.
GEORGE G. WACHTER has been the Senior Vice President of the Bank in charge
of construction and development lending since 1994 and a Vice President in that
capacity since 1990. Mr. Wachter has over 30 years experience in construction
and development lending with several institutions in the Baltimore area.
DIRECTORS' COMPENSATION
DIRECTORS' FEES. Each director of the Company receives an annual retainer
of $1,000. Non-employee directors of the Bank also receive an annual retainer
of $15,000. In addition, the Chairman of the Bank's Board of Directors receives
an annual fee of $30,000. Employee directors who serve on the Bank's Board of
Directors do not receive any fees for their service. In addition to the fees
paid to directors of the Company and the Bank, annual fees in the amount of
$2,500 are paid to the chairmen of the Audit Committee and Loan Committee, and
to the Chairman of the Board of Key Operations.
DIRECTOR STOCK OPTION PLAN. The Company has reserved 60,000 shares of
Common Stock under the Key Capital Corporation 1998 Stock Option Plan for
Directors ("Director Option Plan") for issuance pursuant to non-incentive stock
options granted to non-employee directors and advisory directors of the Company
and its affiliates. The purpose of the Director Option Plan is to advance the
interests of the Company by providing directors of the Company and its
affiliates with the opportunity to acquire shares of Common Stock. No options
have been granted under the Director Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Bank serves as
the compensation committee for the Company's Board of Directors. The
Compensation Committee periodically evaluates the compensation paid to
directors, executive officers and other employees and recommends changes to
compensation policy to the Bank's Board of Directors. During the year ended
December 31, 1997, Irwin Cohen, Bernard Dackman, Marc Rosen and Seymour Sussman
served on the Compensation Committee. Each of the members of the Compensation
Committee has engaged in certain transactions with the Company during the last
fiscal year. See " -- Certain Relationships and Related Transactions."
49
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company and the
Bank to their chief executive officer and to each other executive officer whose
salary and bonus earned in the fiscal year ended December 31, 1997 exceeded
$100,000 for services rendered in all capacities to the Company and its
subsidiaries (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------ -------------------------
RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARD(S) OPTIONS COMPENSATION (2)
------------------ ---- ------ ----- -------------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
David H. Wells, Jr. 1997 $105,000 $53,597 $ -- -- 4,000 $4,000
President
W. Benton Knight 1997 97,000 53,597 -- -- 3,000 3,000
Executive Vice
President
Robert M. Bouza 1997 105,000 21,226 -- -- -- 1,051
Senior Vice President
George G. Wachter 1997 85,000 52,400 -- -- 2,000 2,767
Senior Vice President
</TABLE>
- -------------------------
(1) Excludes certain personal benefits, the value of which in the aggregate did
not exceed the lesser of $50,000 or 10% salary and bonus for any Named
Executive Officer.
(2) "All Other Compensation" consists of 401(k) Plan matching contributions by
Messrs. Wells, Knight, Bouza and Wachter in the amounts of $3,000, $3,000,
$1,051, and $2,767, respectively. Also includes $1,000 in directors fees
received by Mr. Wells for his service on the Company's board of directors.
OPTION GRANTS IN LAST FISCAL YEAR. The following table contains
information concerning the grant of stock options under the Company's Incentive
Stock Option Plan (the "Option Plan") to the Chief Executive Officer and the
Named Executive Officers during fiscal year 1997. No stock appreciation rights
have been granted under the Option Plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN OR BASE EXPIRATION -----------------
NAME GRANTED(1) FISCAL YEAR PRICE(2) DATE 5% 10%
- ---- ---------- ----------- -------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
David H. Wells, Jr. 4,000 25.6% $29.44 4/15/03 $32,535 $71,894
W. Benton Knight 3,000 19.2 29.44 4/15/03 24,402 53,920
Robert M. Bouza -- -- -- -- -- --
George G. Wachter 2,000 12.8 29.44 4/15/03 16,267 35,947
</TABLE>
- --------------------
(1) All options are immediately exercisable.
(2) Exercise price equals fair market value per share at date of grant.
50
<PAGE>
YEAR-END OPTION/SAR VALUES AND EXERCISE OF OPTIONS. The following table
sets forth information concerning the number and potential realizable value at
the end of 1997 of options held by the Chief Executive Officer and Named
Executive Officers and the options such persons exercised during 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END (2)
SHARES ACQUIRED VALUE -------------------------- -------------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- --------------- ----------- ----------- ------------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
David H. Wells, Jr. -- $ -- 19,990 -- $118,310 $ --
W. Benton Knight -- -- 15,000 -- 89,100 --
Robert M. Bouza 3,000 4,800 4,000 -- 16,750 --
George G. Wachter -- -- 10,000 -- 59,400 --
- -------------------------
</TABLE>
(1) Based on the price at which the shares were actually sold.
(2) Calculated based on the product of (a) the number of shares subject to
option times (b) the difference between the estimated market value of the
underlying Common Stock at December 31, 1997 ($29.44 per share) and the
exercise price of the options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank makes loans to executive officers and directors of the Company,
and their affiliates, from time to time in the ordinary course of business.
Loans are made to such persons on the same terms, including interest rates and
collateral, as those prevailing at the time for comparable loans with unrelated
borrowers and the Bank does not believe that they involve more than the normal
risk of collectibility or present other unfavorable features. At December 31,
1997, these loans consisted of outstanding credit card balances and were less
than $60,000 in total.
Dackman, Heyman & Margolies, LLP, a law firm of which Director Bernard
Dackman is a partner, serves as general counsel to the Bank and receives fees
from the Bank for its services. In addition, during the year ended December 31,
1997, Dackman, Heyman & Margolies, LLP, received $214,000 in fees for services
rendered in connection with loan closings which were paid by borrowers.
Scanlan, Rosen & Shar, LLC, a law firm in which Director Marc S. Rosen is a
partner, also performs legal services for the Company. During the year ended
December 31, 1997, Scanlan, Rosen & Shar, LLC, received $80,000 for such
services.
Since January 1, 1997, the Company has borrowed funds pursuant to
promissory notes issued to various related parties to fund loans made by the
Company to third parties. These borrowings replaced a loan from another bank
which was at a rate of 2% over the prime rate. The Company intends to repay
these loans as they come due. The following table sets forth information on
each of these transactions.
<TABLE>
<CAPTION>
RELATION INTEREST
DATE AMOUNT PAYEE TO COMPANY RATE MATURITY
- -------- -------- --------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
02/07/97 $200,000 Hopkins Bancorp, Inc. A 9.0% 03/07/98 *
02/07/97 400,000 Hopkins Bancorp, Inc. A 10.0 03/07/99
02/21/97 100,000 Diversions, Inc. B 9.5 09/21/98 *
03/04/97 300,000 Northwestern Loan Co., Inc. C 9.5 09/04/98 *
04/02/98 200,000 Hopkins Bancorp, Inc. A 10.0 05/01/00
04/07/98 200,000 Irwin R. Cohen D 9.0 05/07/99
04/07/98 200,000 Northwestern Loan Co., Inc. C 10.0 05/07/00
04/14/98 100,000 Diversions, Inc. B 9.5 10/14/99
- -------------------------
</TABLE>
* Repaid.
A: Controlled by Alvin R. Lapidus, a beneficial owner of more than 5% of the
Common Stock.
B: Controlled by the spouse of Morton Shapiro, a director of the Company.
C: Controlled by Seymour Sussman, a director of the Company.
D: Director
51
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of June 30, 1998 concerning
ownership of the Common Stock (which constitutes its only class of equity
securities) by any individual or group known to the Company to be the beneficial
owner of more than 5% of its Common Stock, each of its directors and Named
Executive Officers, and all executive officers and directors as a group. Each
person listed has sole voting and sole investment power with respect to the
shares listed across from his name except as noted otherwise.
<TABLE>
<CAPTION>
ANTICIPATED
COMMON STOCK PERCENTAGE
AMOUNT AND NATURE OF PERCENT PURCHASES IN FOLLOWING THE
NAME BENEFICIAL OWNERSHIP /1/ OF CLASS /2/ THE OFFERING /3,4/ OFFERING /4/
----- ----------------------- ------------ ------------------ -------------
<S> <C> <C> <C> <C>
Directors and Named Executive Officers:
Irwin R. Cohen /5/ 100,400 /6/ 12.33%
Bernard Dackman /5/ 122,436 15.04
Joel Dackman 10,526 1.29
Jan C. Feldman 2,620 *
Philip Glazer /5/ 78,904 /7/ 9.64
W. Benton Knight 17,900 /8/ 2.16
Marc S. Rosen 9,460 /9/ 1.16
Morton Shapiro 3,200 /10/ *
Richard D. Sussman 15,940 1.96
Seymour Sussman /5/ 69,246 8.50
David H. Wells, Jr. /5/ 41,840 /11/ 5.02
Robert M. Bouza 4,000 /12/ *
George G. Wachter 12,680 /13/ 1.54
All directors and executive officers
as a group (18 persons) 498,852 /14/ 57.20
Other Beneficial Owners:
Estate of Charles G. Jules /5/ 51,416 /15/ 6.31
Alvin Lapidus 56,344 /16/ 6.92
Burton Rosen 66,296 /17/ 8.14
</TABLE>
- -------------------------
* Less than 1.0% of shares outstanding.
/1/ For purposes of this table, a person is deemed to be the beneficial owner
of any shares of Common Stock if he or she has or shares voting or
investment power with respect to such Common Stock or has a right to
acquire beneficial ownership at any time within 60 days from June 30,
1998. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct
the disposition of shares. Except as otherwise noted, ownership is direct,
and the named individuals exercise sole voting and investment power over
the shares of the Common Stock .
/2/ In calculaitng percentage ownership for a given individual or group of
individuals, the number of shares of the Common Stock outstanding includes
unissued shares subject to options exercisable within 60 days of June 30,
1998 held by that individual or group.
/3/ Based on an initial public offering price of $12.00 per share.
/4/ Assuming no exercise of the Underwriter's over-allotment option.
/5/ The address of the named individual is 7F Gwynns Mill Court, Owings Mills,
Maryland.
/6/ Includes 30,000 shares held by Capital Industries, Inc. of which he is
president and 20,400 shares held jointly. Excludes 2,620 shares held by his
daughter Jan C. Feldman.
/7/ Includes 3,740 shares held jointly, 3,506 shares held by Associated
Partners, Co., Inc., 29,716 shares held in an individual retirement account
and 9,218 shares held by his spouse as to which he disclaims beneficial
ownership.
/8/ Held jointly. Includes 15,000 shares which Mr. Knight has the right to
acquire pursuant to the exercise of options.
/9/ Includes 700 shares held jointly.
/10/ Includes 3,175 shares held jointly.
/11/ Includes 21,850 shares held jointly. Includes 19,960 shares which Mr.
Wells has the right to acquire pursuant to the exercise of options.
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/12/ Consists of shares that he has the right to acquire pursuant to the
exercise of options.
/13/ Include 2,680 shares held jointly and 10,000 shares that he has the right
to acquire pursuant to the exercise of options.
/14/ Includes 57,834 shares which directors and executive officers have the
right to acquire pursuant to the exercise of options.
/15/ Includes 14,280 shares held jointly.
/16/ Includes 27,972 shares held jointly and 400 shares held by spouse as to
which he disclaims beneficial ownership. Does not include 31,692 shares
held by Hopkins Bancorp, Inc. of which Mr. Lapidus is Chairman and as to
which he disclaims beneficial ownership. Mr. Lapidus' address is
______________________________________________.
/17/ Includes 32,648 shares held by spouse as to which he disclaims beneficial
ownership. Mr. Rosen's address is
______________________________________________.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Common Stock. As
of September __, 1998, there were _____ shares outstanding and _____
stockholders of record. Upon the closing of the Offering, there will be ______
shares of Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option). Each share of the Common Stock has the same relative
rights as, and is identical in all respects with, each other share of Common
Stock. The Common Stock is not subject to redemption and is not convertible
into any other class of securities. Upon payment of the full purchase price
therefor, the Common Stock will be fully paid and non-assessable. THE COMMON
STOCK REPRESENTS NONWITHDRAWABLE CAPITAL, IS NOT AN ACCOUNT OF AN INSURABLE
TYPE, AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
DIVIDENDS. The Company can pay dividends if, as and when declared by its
Board of Directors, subject to compliance with limitations which are imposed by
law. See "Dividends." The holders of the Common Stock will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor.
VOTING RIGHTS. The holders of the Common Stock possess exclusive voting
rights in the Company. Each holder of Common Stock is entitled to one vote per
share. Stockholders are entitled to cumulate their votes in the election of
directors. The classification of the Board of Directors, however, reduces the
amount by which stockholders will be able to cumulate their votes in any
election. Mergers, consolidations, share exchanges and sales of substantially
all the Company's assets as well as amendments to its Articles of Incorporation
require the approval of two-thirds of the outstanding shares. A majority of the
votes cast is generally required for the approval of all other matters submitted
to a vote of the stockholders except as described in " -- Certain Voting
Requirements."
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution in cash or in kind.
REPURCHASE OF OWN SHARES. The Company generally may repurchase its own
shares, subject to certain restrictions under applicable state and federal
banking and securities laws.
PREEMPTIVE RIGHTS. Holders of the Common Stock do not have preemptive
rights with respect to any additional shares which may be issued by the Company.
Any issuance of the Company's capital stock (other than an issuance of treasury
stock or an issuance pursuant to a pro rata stock dividend) must be approved by
the holders of not less than a majority of the outstanding shares of capital
stock.
TRANSFER AGENT AND REGISTRAR. ________ acts as transfer agent and
registrar for the Common Stock.
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CERTAIN VOTING REQUIREMENTS
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS. The Company's Articles
of Incorporation require the affirmative vote of at least 66-2/3% of the
outstanding shares of capital stock of the Company entitled to vote generally in
the election of directors for the approval of any amendment to Article XII
(Removal of Directors), XIII (Indemnification), XIV (Limitations on Liability of
Officers and Directors) and XVI (Amendments of Articles of Incorporation). In
addition, the Articles of Incorporation provide that the following sections of
the Bylaws may only be amended by the vote of not less than a majority of the
outstanding shares of the capital stock of the Company: Article II Stockholders,
Sections 3 (Special Meetings), 8 (Quorum), 10 (Voting) and 12(c) (Voting of
Treasury Shares); Article III Board of Directors, Sections 2 (Number, Term and
Election), 10 (Vacancies) and 11 (Removal of Directors); and Article XI
Amendments.
REMOVAL OF DIRECTORS. Under the Company's Articles of Incorporation,
directors may only be removed for cause and only by the affirmative vote of the
holders of at least 75% of the outstanding shares of capital stock of the
Company entitled to vote generally in the election of directors cast at a
meeting of the stockholders called for that purpose. If less than the entire
board of directors is to be removed, no one of the directors may be removed if
the votes cast against the removal would be sufficient to elect a director if
then cumulatively voted at an election of the class of directors which such
director is a part.
BUSINESS COMBINATIONS. Under the Maryland General Corporation Law,
mergers, consolidations and sales of substantially all of the assets of a
Maryland corporation must generally be approved by the affirmative vote of the
holders of two-thirds of the outstanding shares of stock entitled to vote
thereon. Maryland's Business Combination Statute, however, restricts certain
transactions between a Maryland corporation (or its majority owned
subsidiaries), and any person who, after the date the corporation has 100 or
more beneficial owners of its stock, beneficially owns 10% or more of the
corporation's outstanding voting stock, together with affiliates or associates
thereof (an "Interested Stockholder"). For a period of five years following the
date that a stockholder becomes an Interested Stockholder, Maryland's Business
Combination Statute generally prohibits the following types of transactions
between the corporation and the Interested Stockholder (unless certain
conditions, described below, are met): (i) mergers, consolidations or share
exchanges; (ii) sales, leases, exchanges or other dispositions other than in the
ordinary course of business or pursuant to a dividend, in any twelve-month
period, of assets having an aggregate book value of 10% or more of the total
market value of the outstanding stock of the corporation or of its net worth;
(iii) issuances or transfers by the corporation or any subsidiary thereof of any
equity securities of the corporation or any subsidiary thereof having a market
value of 5% or more of the total market value of the outstanding stock of the
corporation; (iv) the adoption of a proposal or plan of liquidation or
dissolution of the corporation in which anything other than cash will be
received by the Interested Stockholder or any affiliate of any Interested
Stockholder; (v) any reclassification of securities, or recapitalization of the
corporation, or any merger, consolidation, or share exchange of the corporation
with any of its subsidiaries which has the effect of increasing by 5% or more of
the total number of shares, the proportionate amount of the outstanding shares
of any class of equity securities of the corporation or any subsidiary thereof
which is owned by an Interested Stockholder; and (vi) the receipt by any
Interested Stockholder or any affiliate thereof of the benefit, directly or
indirectly, (except proportionately as a stockholder) of any loan, advance,
guarantee, pledge, or other financial assistance or any tax credit or other tax
advantage provided by the corporation or any of its subsidiaries. After the
five-year moratorium on business combinations has expired, a business
combination must (i) be recommended by the board of directors and approved by
(a) 80% of the stockholders entitled to vote, and (b) two-thirds of the
disinterested stockholders, or (ii) meet the rigorous fair price requirements of
the business combination statute, or (iii) qualify for one of the statutory
exemptions. This restriction does not apply if before such person becomes an
Interested Stockholder, the Board of Directors approves the transaction in which
the Interested Stockholder becomes an Interested Stockholder or approves the
business combination, or a statutory exemption applies. A Maryland corporation
may exempt particular interested stockholders from the requirements of the
statute by resolution adopted by its board of directors prior to the date the
Interested Stockholder became an Interested Stockholder.
54
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CONTROL SHARE ACQUISITIONS. The Maryland General Corporation Law provides
that "control shares" of a Maryland corporation acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the shares entitled to be voted on the matter, excluding shares of
stock owned by the acquiror or by officers or directors who are employees of the
corporation. "Control shares" are voting shares of stock which, if aggregated
with all other such shares of stock previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power except solely by virtue of a revocable proxy, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-third;
(ii) one-third or more but less than a majority; or (iii) a majority of all
voting power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions for shares acquired through descent or distribution, in
satisfaction of a pledge or in a merger, consolidation or share exchange to
which the corporation is a party. The control share acquisition statute applies
to any Maryland corporation with 100 or more beneficial owners of its stock
other than a close corporation or an investment company.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses and
delivery of an "acquiring person statement"), may compel the corporation's board
of directors to call a special meeting of stockholders to be held within 50 days
of demand to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any
stockholders' meeting.
Unless the articles or bylaws provide otherwise, if voting rights are not
approved at the meeting or if the acquiring person does not deliver an
acquiring person statement within 10 days following a control share acquisition
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except for those which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. Moreover, unless the
charter or bylaws provides otherwise, if voting rights for control shares are
approved at a stockholders' meeting and the acquiror becomes entitled to
exercise or direct the exercise of a majority or more of all voting power, other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Articles of Incorporation authorize the issuance of
20,000,000 shares of Common Stock. Upon completion of the Offering, there will
be outstanding ______ shares of Common Stock (assuming no exercise of the over-
allotment option).
All shares of Common Stock issued in the Offering will be available for
resale in the public market without restriction or further registration under
the Securities Act, except for shares purchased by affiliates of the Company (in
general, any person who has a control relationship with the Company), which
shares will be subject to the resale limitations of Rule 144. After the
Offering, ______ additional shares of Common Stock held by affiliates will be
considered to be "control shares" and 66,984 additional shares of Common Stock
issuable upon the exercise of options that the Company has granted or agreed to
grant will be "restricted securities" within the meaning of Rule 144, and are
eligible for sale in the public market in compliance with Rule 144. The Company
intends to file a registration statement on Form S-8 under the Securities Act
registering approximately 200,000 shares of Common Stock issuable upon the
exercise of options granted or to be granted pursuant to its Stock Option Plans.
Upon effectiveness of the registration statement, shares issued to nonaffiliates
upon the exercise of the options generally will be freely tradeable without
restriction or further registration under the Securities Act. All directors and
executive officers and certain other stockholders of the Company have agreed,
subject to certain exceptions, that they will not offer, sell or otherwise
dispose of any shares of Common Stock owned by them for a period of 180 days
after the date of this Prospectus without the prior written consent of Ryan,
Beck. The Company has agreed, subject to certain exceptions, that it will
55
<PAGE>
not offer, sell or otherwise dispose of any shares of Common Stock for a period
of 180 days after the date of this Prospectus without the prior written consent
of Ryan, Beck.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell a limited number of shares provided that the person has owned
the shares for at least one year. Sales, within any three-month period, may not
exceed the greater of (i) one percent of the then outstanding shares of Common
Stock, or (ii) if the average weekly trading volume of the Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 must also
comply with certain requirements as to the manner of sale, notice, and the
availability of current public information about the Company. However, a person
who is not deemed to have been an affiliate of the Company during the three
months preceding a sale by such person and who has beneficially owned the shares
at least two years is entitled to sell them without regard to the volume, manner
of sale, or notice requirements of Rule 144.
THE OFFERINGS
The Company proposes to offer a total of _________ shares of the Common
Stock in two stages. In the first stage, the Company will offer _________
shares on a best efforts basis in the Community Offering. The Company intends to
sell any shares which remain unsold at the close of the Community Offering
(along with another _______ shares) to Ryan, Beck for resale in a firm
commitment Public Offering. The Company will not issue any shares to subscribers
in the Community Offering unless the Public Offering takes place. Subscribers in
the Community Offering will pay the same price per share as purchasers in the
Public Offering.
THE COMMUNITY OFFERING
GENERAL. The Company is offering up to _________ shares of its Common
Stock at a price between $10.00 and $12.00 per share in the Community Offering.
The minimum purchase for the Community Offering is 100 shares and the maximum
purchase is $__________. In its sole discretion, however, the Company may
accept a subscription for a lesser or greater number of shares. Subscribers
should be aware that beneficial ownership of more than 5% of the outstanding
shares could obligate the beneficial owner to comply with certain reporting and
disclosure requirements of federal and state banking and securities laws.
Subscription orders will be accepted until __:__ _.m., Eastern time on
_____________, 1998. See "Escrow Account and Release of Funds" below. The
Company reserves the right to terminate the Community Offering at any time. The
date the Community Offering terminates is referred to herein as the "Expiration
Date."
Subscriptions are binding on subscribers upon acceptance by the Company.
Subscribers may not revoke subscriptions without the consent of the Company. In
addition, the Company reserves the right to cancel subscriptions received at any
time and for any reason until the proceeds of the Community Offering are
released from the Escrow Account (as discussed in greater detail in "Escrow
Account and Release of Funds" below). The Company reserves the right to reject
any subscription, in whole or in part and in its sole discretion. In the event
of an over-subscription, the Company may allocate shares among subscribers in
its sole discretion. In determining which subscriptions to accept, in whole or
in part, the Company may take into account the order in which subscriptions are
received, a subscriber's potential to do business with, or to direct customers
to, the Bank, and the Company's desire to have a broad distribution of stock
ownership, and other considerations.
In the event the Company rejects all, or accepts less than all, of a
subscription, the Company will refund promptly without interest the amount
remitted that corresponds to $_____ multiplied by the number of shares as to
which the subscription is not accepted. If the Company accepts a subscription
but in its discretion subsequently elects to cancel all or part of such
subscription, the Company will refund the amount remitted and no interest will
be earned thereon.
56
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ESCROW ACCOUNT AND RELEASE OF FUNDS. Subscription proceeds accepted by the
Company for _______ shares subscribed for in the Community Offering will be
promptly deposited in an escrow account with __________ (the "Escrow Agent"),
until the closing of the Public Offering. After the close of the Community
Offering, the Escrow Agent will continue to hold the subscription proceeds of
the Offering until the completion of the Public Offering. Certificates
representing shares duly subscribed and paid for will be issued by the Company
promptly after the completion of both the Offerings and escrowed funds are
delivered to the Company. The Escrow Agent has not investigated the advisability
of an investment in the shares and has not approved, endorsed, or passed upon
the merits of an investment in the shares of Common Stock. Subscription proceeds
held in the Escrow Account will not earn interest. If the above conditions are
satisfied, the Escrow Account will be terminated by the Company, in which event
the subscription amounts held in Escrow Account, and any interest earned
thereon, will be paid to the Company.
HOW TO SUBSCRIBE. Shares may be subscribed for by delivering the Stock
Order Form to the Stock Information Center, established by Ryan, Beck, on or
before the Expiration Date. The address of the Stock Information Center is 7F
Gwynns Mill Court, Owings Mills, Maryland 21117. Subscribers should retain a
copy of their completed Stock Order Form for their records. The subscription
price is due and payable when the Stock Order Form is delivered. Payment must be
made in United States dollars by check, bank draft or money order drawn to the
order of "_______________, as Escrow Agent for Key Capital Corporation", in the
amount of $12.00 multiplied by the number of shares subscribed for. Funds also
may be delivered to the Escrow Agent by wire transfer. Please call the Stock
Information Center at (410) 363-7050 for wire transfer instructions.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES. To ensure that
each purchaser receives a Prospectus at least 48 hours prior to the Expiration
Date in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no Prospectus will be mailed any later than five
days prior to the Expiration Date or hand delivered any later than two days
prior to such date. Order forms will only be distributed with a Prospectus.
Execution of the order form will confirm receipt of the Prospectus in accordance
with Rule 15c2-8. The Company is not obligated to accept orders not submitted
on original order forms. Order forms unaccompanied by an executed
acknowledgment form will not be accepted. Payment by check, money order, bank
draft or wire transfer must accompany the order and acknowledgment forms.
PLAN OF DISTRIBUTION. Under the Agency Agreement (the "Agency Agreement")
which the Company has entered into with Ryan, Beck, the Company has retained
Ryan, Beck as its exclusive financial adviser, to consult with and advise the
Company with respect to the Community Offering and to provide assistance in
connection with the sale of shares of Common Stock in the Community Offering.
Ryan, Beck is a registered broker-dealer and is a member of the National
Association of Securities Dealers, Inc.
Among other things, Ryan, Beck will assist with administrative and
marketing functions, such as (i) training the Company's employees and Stock
Information Center (as defined below) staff regarding the mechanics of the
Community Offering, (ii) answering investors' questions and participating in
informational meetings for investors, (iii) coordinating Stock Information
Center activities and organizing the sales effort, (iv) soliciting orders to
purchase shares of Common Stock, and (v) maintaining records of all sales
activity. Ryan, Beck will not have any obligation to purchase or accept any
shares of Common Stock for its own account in the Community Offering.
For these services, the Company will pay Ryan, Beck a marketing /management
fee of 2.5% of the total dollar amount of Common Stock sold in the Community
Offering. The Company, however, will not pay fees to Ryan, Beck for shares sold
to directors, officers, employees or employee benefit plans of the Company or
the immediate families of such persons.
The Company will pay for all of its own expenses in connection with the
Community Offering, such as legal, accounting, printing and filing fees and
expenses. The Company also will reimburse Ryan, Beck for up to $5,000 of its
itemized and reasonable out-of-pocket expenses, and will pay legal fees up to
$40,000 plus associated expenses. The Company has agreed in the Agency
Agreement to indemnify Ryan, Beck against liabilities and expenses (including
57
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legal fees) incurred in connection with certain claims or litigation arising out
of or based upon untrue statements or omissions contained in the offering
materials for the Common Stock, including but not limited to liabilities under
the Securities Act and under the Exchange Act.
Offering materials for the Community Offering initially will be distributed
to certain persons by mail. Additional copies will be available at the Company's
executive offices ("Stock Information Center"). Officers and directors of the
Company will be available to answer questions about the Community Offering and
may also hold informational meetings for interested persons. Such officers and
directors will not be permitted to make statements about the Offerings
contemplated in this Prospectus unless such information is set forth in the
Prospectus (or is incorporated herein by reference) nor may they render
investment advice. The Common Stock will be offered in the Community Offering
principally by the distribution of this Prospectus and through activities
conducted at the Stock Information Center.
Certain employees, officers or directors of the Company may participate or
assist in the Community Offering. The assistance to be provided by employees in
connection with the Offerings will consist of (i) assisting in the mailing of
the Prospectus and other offering materials, (ii) staffing the Stock Information
Center and responding to telephone inquiries of potential investors with regard
to matters of ministerial nature, and (iii) maintaining records of all
subscriptions and orders. In addition, officers and directors may attend
informational meetings for potential investors and communicate with potential
investors by telephone, in either case limiting any statements or discussions to
the business and affairs of the Company and its prospects to the extent such
information is included in this Prospectus. Each employee, officer and director
who will assist in the Community Offering will be instructed not to make any
recommendation respecting subscriptions or orders for the Common Stock.
PUBLIC OFFERING
It is anticipated that all shares of Common Stock not subscribed for in the
Community Offering plus an additional _________ shares will be sold to Ryan,
Beck for resale in the Public Offering. It is anticipated that Ryan, Beck will
purchase such shares at a market price less an underwriting discount. An
underwriting agreement (the "Underwriting Agreement") between the Company and
Ryan, Beck will not be entered into until immediately prior to the Public
Offering. Subject to the conditions contained in the Underwriting Agreement,
the Underwriting Agreement will require Ryan, Beck to purchase all shares of
Common Stock that have not been subscribed for in the Community Offering plus an
additional _________ shares. The Underwriting Agreement is expected to require
the Company to pay to Ryan, Beck a fee equal to 7% of the total dollar amount
of purchases by Ryan, Beck, as underwriter.
Among other things, Ryan, Beck will not be obligated to purchase any
such shares if certain events occur which could have a material adverse effect
upon the business or financial condition of the Company or Bank or on the
banking-thrift industry or financial markets generally (all as more fully
discussed in the Underwriting Agreement), and/or which, in the sole judgment of
Ryan, Beck, make it impracticable or inadvisable to proceed with the Public
Offering. Ryan, Beck may elect to waive any condition and purchase such amounts
of the shares of Common Stock as it specifies by notice to the Company.
Pursuant to the Underwriting Agreement, the Company will grant Ryan, Beck
an option, exercisable not later than 30 days after the date of the Prospectus
in the Public Offering, to purchase up to 15% of the shares offered in the
Public Offering at the public offering price, less an agreed upon underwriting
discount and commission, solely to cover over-allotments. To the extent that
Ryan, Beck exercises this option, the Ryan, Beck will be obligated, subject to
certain conditions, to purchase such additional shares.
The Company, each of its directors and executive officers, and certain
other stockholders of the Company have agreed not to sell or otherwise dispose
of any shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Ryan, Beck, except that the
Company may issue shares of Common Stock upon the exercise of currently
outstanding options.
58
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The Company will pay for all its expenses in connection with the Public
Offering, such as legal, accounting, printing and filing fees and expenses. The
Company also will reimburse Ryan, Beck for its itemized and reasonable out-of
pocket expenses, which shall include legal fees and associated expenses, less
any reimbursement of such amounts as discussed above under " -- Plan of
Distribution." The Company will agree in the Underwriting Agreement to indemnify
Ryan, Beck against liabilities and expenses (including legal fees) incurred in
connection with certain claims or litigation arising out of or based upon untrue
statements or omissions contained in the offering materials for Common Stock,
including, but not limited to, liabilities under the Securities Act and under
the Exchange Act.
EXPERTS
The Consolidated Financial Statements of Key Capital Corporation and
subsidiaries as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 have been included herein and in the
Registration Statement on Form S-1 in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
The legality of the Common Stock offered hereby has been passed on for the
Company by Housley Kantarian & Bronstein, P.C., Washington, D.C. Certain
matters will be passed on for Ryan, Beck by Thacher Proffitt & Wood, Washington,
D.C.
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form S-1 with the
Securities and Exchange Commission under the 1933 Act with respect to the Common
Stock being offered hereby. This Prospectus is part of the Registration
Statement. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the Registration
Statement. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement. A copy
of the Registration Statement may be examined without charge at the Commission's
principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission upon payment of certain fees
prescribed by the Commission. Copies of such materials may also be obtained
from the website that the Commission maintains at http://www.sec.gov. Although
the Prospectus contains a discussion of the material aspects of the documents
filed as exhibits to the Registration Statement, statements contained in this
Prospectus as the contents of any contract or other document are not necessarily
complete and, in such instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
Since its inception, the Company has and intends to continue to make
available to its stockholders annual reports containing financial information
that has been examined and reported upon, with an opinion expressed by, an
independent firm of certified public accountants.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND 1997 AND THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<S> <C>
Independent Auditors' Report......................... F-1
Consolidated Financial Statements:
Statements of Financial Condition............... F-2
Statements of Income............................ F-3
Statements of Changes in Stockholders' Equity... F-5
Statements of Cash Flows........................ F-6
Notes to Consolidated Financial Statements........... F-8
</TABLE>
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Key Capital Corporation:
We have audited the accompanying consolidated statements of financial condition
of Key Capital Corporation and subsidiaries (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Key Capital
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
February 20, 1998
F-1
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
======================================================================================================================
December 31,
June 30, ----------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash on hand and due from banks $ 9,591,866 7,008,538 6,915,598
Short-term investments (note 1) 16,619,747 14,980,475 7,102,713
Securities purchased under agreements to resell (note 2) -- 187,518 --
Certificates of deposit 37,102 171,993 144,548
Investment securities available-for-sale (note 3) 27,002,386 25,805,514 14,796,424
Mortgage-backed securities available-for-sale (note 3) 4,169,984 5,238,594 5,656,521
Loans receivable, net (notes 4 and 8) 192,640,201 193,654,037 200,192,994
Mortgage loans held for sale 11,606,602 4,775,250 1,040,050
Accrued interest receivable 2,484,611 2,597,936 2,529,501
Investment in Federal Home Loan Bank stock, at cost (note 10) 799,000 752,100 734,600
Other real estate owned and other foreclosed assets, net (note 5) 2,268,549 2,894,827 3,114,491
Property and equipment, net (note 6) 6,640,473 6,517,634 6,440,420
Prepaid expenses and other assets 1,308,299 1,236,791 1,043,358
Deferred federal and state income taxes (note 9) 2,519,058 2,655,651 3,326,857
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 277,687,878 268,476,858 253,038,075
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 7) $ 243,467,354 235,760,044 226,513,106
Notes payable (note 8) 1,509,661 1,006,007 --
Federal Home Loan Bank advances (note 8) 2,002,449 -- --
Advance payments by borrowers for taxes and insurance 731,303 333,663 449,135
Due to investors on loans serviced 376,284 241,808 275,322
Federal and state income taxes payable 257,199 -- 271,607
Accrued expenses and other liabilities 4,461,320 7,967,413 5,019,884
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 252,805,570 245,308,935 232,529,054
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 9, 10, 13, 14 and 15):
Common stock $1 par value per share:
20,000,000 shares authorized; 813,370, 809,640 and
810,334 shares issued and outstanding, respectively 813,370 809,640 810,334
Additional paid-in capital 785,923 713,405 740,624
Retained income 23,329,602 21,715,550 19,326,230
Accumulated other comprehensive income (46,587) (70,672) (368,167)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 24,882,308 23,167,923 20,509,021
Commitments (notes 4, 6 and 16)
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 277,687,878 268,476,858 253,038,075
======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
============================================================================================================================
Six months ended
June 30, Year ended December 31,
------------------------------ ---------------------------------------------
1998 1997 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 13,982,500 14,289,198 28,315,645 28,747,988 26,622,701
Mortgage-backed securities 31,276 71,825 110,709 303,049 585,356
Investment securities 859,683 560,163 1,275,939 544,327 566,567
Federal funds sold 200,978 50,718 319,414 257,368 143,579
Dividends on Federal
Home Loan Bank Stock 28,460 27,178 54,666 50,956 43,774
Other 233,382 220,584 409,169 379,831 370,915
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 15,336,279 15,219,666 30,485,542 30,283,519 28,332,892
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Certificates 4,986,514 4,415,872 9,153,193 8,072,880 6,960,623
NOW and money market
deposit accounts 269,236 274,552 561,147 575,929 706,323
Savings 221,788 227,543 456,422 494,493 585,731
Collateralized savings accounts 151,529 190,071 358,433 882,599 1,414,832
- ----------------------------------------------------------------------------------------------------------------------------
5,629,067 5,108,038 10,529,195 10,025,901 9,667,509
Borrowed funds 60,854 32,657 81,354 11,994 24,772
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,689,921 5,140,695 10,610,549 10,037,895 9,692,281
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 9,646,358 10,078,971 19,874,993 20,245,624 18,640,611
Provision for loan losses (note 4) 2,544,583 3,845,436 7,623,136 7,883,024 3,811,560
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 7,101,775 6,233,535 12,251,857 12,362,600 14,829,051
- ----------------------------------------------------------------------------------------------------------------------------
Other non-interest income:
Service fees on deposits 238,935 178,458 408,312 322,608 299,854
Credit card processing income 675,186 139,706 316,144 52,033 108,516
Credit card fees, service charges
and related income 2,514,247 3,212,209 6,190,565 5,699,859 5,779,738
Gain on sale of SBA loans 238,134 237,116 544,069 483,228 75,356
Gain on sale of mortgage loans held
for sale 346,827 299,055 755,916 322,447 84,522
Other 204,560 408,893 869,605 743,191 687,863
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 4,217,889 4,475,437 9,084,611 7,623,366 7,035,849
- ----------------------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
F-3
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income, Continued
<TABLE>
<CAPTION>
============================================================================================================================
Six months ended
June 30, Year ended December 31,
------------------------------ ---------------------------------------------
1998 1997 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Other non-interest expense:
Salaries and employee benefits $ 3,653,186 3,340,405 6,952,333 6,514,297 6,472,663
Credit card related expenses 937,029 1,197,068 2,583,948 2,442,893 2,219,439
Federal Deposit Insurance
Corporation premiums (note 10) 79,958 18,239 135,602 1,817,779 456,782
Professional services 997,546 588,477 1,494,382 1,092,474 864,251
Occupancy 786,614 764,047 1,545,149 1,450,146 1,200,370
Data processing expense 223,555 210,149 402,370 359,380 345,392
Loss (gain) on sale of other
real estate owned, net 71,393 68,510 48,803 43,606 (3,623)
Loss on investment securities, net 13,077 -- 393,621 -- 68,053
Advertising expense 190,395 511,025 732,648 2,617,584 1,709,879
Provision for losses on other
real estate owned (note 5) 45,000 -- 64,000 30,000 600,000
Other 1,357,567 1,189,877 2,335,219 2,581,888 2,751,759
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 8,355,320 7,887,797 16,688,075 18,950,047 16,684,965
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,964,344 2,821,175 4,648,393 1,035,919 5,179,935
Income tax provision (benefit) (note 9) 1,106,281 1,094,194 1,813,386 (210,317) 2,014,368
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 1,858,063 1,726,981 2,835,007 1,246,236 3,165,567
============================================================================================================================
Earnings per common share (note 13):
Basic $ 2.29 2.13 3.50 1.54 3.91
Diluted 2.25 2.10 3.44 1.52 3.87
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For six months ended June 30, 1998 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
===================================================================================================================================
Retained Accumulated Total
Additional income- other stock-
Common paid-in substantially comprehensive holders'
stock capital restricted income equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 405,162 1,145,622 15,805,786 (900,826) 16,455,744
Net income - - 3,165,567 - 3,165,567
Other comprehensive income - - - 508,940 508,940
Dividends paid - $1.10 per share - - (445,675) - (445,675)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 405,162 1,145,622 18,525,678 (391,886) 19,684,576
Net income - - 1,246,236 - 1,246,236
Other comprehensive income - - - 23,719 23,719
Exercise of stock options 10 164 - - 174
Stock split two-for-one 405,162 (405,162) - - -
Dividends paid - $.55 per share - - (445,684) - (445,684)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 810,334 740,624 19,326,230 (368,167) 20,509,021
Net income - - 2,835,007 - 2,835,007
Other comprehensive income - - - 297,495 297,495
Exercise of stock options 7,406 131,413 - - 138,819
Repurchase of stock (8,100) (158,632) - - (166,732)
Dividends paid - $.55 per share - - (445,687) - (445,687)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 809,640 713,405 21,715,550 (70,672) 23,167,923
Net income - - 1,858,063 - 1,858,063
Other comprehensive income - - - 24,085 24,085
Exercise of stock options 1,230 20,218 - - 21,448
Issuance of stock 2,500 52,300 - - 54,800
Dividends paid - $.30 per share - - (244,011) - (244,011)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ 813,370 785,923 23,329,602 (46,587) 24,882,308
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
=================================================================================================================================
For the six months ended
June 30, For the year ended December 31,
--------------------------- --------------------------------------------
1998 1997 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activies:
Net Income $ 1,858,063 1,726,981 2,835,007 1,246,236 3,165,567
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 415,245 398,267 820,312 737,777 478,773
Provision for losses on loans and other
real estate owned 2,589,583 3,845,436 7,687,136 7,913,024 4,411,560
Loss on investment securities, net 13,077 - 393,621 - 68,053
Gain on sale of SBA loans (238,134) (237,116) (544,069) (483,228) (75,356)
Loss on sale of other real estate owned, net 71,393 68,510 48,803 43,606 (3,623)
Deferred income taxes 120,778 1,472,734 483,808 (2,110,283) (229,641)
Amortization of loan fees and premiums
and discounts, net (427,779) (367,659) (1,103,024) (1,287,703) (774,945)
Loan fees deferred 577,034 350,798 925,413 656,271 844,986
Sales of mortgage loans held for sale 46,866,272 15,493,495 46,780,466 29,305,914 8,254,342
Gain on sale of mortgage loans held for sale (346,827) (299,055) (755,916) (322,447) (84,522)
Originations of mortgage loans held for sale (53,350,797) (17,779,100) (49,759,750) (26,958,350) (12,345,700)
(Increase) decrease in prepaid expenses and
other assets (71,508) 60,862 (193,433) 1,587,308 (930,988)
(Increase) decrease in accrued interest
receivable 113,325 114,032 (68,435) (573,412) (223,548)
Increase in accrued expenses and
other liabilities (3,506,093) 1,424,728 2,947,529 46,306 1,514,839
Increase (decrease) in federal and
state income taxes payable 257,199 (1,187,450) (271,607) 106,211 (165,301)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (5,059,169) 5,085,463 10,225,861 9,907,230 3,904,496
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale (19,621,876) (8,100,000) (15,100,000) (6,000,000) -
Mortgage-backed securities
available-for-sale - - (3,565,642) (1,500,000) -
Maturities of investment securities
available-for-sale 17,600,000 - - 1,000,000 -
Proceeds from sales of investment
securities available-for-sale 801,020 2,047,460 4,089,037 - 1,931,947
Principal repayments of mortgage-backed
securities available-for-sale 1,105,942 2,339,729 3,725,471 4,155,377 2,011,840
Proceeds from sales of mortgage-backed
securities available-for-sale - - 269,224 - 5,131,913
Loan disbursements net of principal repayments (4,873,225) (6,803,769) (14,357,656) (37,220,497) (28,127,445)
Purchases of loans receivable - - (467,366) (3,242,488) (3,281,430)
Sales of loans receivable 2,760,218 4,518,460 10,304,559 8,207,615 2,403,892
Increase in investment in Federal Home
Loan Bank stock (46,900) (17,500) (17,500) (123,000) (12,400)
Costs capitalized to other real
estate owned (78,105) (253,151) (702,903) (569,101) (484,369)
Proceeds from disposition of property
and equipment 52,543 422 11,731 8,896 91,035
Purchases of property and equipment (590,627) (474,831) (909,257) (1,947,789) (1,609,321)
Proceeds from sales of other
real estate owned 660,293 2,159,473 2,366,513 882,533 2,509,851
Proceeds from sales of other
foreclosed assets 612,311 781,522 2,683,234 6,318,160 914,058
Decrease (increase) in investment
in certificates of deposit 134,891 (3,607) (27,445) (7,385) 48,215
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,483,515) (3,805,792) (11,698,000) (30,037,679) (18,472,214)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
==================================================================================================================================
For the six months ended
June 30, For the year ended December 31,
-------------------------- --------------------------------------
1998 1997 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase in savings accounts $ 7,707,310 1,557,214 9,246,938 14,228,466 29,782,999
Increase (decrease) in advance payments by
borrowers for taxes and insurance 397,640 309,457 (115,472) 40,050 (206,778)
Proceeds from exercise of stock options 21,448 10,582 138,819 174 --
Issuance (repurchase) of stock 54,800 -- (166,732) -- --
Increase (decrease) in due to investors on
loans serviced 134,476 108,797 (33,514) (143,438) 30,107
Increase in notes payable 503,654 1,005,310 1,006,007 -- --
Increase in Federal Home Loan Bank advances 2,002,449 -- -- -- --
Dividends paid (244,011) (202,736) (445,687) (445,684) (445,675)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,577,766 2,788,624 9,630,359 13,679,568 29,160,653
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,035,082 4,068,295 8,158,220 (6,450,881) 14,592,935
Cash and cash equivalents at beginning of year 22,176,531 14,018,311 14,018,311 20,469,192 5,876,257
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 26,211,613 18,086,606 22,176,531 14,018,311 20,469,192
==================================================================================================================================
Supplemental information:
Interest paid on savings deposits and borrowed funds $ 5,707,000 5,153,000 10,546,000 10,069,000 9,698,000
Income taxes paid 745,000 809,000 1,690,000 1,794,000 2,411,000
==================================================================================================================================
Non-cash transactions:
Transfers of balances from loans to other real
estate owned, net $ 316,474 2,130,833 2,332,855 1,730,000 114,463
Transfers of balances from loans to other
foreclosed assets 368,140 505,913 2,234,128 6,577,000 1,235,595
==================================================================================================================================
Loans to facilitate the sale of other real estate
owned acquired through foreclosure $ 508,000 917,000 516,500 726,000 812,000
==================================================================================================================================
Decrease in unrealized holding losses on securities
available for sale, net of income tax effect $ 24,085 69,946 297,495 23,719 508,940
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998 and 1997 and December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Key Capital
Corporation (the Company) and its wholly owned subsidiary, Key Bank and
Trust (the Bank) and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
BUSINESS
The Bank provides a full range of banking services to individual and
corporate customers through its subsidiaries and branch banks in Maryland
and Virginia. The Bank is subject to competition from other financial
institutions and providers of financial related services. The Bank is
subject to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
Effective October 1, 1996, the Bank converted from a federal savings and
loan association (formerly Key Federal Savings Bank) to a Maryland
commercial bank. In conjunction with the conversion of the Bank, the
Company converted from a unitary savings and loan holding company to a bank
holding company. Management's decision to convert to a commercial bank
reflects the direction established by the Bank's business plan with respect
to loan growth and the growing commercial orientation of the Bank.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement
of financial condition and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses and the valuation of other real estate owned and other foreclosed
assets. In connection with the determination of the allowance and
valuation, management obtains independent appraisals for significant
properties and prepares fair value analyses where appropriate.
Management believes that the allowances for losses on loans and other real
estate owned and other foreclosed assets are adequate to absorb losses that
relate to outstanding loans and other real estate owned and other
foreclosed assets. While management uses currently available information
and previous loss experience to recognize losses on loans, other real
estate owned and other foreclosed assets, future additions to the
allowances may be necessary based on changes in economic conditions and
their effect on borrowers, particularly in the Maryland and Virginia area.
In addition, various regulatory agencies,
(Continued)
F-8
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
as an integral part of their examination process, periodically review the
Bank's allowances for losses. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examinations.
CASH AND CASH EQUIVALENTS
Cash equivalents include short-term investments and securities purchased
under agreements to resell. Generally, federal funds are purchased and
sold for one-day periods. Securities purchased under agreements to resell
have original maturities when purchased of three months or less.
The Bank is required by the Federal Reserve System to maintain certain cash
reserve balances based principally on deposit liabilities. At December 31,
1997 and 1996, the required reserve balances were $474,000 and $741,000,
respectively.
SHORT-TERM INVESTMENTS
Short-term investments consist of Federal funds sold and interest-bearing
overnight investment accounts of $11,371,948 and $3,608,527 at December 31,
1997 and $4,384,715 and $2,717,998 at December 31, 1996, respectively.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and recorded at
amortized cost. Debt and equity securities not classified as held-to-
maturity and equity securities with readily determinable fair values are
classified as trading securities if bought and held principally for the
purpose of selling them in the near term. Trading securities are reported
at fair value, with unrealized gains and losses included in earnings.
Investments not classified as held-to-maturity or trading are considered
available-for-sale and are reported at fair value, with unrealized holding
gains and losses excluded from earnings and reported as a separate
component of stockholders' equity (net of tax effects) in other
comprehensive income. Fair value is determined based on bid prices
published in financial newspapers or bid quotations received from
securities dealers.
Premiums and discounts on investment and mortgage-backed securities are
amortized over the term of the security using methods which approximate the
interest method. Gain or loss on sale of investments available-for-sale is
reflected in income at the time of sale using the specific identification
method.
(Continued)
F-9
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
GAIN ON SALE OF LOANS
Mortgage loans held for sale are carried at the lower of cost or market as
determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate basis. Non-refundable loan
fees and direct costs associated with the origination of loans are
deferred and netted against the outstanding loan balances. Mortgage loans
are sold servicing released.
The company sells participations representing the SBA-guaranteed portions
of its SBA loans in the secondary market. In connection with such sales,
the Company receives a cash premium related to the guaranteed portion being
sold. A portion of the cash premium received from the sale of the
guaranteed portion of the SBA loan is deferred as an unearned discount
based on the relative fair value of the guaranteed and unguaranteed
portions to the total loan and the remainder is recognized as income at the
time of the sale. The resulting unearned discount is recognized in
interest income using the interest method.
OTHER REAL ESTATE OWNED AND OTHER FORECLOSED ASSETS
Other real estate owned represents real estate acquired through foreclosure
and are initially recorded at the lower of cost (principal balance of the
former mortgage loan plus costs of obtaining title and possession) or
estimated fair value less estimated costs to sell. After foreclosure
management periodically evaluates the carrying value and establishes a
valuation allowance for declines in fair value, less estimated selling
costs, below the initially recorded value. Revenue and expenses from
operations are charged against income. Changes in the valuation allowance
of other real estate owned are included in the provision for losses, while
costs of improvements to the properties are capitalized.
Other foreclosed assets represents repossessed automobiles in process of
liquidation and is initially recorded at the lower of cost or estimated
fair value based on wholesale auction values.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are accumulated using the
straight-line method over the estimated useful lives of the related assets
or over the initial terms of the various leases as to leasehold
improvements. Additions and betterments are capitalized and charges for
repairs and maintenance are expensed when incurred. The related cost and
accumulated depreciation or amortization are eliminated from the accounts
when an asset is sold or retired and the resultant gain or loss is credited
or charged to income.
LOAN FEES
Loan fees and certain direct loan origination costs are deferred and the
net fee or cost is
(Continued)
F-10
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
recognized in interest income using a method that approximates the interest
method. Amortization of loan fees is discontinued for non-accrual loans.
BANKCARD FEES AND ORIGINATION COSTS
Bankcard fees are assessed on an annual basis and are recognized as
noninterest income over a one-year period from the date of assessment on a
straight-line basis. Costs of origination are recognized as noninterest
expense as incurred.
CREDIT CARD LOANS
Credit card loans arise primarily under open-end revolving credit accounts
and are either partially secured by collateral or are fully unsecured loans
and are made based on the borrower's creditworthiness, including such
factors as income, other indebtedness and credit history. These accounts
have various billing and payment structures, including varying minimum
payment levels and finance charge rates.
Uncollectible accounts are generally charged off against the allowance
automatically at the beginning of the billing cycle in which the customer's
balance is deemed to be more than 180 days past due for secured cards and
155 days past due for unsecured cards.
AMORTIZATION OF DISCOUNTS AND PREMIUMS ON LOANS
Discounts and premiums on loans are amortized over the estimated remaining
lives of the purchased loans using a method that approximates the interest
method. Discounts and premiums on purchased credit card portfolios are
amortized over the estimated remaining life of the portfolio using the
interest method.
PROVISION FOR LOSSES ON LOANS RECEIVABLE, RESERVE FOR LOAN LOSSES AND
NONREFUNDABLE DEALER RESERVES
Provisions for losses on loans receivable are charged to income, based on
management's judgment with respect to the risks inherent in the portfolio.
Such judgment considers a number of factors including changes in the size
and composition of the portfolio, historical loss experience, the present
and prospective financial condition of borrowers, the estimated value of
underlying collateral, geographic concentrations, current and prospective
economic conditions, delinquency experience and status of nonperforming
assets. Additionally, accrual of interest on potential problem loans is
excluded from income when, in the opinion of management, suspension of the
accrual is warranted.
(Continued)
F-11
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
A loan is determined to be impaired when, based on current information and
events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. A
loan is not considered impaired during a period of delay in payment if the
Company expects to collect all amounts due, including interest past-due.
The Company generally considers a period of delay in payment to include
delinquency up to 90 days.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
114, Accounting by Creditors for Impairment of a Loan (Statement 114) and
SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition Disclosures (Statement 118), the Company measures impairment
(i) at the present value of expected cash flows discounted at the loan's
effective interest rate; (ii) at the observable market price; or (iii) at
the fair value of the collateral if the loan is collateral dependent. If
the measure of the impaired loan is less than the recorded investment in
the loan, an impairment is recognized through a valuation allowance and a
corresponding charge to provision for loan losses.
Statement 114 does not apply to larger groups of smaller-balance
homogeneous loans such as consumer installment, residential mortgage loans
and credit card loans. These loans are collectively evaluated for
impairment. The Company's impaired loans are therefore comprised primarily
of commercial loans, including commercial mortgage loans, and real estate
development and construction loans. In addition, impaired loans are
generally loans which management has placed in nonaccrual status since
loans are generally placed in nonaccrual status on the earlier of the date
that management determines that the collection of principal and/or interest
is in doubt or the date that principal or interest is 90 days or more past-
due.
The Bank recognizes interest income for impaired loans consistent with its
method for nonaccrual loans. Specifically, interest payments received are
recognized as interest income or, if the ultimate collectibility of
principal is in doubt, are applied to principal.
The Company purchases loans receivable from dealers at various discounts
under the Company's available financing plans. The Company's accounting
treatment for such discounts follows guidelines analogous to the treatment
prescribed in AICPA Practice Bulletin 6, Amortization of Discounts on
Certain Acquired Loans. A significant portion of this discount represents
anticipated credit loss and, based upon projected loss experience, is
allocated to the nonrefundable dealer reserves. The remaining portion of
the discount, if any, is recorded as unearned discount. The Company
stratifies its loans receivable by quarter of purchase and among the
Company's various financing plans (referred to as "pools") to evaluate the
adequacy of the nonrefundable dealer reserves allocated to such pools. If
the nonrefundable dealer reserves associated with an individual pool of
loans
(Continued)
F-12
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
receivable are estimated to be deficient, based on an analysis of
historical loss experience for that pool, current levels of repossessed
assets, and other appropriate considerations, the Company evaluates the
sufficiency of its allowance for credit losses to absorb such deficiency
and, if considered necessary, records an additional provision for credit
losses in the amount of the estimated deficiency. If the nonrefundable
dealer reserves associated with an individual pool of installment contracts
receivable are estimated to exceed expected future credit losses for that
pool, such excess is accreted into interest income over the remaining life
of the respective pool, using a method that approximates the interest
method. There has been no excess to date.
Prior to January 1, 1998, the Company purchased loans receivable from
dealers under contracts for which the dealer reserve was refundable. The
Company stratified its loans receivable by dealer to evaluate the adequacy
of the refundable dealer reserve. These reserves were used to absorb
credit losses associated with that dealer. Amounts from each dealer are
maintained in a savings account held by the Bank. The balance of
refundable dealer reserves was $481,559 and $818,341 at December 31, 1997
and 1996, respectively.
Management believes that the combined balance of the nonrefundable dealer
reserves and allowance for credit losses is adequate to absorb losses
inherent in the loans receivable portfolio. However, unforeseen changes in
economic and other factors could have a significant impact on the estimates
and assumptions used by management to determine the adequacy of the
nonrefundable dealer reserves and allowance for credit losses, which could
result in future provisions for credit losses and could adversely impact
operating results.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account for stock-based
employee compensation plans. Under this method, compensation cost is
recognized for awards of shares of common stock to employees only if the
estimated market price of the stock at the grant dates (or other
measurement date, if later) is greater than the amount the employee must
pay to acquire the stock. Information concerning the pro forma effects of
using an optional fair value-based method to account for the stock-based
employee compensation plan is provided in note 14.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (Statement 125). Statement 125 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and requires, among other
things, that the Company record at fair value, assets and liabilities
resulting from a transfer of financial assets. In December 1996, statement
127 was issued which deferred the effective date of certain provisions of
Statement 125 related to
(Continued)
F-13
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
repurchase agreements, securities lending and similar transactions until
January 1, 1998. The Company adopted the currently effective portions of
Statement 125 as of January 1, 1997. Adoption did not have a material
impact on the Company's financial statements.
COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income
are to be reported in an annual financial statement that is displayed with
the same prominence as other financial statements. This statement
stipulates that comprehensive income reflect the change in equity of an
enterprise during a period of transactions and other events and
circumstances from nonowner sources. Comprehensive income will thus
represent the sum of net income and other accumulated comprehensive income.
The accumulated balance of other accumulated comprehensive income is
required to be displayed separately from retained earnings and additional
paid-in capital in the statement of financial position. The adoption of
SFAS No. 130 resulted primarily in the Company reporting unrealized gains
and losses on available-for-sale securities in other comprehensive income.
The Company's components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Six months ended June 30, Year ended December 31,
---------------------------- -----------------------------------
1998 1997 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 1,858,063 1,726,981 2,835,007 1,246,236 3,165,567
Changes in accumulated other
comprehensive income-unrealized
holding gains/losses on
securities available-for-sale 24,085 69,946 297,495 23,719 508,940
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 1,882,148 1,796,927 3,132,502 1,269,955 3,674,507
=======================================================================================================================
</TABLE>
(Continued)
F-14
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
INCOME TAXES
Deferred income taxes are accounted for using the asset and liability
method. Under this method, deferred income taxes are recognized, with
certain exceptions, for temporary differences between the financial
reporting basis and income tax basis of assets and liabilities based on
enacted tax rates expected to be in effect when such amounts are realized
or settled. The effects of changes in tax laws or rates on deferred tax
assets and liabilities are recognized in the period that includes the
enactment date.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997.
Earlier application is encouraged. Management will adopt the provisions of
SFAS No. 131 as required.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
as derivatives), and for hedging activities. SFAS No. 133 requires that an
entity reorganize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. It is effective for all fiscal quarters or fiscal years beginning
after June 15, 1999. Initial application of this Statement should be as of
the beginning of an entity's fiscal quarter on that date, hedging
relationships must be designated anew and documented pursuant to the
provisions of SFAS No. 133. Earlier application is encouraged, but is
permitted only as of the beginning of any fiscal quarter that begins after
issuance of SFAS No. 133. It should not be applied retroactively to
financial statements of prior periods. Management has not determined when
it will adopt the provisions of SFAS No. 133 but believes that it will not
have a material effect on the Company's financial position or results of
operations.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform to the 1997 presentation.
F-15
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(2) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank purchases securities under agreements to resell. The amounts
advanced under the agreements represent short-term loans and are reported
separately in the statement of financial condition. The securities
underlying the agreements are book entry securities which were delivered by
appropriate entry in the Bank's account maintained at a commercial bank,
under a written custodial agreement that explicitly recognizes the Bank's
interest in the securities. At December 31, 1997, agreements outstanding
totaled $187,518. There were no agreements outstanding at December 31,
1996. Securities purchased under agreements to resell averaged $259,000
and $1,100,000 during 1997 and 1996, respectively. The maximum amounts
outstanding at any month-end were $606,000 and $2,100,000 during 1997 and
1996, respectively.
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
The following tables summarize the Company's investment and mortgage-backed
securities available-for-sale at December 31:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------
Amortized Gross unrealized
----------------------------- Fair Carrying
cost gains losses value amount
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
federal agencies $ 21,097,915 800 - 21,098,715 21,098,715
Adjustable rate mortgages-
mutual funds 4,741,216 - (34,417) 4,706,799 4,706,799
- -----------------------------------------------------------------------------------------------------------------
$ 25,839,131 800 (34,417) 25,805,514 25,805,514
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------------
Amortized Gross unrealized
----------------------------- Fair Carrying
cost gains losses value amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
federal agencies $ 6,000,000 - (14,142) 5,985,858 5,985,858
Adjustable rate mortgages-
mutual funds 9,223,874 - (413,308) 8,810,566 8,810,566
- ---------------------------------------------------------------------------------------------------------------
$ 15,223,874 - (427,450) 14,796,424 14,796,424
===============================================================================================================
</TABLE>
(Continued)
F-16
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) CONTINUED
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------
Gross unrealized
Amortized ----------------------------- Fair Carrying
cost gains losses value amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation $ 1,981,092 - (50,903) 1,930,189 1,930,189
Federal National
Mortgage Association 3,338,807 - (30,402) 3,308,405 3,308,405
- ---------------------------------------------------------------------------------------------------------------------
$ 5,319,899 - (81,305) 5,238,594 5,238,594
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------
Gross unrealized
Amortized ----------------------------- Fair Carrying
cost gains losses value amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation $ 2,856,127 - (70,850) 2,785,277 2,785,277
Federal National
Mortgage Association 2,972,759 - (101,515) 2,871,244 2,871,244
- ---------------------------------------------------------------------------------------------------------------------
$ 5,828,886 - (172,365) 5,656,521 5,656,521
=====================================================================================================================
</TABLE>
Investment securities at December 31 mature as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
Amortized Fair Amortized Fair
cost value cost value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due after one through five years $ 21,097,915 21,098,715 $ 6,000,000 5,985,858
=============================================================================================================================
</TABLE>
Contractual maturities of mortgage-backed securities are as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
Amortized Fair Amortized Fair
cost value cost value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due after one through five years $ 4,189,087 4,139,365 3,897,335 3,799,523
Due after ten years 1,130,812 1,099,229 1,931,551 1,856,998
- -----------------------------------------------------------------------------------------------------------------------------
$ 5,319,899 5,238,594 5,828,886 5,656,521
=============================================================================================================================
</TABLE>
Contractual maturities do not consider anticipated prepayments of mortgage-
backed securities.
(Continued)
F-17
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) CONTINUED
The proceeds from the sales of securities available for sale and the gross
realized gains and losses were $4,358,261, $722 and $394,343, respectively,
for the year ended December 31, 1997. The gross realized losses includes
$256,000 recognized when management established a plan to sell certain
mutual funds included in investment securities available-for-sale. The
Company had no sales of investment securities or mortgage-backed securities
during the year ended December 31, 1996.
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by mortgages on real estate:
Conventional residential $ 30,256,994 32,363,068
Construction and development 112,542,416 99,972,722
- --------------------------------------------------------------------------------------------------------
Total mortgage loans 142,799,410 132,335,790
Commercial 38,079,673 35,173,539
Consumer 26,757,040 31,416,435
Credit card loans:
Partially secured by savings accounts 35,969,297 43,761,200
Unsecured 10,314,822 11,680,757
- --------------------------------------------------------------------------------------------------------
253,920,242 254,367,721
Less:
Undisbursed portion of loans in process -
construction and development 51,899,031 45,604,586
Unearned loan fees 343,418 315,829
Allowance for loan losses 8,023,756 8,254,312
- --------------------------------------------------------------------------------------------------------
Loans receivable, net $ 193,654,037 200,192,994
========================================================================================================
</TABLE>
A substantial portion of the Company's loans receivable are mortgage loans
secured by residential and commercial real estate properties. Loans are
extended only after evaluation by management of customers' creditworthiness
and other relevant factors on a case-by-case basis. The Company generally
does not lend more than 80% of the appraised value of a property and
requires private mortgage insurance on residential mortgages with loan-to-
value ratios in excess of this ratio. In addition, the Company generally
obtains personal guarantees of repayment from borrowers and/or others for
construction, commercial and multi-family residential loans and disburses
the proceeds of construction and similar loans only as work progresses on
the related projects.
(Continued)
F-18
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) CONTINUED
Residential lending is generally considered to involve less risk than other
forms of lending although repayment of these loans is dependent to some
extent on economic and market conditions in the Company's primary lending
area. Multi-family residential, commercial real estate and construction
loans generally entail greater risks than residential mortgage lending.
The loans typically involve larger loan balances and repayments are
generally dependent on the operations of the related properties or the
financial condition of the borrower or guarantor. Accordingly, repayments
of such loans are more susceptible to adverse conditions in the real estate
market or in the economy in general. Consumer loans generally are secured
auto loans and are made based on an evaluation of the collateral and the
borrower's creditworthiness, including such factors as income, other
indebtedness and credit history. Lending in this area may involve special
risks, including decreases in the value of collateral and transaction costs
associated with foreclosure and repossession. Repayments of consumer loans
are dependent to some extent on national and regional economic and market
conditions. Credit card loans are either partially secured by collateral
or are fully unsecured loans and are made based on the borrower's
creditworthiness, including such factors as income, other indebtedness and
credit history. Lending in this area may involve special risk as the loans
are generally partially or totally unsecured. The non-real estate secured
commercial loans are mainly business loans secured by a variety of business
or personal assets. Repayments of such loans are susceptible to adverse
national and regional economic and market conditions and to deterioration
in the financial condition of the borrower or guarantor.
Commitments to extend credit are agreements to lend to customers, provided
that terms and conditions established in the related contracts are met.
The Company had the following contractual commitments to extend credit,
exclusive of undisbursed loans in process at December 31, 1997:
<TABLE>
<CAPTION>
Fixed Floating
rate rate
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans $ - 23,856,000
Commercial loans - 400,000
========================================================================================
</TABLE>
Commitments for mortgage loans generally expire in 90 days. The Company
had commitments to sell loans of $9,090,000 and $5,594,000 at December 31,
1997 and 1996, respectively. The Company had no commitments to purchase
loans at December 31, 1997 and 1996.
As of December 31, 1997 and 1996 the Company was servicing participations
sold and loans for the benefit of others of approximately $54,400,000 and
$51,100,000, respectively.
Loans in arrears three months or more (non-accrual loans) or in process of
foreclosure were approximately $3,311,000 and $3,121,000 at December 31,
1997 and 1996, respectively.
(Continued)
F-19
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) CONTINUED
Interest income that would have been recorded under the original terms of
such loans and the interest income actually recognized are summarized below
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded $ 558,518 402,763 845,904
Interest income recognized (266,996) (177,143) (353,060)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income foregone $ 291,522 225,620 492,844
===================================================================================================================================
</TABLE>
Included in the Company's nonaccrual loans above are certain impaired loans
as defined by Statement 114. Impaired loans and the allocated valuation
allowances at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- --------------------------
Loan Valuation Loan Valuation
balance allowance balance allowance
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired with valuation allowance $ 132,000 93,000 1,396,000 431,000
Impaired without valuation allowance - - - -
- ---------------------------------------------------------------------------------------------------
$ 132,000 93,000 1,396,000 431,000
===================================================================================================
</TABLE>
The allocated valuation allowance for impaired loans at December 31, 1997
and 1996, and activity related thereto for the years ended December 31,
1997 and 1996, is included in the allowance for loan losses summary.
The average recorded investment in impaired loans and the amount of
interest income recognized for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average recorded investment in impaired loans $ 170,000 1,725,000 1,885,000
Interest income recognized during impairment 16,000 - -
===================================================================================================================================
</TABLE>
(Continued)
F-20
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) CONTINUED
An analysis of the allowance for losses for the years ended December 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $ 5,266,867
Provision for loan losses 3,811,560
Recoveries 3,762,433
Charge-offs (7,183,241)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 5,657,619
Provision for loan losses 7,883,024
Recoveries 5,758,689
Charge-offs (11,045,020)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 8,254,312
Provision for loan losses 7,623,136
Recoveries 7,466,071
Charge-offs (15,319,763)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 8,023,756
======================================================================================================
</TABLE>
Recoveries in the analysis of the allowance for losses includes amounts
recaptured from secured credit cards, refundable dealer reserves and
liquidation of the related collateral.
(5) OTHER REAL ESTATE OWNED AND OTHER FORECLOSED ASSETS
Balances are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Other real estate owned acquired through foreclosure $ 2,442,164 2,212,721
Other foreclosed assets 452,663 901,770
Allowance for losses -- --
- --------------------------------------------------------------------------------------
$ 2,894,827 3,114,491
======================================================================================
</TABLE>
(Continued)
F-21
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) CONTINUED
Activity in the allowance for losses on other real estate owned and other
foreclosed assets for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ - - -
Provision for losses 64,000 30,000 600,000
Charge-offs, net of recoveries (64,000) (30,000) (600,000)
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period $ - - -
===================================================================================================================
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
Estimated
1997 1996 useful lives
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 1,626,955 1,626,955 -
Buildings and improvements 4,008,472 3,991,808 25-40 years
Leasehold improvements 848,837 660,857 5-10 years
Furniture, fixtures and equipment 5,110,896 4,474,654 5-10 years
- -------------------------------------------------------------------------------------------
Total, at cost 11,595,160 10,754,274
Less accumulated depreciation and amortization 5,077,526 4,313,854
- -------------------------------------------------------------------------------------------
Property and equipment, net $ 6,517,634 6,440,420
===========================================================================================
</TABLE>
At December 31, 1997, the Company was obligated under noncancellable
operating leases for the main office and branch offices. The leases expire
on various dates through 2007 and have aggregate minimum lease payments as
follows for the years ending December 31:
<TABLE>
<S> <C>
1998 $ 185,459
1999 185,459
2000 178,899
2001 157,326
2002 145,886
Thereafter 121,083
=====================================================================================
</TABLE>
Total rent expense was approximately $194,000, $193,000 and $139,000 for
1997, 1996 and 1995, respectively.
(Continued)
F-22
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) DEPOSITS
Savings accounts and accrued interest thereon are summarized as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------ ------------------------------------------
Weighted Weighted
average average
Type of account rate Amount % rate Amount %
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit 6.35% $ 162,691,945 69.0% 6.24% $ 149,072,710 65.8%
Non-certificate:
Savings 2.92% 15,044,847 6.4 2.92% 14,728,680 6.5
Demand deposits 0.00% 13,674,522 5.8 0.00% 13,111,600 5.8
Interest bearing demand
and money market
accounts 2.85% 21,428,392 9.1 2.86% 20,087,041 8.9
Deposits collateralizing
credit card loans 1.35% 22,844,454 9.7 1.34% 29,433,821 13.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-certificate 72,992,215 31.0 77,361,142 34.2
- ----------------------------------------------------------------------------------------------------------------------------------
Accrued interest on
certificates 75,884 0.0 79,254 0.0
- -----------------------------------------------------------------------------------------------------------------------------------
$ 235,760,044 100.0% $ 226,513,106 100.0%
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Amount % Amount %
- -----------------------------------------------------------------------------------------------
Certificate accounts maturing:
<S> <C> <C> <C> <C>
Under 12 months $ 87,564,938 53.8% $ 48,861,581 32.8%
12 months to 24 months 36,027,866 22.1 56,117,053 37.6
24 months to 36 months 24,811,294 15.3 12,924,196 8.7
36 months to 48 months 7,686,445 4.7 22,942,785 15.4
48 months to 60 months 5,496,028 3.4 7,499,784 5.0
Over 60 months 1,105,374 0.7 727,311 0.5
- -----------------------------------------------------------------------------------------------
$ 162,691,945 100.0% $ 149,072,710 100.0%
===============================================================================================
</TABLE>
Certificates of $100,000 or more were approximately $19,010,000 and
$20,000,000 as of December 31, 1997 and 1996.
(Continued)
F-23
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) BORROWED FUNDS
The Company enters into sales of mortgage-backed securities with agreements
to repurchase under fixed-coupon reverse repurchase agreements. Such
agreements are treated as financings, and the obligations to repurchase
securities sold are reflected as a liability in the consolidated statements
of financial condition. The securities underlying the agreements are book-
entry securities. The securities are delivered by appropriate entry into
the counterparties' accounts maintained at the Federal Reserve Bank of New
York. For the mortgage-backed securities, the dealers may have sold,
loaned or otherwise disposed of such securities to other parties in the
normal course of their operations, and have agreed to resell to the Company
substantially identical securities at the maturities of the agreements.
All agreements generally mature within 30 days. At December 31, 1997 and
1996, there were no agreements to repurchase.
The maximum and average amounts of borrowings under reverse repurchase
agreements were approximately $2,000,000 and $140,000 during 1996,
respectively. There were no borrowings under reverse repurchase agreements
during the year ended December 31, 1997.
Under terms of a collateral pledge and security agreement with the Federal
Home Loan Bank (FHLB), the Company has identified and assigned qualifying
first mortgage loans as collateral for FHLB advances. At December 31, 1997
and 1996, such loans totaled approximately $8,054,000 and $9,739,000.
There were no FHLB advances outstanding at December 31, 1997 and 1996.
In connection with a repurchase of the Company stock and other lending and
investing activities, the Company borrowed $1,000,000 from related parties
in February and March 1997. Interest rates and maturities on these notes
payable are as follows:
<TABLE>
<CAPTION>
Principal
Amount Due Date Interest Rate
- -------------------------------------------------------------------------------
<S> <C> <C>
$ 200,000 March 1998 9.00%
400,000 September 1998 9.50%
400,000 March 1999 10.00%
===============================================================================
</TABLE>
These interest rates are less than those paid under the previous line of
credit agreement.
(Continued)
F-24
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) INCOME TAXES
The income tax provision (benefit) is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,088,587 1,569,128 1,837,843
State 240,991 330,838 406,166
- ----------------------------------------------------------------------------------------------
1,329,578 1,899,966 2,244,009
- ----------------------------------------------------------------------------------------------
Deferred:
Federal 396,116 (1,727,787) (188,018)
State 87,692 (382,496) (41,623)
- ----------------------------------------------------------------------------------------------
483,808 (2,110,283) (229,641)
- ----------------------------------------------------------------------------------------------
$ 1,813,386 (210,317) 2,014,368
==============================================================================================
</TABLE>
Statement 109 continues the exception for providing a deferred tax
liability on bad debt reserves for tax purposes of banks, such as the
reserve that arose in fiscal years beginning before December 31, 1987.
Such bad debt reserve for the Bank amounted to approximately $3,650,000
with an income tax effect of approximately $1,410,000 at December 31, 1997.
This bad debt reserve could become taxable for income tax return purposes
under certain conditions.
In years prior to 1996, deferred taxes were provided on a portion of the
bad debt reserve. As a result of Federal tax legislation enacted during
1996, it was determined that the deferred tax provision of approximately
$700,000 was no longer required.
The net deferred tax asset as of December 31, 1997 and 1996 consists of
total deferred tax assets of approximately $3,145,542 and $3,725,059 and
total deferred tax liabilities of approximately $489,891 and $398,202,
respectively. The tax effects of temporary
(Continued)
F-25
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) CONTINUED
differences between the financial reporting basis and income tax basis of
assets and liabilities that are included in the net deferred tax asset as
of December 31 relate to the following:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Bad debt reserve $ 2,460,038 2,814,073
Deferred fees 395,000 461,000
Loans receivable (262,336) (263,100)
Depreciation (146,838) (54,385)
Goodwill 42,911 30,038
FHLB stock (80,717) (80,717)
Accrued bonus - 75,734
Unrealized holding losses on debt securities available-for-sale 44,250 231,648
Other, net 203,343 112,566
- -----------------------------------------------------------------------------------------
Net deferred tax asset $ 2,655,651 3,326,857
=========================================================================================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of the deferred
tax assets is based on consideration of available evidence, including tax
planning strategies and other factors. Based on consideration of the above
factors, management believes that no valuation allowance is required at
December 31, 1997 and 1996.
A reconciliation between the income tax provision and the amount computed
by multiplying income before income taxes by the statutory Federal income
tax rate of 34% is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax provision at the statutory rate $ 1,580,454 352,212 1,761,178
State income taxes, net of Federal income tax benefit 216,931 (34,094) 240,606
Tax bad debt reserve adjustment, net of state income taxes - (548,261) -
Other 16,001 19,826 12,584
- ----------------------------------------------------------------------------------------------------
Income tax provision (benefit) $ 1,813,386 (210,317) 2,014,368
====================================================================================================
</TABLE>
(Continued)
F-26
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) REGULATORY MATTERS
The Federal Deposit Insurance Corporation, through the Savings Association
Insurance Fund, insures deposits of accountholders up to $100,000. The
Bank pays an annual premium to provide for this insurance. The Bank is
also a member of the Federal Home Loan Bank System (FHLB) and is required
to maintain an investment in the stock of the Federal Home Loan Bank of
Atlanta equal to at least 1% of the unpaid principal balances of its
residential mortgage loans, .3% of its total assets or 5% of its
outstanding advances from the FHLB, whichever is greater. FHLB stock is
carried at cost and purchases and sales of stock are made directly with the
FHLB at par value.
During 1996, the Bank expensed approximately $1,300,000 as a one time
assessment resulting from the federally mandated recapitalization of the
Savings Association Insurance Fund (SAIF). The assessment was required of
substantially all SAIF insured depository institutions.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (as defined in the
regulations and as set forth in the table below, as defined) of total and
Tier I capital (as defined) to risk-weighted assets (as defined), and of
Tier I capital to average assets (as defined). Management believes, as of
December 31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject, and is categorized as well capitalized.
(Continued)
F-27
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) CONTINUED
The Bank's actual capital amounts and ratios are also presented in the
table (in thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Tangible capital (a) $ 20,832 7.84% 3,988 1.50% 13,294 more than 5%
Core capital (b) 20,832 7.84 5,740 3.00 11,481 more than 6%
Total risk-based capital (c) 23,295 12.17 15,308 8.00 19,135 more than 10%
As of December 31, 1996:
Tangible capital (a) 18,535 7.37 3,770 1.50 12,566 more than 5%
Core capital (b) 18,535 7.37 5,517 3.00 11,035 more than 6%
Total risk-based capital (c) 20,906 11.37 14,713 8.00 18,391 more than 10%
=========================================================================================================================
(a) Percentage of capital to assets
(b) Percentage of capital to assets for actual and capital adequacy purposes and percentage of capital to
risk-weighted assets to be well capitalized under prompt corrective action provisions
(c) Percentage of total capital to risk-weighted assets
=========================================================================================================================
</TABLE>
(11) RELATED PARTY TRANSACTIONS
A director, who is also a major shareholder of the Company, is a member of
the law firm which serves as general counsel for the Bank. The law firm
received $7,500 in each of the years ended December 31, 1997 and 1996, as a
retainer. In addition, the firm regularly performs loan closing services
for borrowers from the Company. The law firm received approximately
$214,000, $280,000 and $308,000 from borrowers for legal services rendered
in connection with loan closings for the years ended December 31, 1997,
1996 and 1995, respectively. Another director is a member of a law firm
which received approximately $80,000, $9,000 and $23,000 in the years ended
December 31, 1997, 1996 and 1995, respectively, as payment for legal
services.
(Continued)
F-28
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) plan for all qualified employees effective
January 1, 1986. Qualified employees are all employees of the Company who
have completed twelve months of employment with at least 1,000 hours of
service, as defined in the Plan. The Company may make a discretionary
matching contribution. Historically, the Company has made a matching
contribution equal to 50% of each participant's contribution; however, the
matching percentage was applied only to salary reductions up to 4% of the
participant's annual compensation. The Company may also elect to make a
discretionary contribution to the Plan each Plan year. The expense
recognized by the Company related to anticipated plan contributions for the
year ended December 31, 1997, 1996 and 1995 was approximately $47,000,
$56,000 and $38,000, respectively.
(13) COMMON STOCK
The Company adopted SFAS No. 128, Earnings Per Share, (Statement 128)
during the year ended December 31, 1997. Statement 128 establishes revised
standards for computing and presenting earnings per share (EPS) data. It
requires dual presentation of "basic" and "diluted" EPS on the face of the
statements of income and reconciliation of the numerators and denominators
used in the basic and diluted EPS calculations. As required by Statement
128, EPS data for prior periods presented have been restated to conform to
the new standard.
Basic EPS is calculated by dividing net income by the weighted-average
number of common shares outstanding for the applicable period. Diluted EPS
is calculated after adjusting the numerator and the denominator of the
basic EPS calculation for the effect of all dilutive potential common
shares outstanding during the period. Information related to the
calculation of net income per share of common stock is summarized as
follows for the years ended December 31:
<TABLE>
<CAPTION>
Six months ended Year ended December 31,
--------------------------- ---------------------------------------
1998 1997 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income used in
EPS calcuation $ 1,858,063 1,726,981 2,835,007 1,246,236 3,165,567
- -----------------------------------------------------------------------------------------------------------
Weighted-average shares
outstanding - Basic 811,505 810,637 811,039 810,331 810,324
Dilutive securities - options 15,009 13,278 13,103 10,098 7,028
- -----------------------------------------------------------------------------------------------------------
Adjusted weighted-average
shares used in EPS
computation - Diluted 826,514 823,915 824,142 820,429 817,352
===========================================================================================================
</TABLE>
In January 1996, the Company declared a two-for-one stock split. The 1995
information has been restated to reflect the split.
(Continued)
F-29
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(14) STOCK OPTION PLAN
Under the terms of the Company's qualified stock option plan, options may
be granted (to a maximum of 80,000 shares) to officers and certain key
employees for the purchase of the Company's common stock. These options
were issued at the estimated market price at the grant dates. Options
expire five years from the date of grant and are exercisable from the time
of grant. All share amounts reflect the two-for-one stock split.
A summary of changes in stock options outstanding is as follows for the
years ended December 31:
<TABLE>
<CAPTION>
Weighted
Range of average
Number of exercise exercise
shares prices price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 31,200 $17.44 to $20.12 $18.78
- -----------------------------------------------------------------------------------------
Granted 15,600 $24.24 $24.24
Expired - - -
Exercised - - -
- -----------------------------------------------------------------------------------------
Balance at December 31, 1995 46,800 $17.44 to $24.24 $20.60
- -----------------------------------------------------------------------------------------
Granted 16,200 $26.27 $26.27
Expired - - -
Exercised (10) $17.44 $17.44
- ---------------------------------------------------------------------------------------
Balance at December 31, 1996 62,990 $17.44 to $26.27 $22.06
- ---------------------------------------------------------------------------------------
Granted 15,600 $29.44 $29.44
Expired - - -
Exercised (7,406) $17.44 to $20.12 $18.76
- ---------------------------------------------------------------------------------------
Balance at December 31, 1997 71,184 $17.44 to $29.44 $24.02
- ---------------------------------------------------------------------------------------
Exercisable at December 31, 1997 71,184 $17.44 to $29.44 $24.02
=======================================================================================
</TABLE>
The options outstanding are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997
- -----------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
- -------------------------------------------------------------- ---------------------------------
Option price Number Weighted average Weighted Weighted
per of remaining average Number average
share shares contractual life exercise price of shares exercise price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 17.04 11,790 1 year $ 17.44 11,790 $ 17.44
20.12 11,994 2 years 20.12 11,994 20.12
24.24 15,600 3 years 24.24 15,600 24.24
26.27 16,200 4 years 26.27 16,200 26.27
29.44 15,600 5 years 29.44 15,600 29.44
- ----------------------------------------------------------------------------------------------------
71,184 3.2 years $ 24.02 71,184 $ 24.02
===================================================================================================
</TABLE>
(Continued)
F-30
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(14) CONTINUED
<TABLE>
<CAPTION>
1996
- -----------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
- -------------------------------------------------------------- ------------------------------------
Weighted average Weighted Weighted
Option price Number remaining average Number average
per share of shares contractual life exercise price of shares exercise price
- -------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
$ 17.44 15,590 2 years $ 17.44 15,590 $ 17.44
20.12 15,600 3 years 20.12 15,600 20.12
24.24 15,600 4 years 24.24 15,600 24.24
26.27 16,200 5 years 26.27 16,200 26.27
- -----------------------------------------------------------------------------------------------------
62,990 3.5 years $ 22.06 62,990 $ 22.06
=====================================================================================================
</TABLE>
The Company applies the intrinsic value method in accounting for issuance
of options to purchase its stock and, accordingly, no compensation cost has
been recognized for the issuance of options. Had the Company determined
compensation cost using a fair value-based method for options granted in
1997 and 1996, the Company's net income or earnings per share amounts would
have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 2,835,007 1,246,236 3,165,567
Pro forma 2,768,207 1,184,836 3,110,567
Net income per common share - basic
As reported 3.50 1.54 3.91
Pro forma 3.41 1.46 3.84
Net income per common share - diluted
As reported 3.44 1.52 3.87
Pro forma 3.36 1.44 3.81
===============================================================================================
</TABLE>
The weighted average fair values of options granted during 1997, 1996 and
1995 were $67,000, $62,000 and $55,000 on the dates of grant. The fair
values of options granted were calculated using the Black-Scholes option-
pricing model with the following weighted average assumptions used for
grants in 1997, 1996 and 1995: risk-free interest rate of 6.0%; expected
volatility of 15%; dividend yield and expected dividend growth rate of 4.0%
in all years; and expected lives of five years and expected forfeitures of
0% for all years.
(15) RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 1997,
approximately $2,498,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
(Continued)
F-31
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(16) FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet
(statement of financial condition) risk in the normal course of business.
These financial instruments include mortgage and commercial loan
commitments, undisbursed lines of credit, standby letters of credit and
commitments to purchase loans. These instruments involve, to various
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statements of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument is represented by the contract
amount of the financial instrument. Since certain of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company uses the same
credit policies in making commitments for off-balance-sheet financial
instruments as it does for on-balance-sheet financial instruments.
Financial instruments with off-balance-sheet risk are as follows at
December 31:
<TABLE>
<CAPTION>
Contract amount
(in thousands)
------------------------
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Commercial loan commitments $ 400 120
Mortgage loan commitments 23,856 8,409
Undisbursed lines of credit (primarily credit cards) 29,727 29,245
Secured standby letters of credit 3,745 2,890
Unsecured standby letters of credit 466 497
=======================================================================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of
credit is based on management's credit evaluation of the counterparty.
Collateral held varies but generally may include cash, marketable
securities, and property.
The undisbursed lines of credit primarily relate to unused and open-ended
credit card lines of credit. The credit risk involved in extending the
consumer lines of credit is essentially the same as that involved in
extending loans to customers.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The Company holds collateral
supporting those commitments when deemed necessary.
(Continued)
F-32
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value assumptions, methods and estimates are set forth below for
the Company's financial instruments as of December 31, 1997 and 1996.
The carrying value and estimated fair value of financial instruments is
summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash on hand and due from banks $ 7,008,538 7,009,000 6,915,598 6,916,000
Short-term investments 14,980,475 14,980,000 7,102,713 7,103,000
Securities purchased under agreements to resell 187,518 188,000 - -
Certificates of deposit 171,993 172,000 144,548 145,000
Investment securities available-for-sale 25,805,514 25,806,000 14,796,424 14,796,000
Mortgage-backed securities available-for-sale 5,238,594 5,239,000 5,656,521 5,657,000
Loans receivable 193,654,037 214,054,000 200,192,994 215,427,000
Mortgage loans held for sale 4,775,250 4,775,000 1,040,050 1,040,000
Federal Home Loan Bank Stock 752,100 752,000 734,600 735,000
Liabilities:
Savings accounts 235,760,044 237,526,000 226,513,106 228,948,000
Notes payable 1,006,007 1,006,000 - -
Advances payments by borrowers
for taxes and insurance 333,663 334,000 449,135 449,000
==========================================================================================================================
</TABLE>
Cash, Short-term Investments and Certificates of Deposit - For cash, short-
term investments consisting of Federal funds sold and interest-bearing
overnight investment accounts, securities purchased under agreements to
resell, and certificates of deposit, the carrying amount is a reasonable
estimate of fair value.
Investments and Mortgage-Backed Securities - The fair value of investments
in U.S. Government and Federal agencies, equity securities and mortgage-
backed securities is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers.
Federal Home Loan Bank Stock - The fair value of Federal Home Loan Bank
stock is estimated to be equal to its carrying amount given it is not a
publicly traded equity security, it has an adjustable dividend rate, and
all transactions in the stock are executed at the stated par value.
(Continued)
F-33
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) CONTINUED
Loans Receivable - Fair values are estimated for portfolios of loans with
similar financial characteristics. Mortgage loans are segregated by type,
including but not limited to residential, commercial, and construction.
Consumer and commercial loans are segregated by type, including automobile
loans, boat loans, timeshares, savings secured, personal unsecured, deeds
of trust and commercial loans. Credit cards are segregated by secured and
unsecured cards. Each loan category may be segmented, as appropriate, into
fixed and adjustable interest rate terms, ranges of interest rates,
performing and nonperforming, and repricing frequency.
The fair value of each loan portfolio is calculated by discounting both
scheduled and unscheduled cash flows through the remaining contractual
maturity using the rate that the Company would charge under current
conditions to originate similar financial instruments. Unscheduled cash
flows take the form of estimated prepayments and are generally based upon
anticipated experience derived from current and prospective economic and
interest rate environments. For certain types of loans, anticipated
prepayment experience is based on published tables from securities dealers
and actual prepayment speeds experienced by the Company.
The fair value of significant classified mortgage loans is based on recent
external appraisals of related real estate collateral or estimated cash
flows discounted using a rate commensurate with the credit risk associated
with those cash flows. Assumptions regarding credit risk, cash flows and
discount rates are judgmentally determined using available market
information and specific borrower information.
Savings Accounts and Advance Payments by Borrowers for Taxes and
Insurance - The fair value of deposits with no stated maturity, such as
passbook savings, NOW accounts, collateralized savings and money market
accounts and advance payments by borrowers for taxes and insurance are
equal to the amount payable upon demand as of December 31. The fair value
of certificates of deposit is based on the lower of redemption (net of
penalty) or discounted value of contractual cash flows. Discount rates for
certificates of deposit are estimated using the rates currently offered by
the Company for deposits of similar remaining maturities.
Notes Payable - The principal balance of the notes payable approximates
fair value based on borrowing rates currently available to the Company for
loans with similar terms and remaining maturities.
Commitments to Extend Credit - The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates.
(Continued)
F-34
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) CONTINUED
The fair value of commitments to extend credit is estimated to equal the
commitment amount. See note 16 and note 4 to the consolidated financial
statements for the amount of such instruments.
Limitations - Fair value estimates are made at a specific point in time,
based on relevant market and financial instrument information. These
estimates also include judgments regarding future economic conditions,
expected loss and risk assessments. Not included was any estimate of a
premium or discount that could result from offering for sale at one time
the company's entire holdings of a financial instrument. These estimates
are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect estimates.
(18) CONTINGENCIES
On May 20, 1997, KeyCorp, a $67 billion bank holding company headquartered
in Cleveland, Ohio, filed a suit against the Bank in the united States
District Court for the Northern District of Ohio, Eastern Division,
alleging that the Bank's use of the name "Key Bank and Trust" and the
Bank's use of its service mark infringes on the trademarks of KeyCorp. In
response to the suit filed by KeyCorp, the Bank filed a counterclaim
asserting that KeyCorp has infringed upon the Bank's name and service mark,
and has petitioned to cancel KeyCorp's federally registered mark. In their
respective actions, both the Bank and KeyCorp seek monetary damages equal
to three times the other's profits, as well as other monetary and
consequential damages. The case is still pending. The Bank believes that
the claims by KeyCorp are without merit and it intends to vigorously defend
this suit.
The Company is also a defendant in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial condition or results
of operations of the Company.
(Continued)
F-35
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(19) FINANCIAL INFORMATION OF PARENT COMPANY
The following is financial information of Key Capital Corporation (parent
company only):
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash on hand and due from banks $ 657,749 165,499
Securities purchased under agreements to resell 187,518 -
Short-term investments - 45,598
Loans receivable, net 2,416,772 1,660,802
Accrued interest receivable 29,813 -
Investment in subsidiaries 20,928,369 18,653,527
Prepaid expenses and other assets 26,500 66,793
Deferred federal and state income taxes 49,086 -
- -------------------------------------------------------------------------------------
Total assets $ 24,295,807 20,592,219
- -------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 1,006,007 -
Accrued expenses and other liabilities 41,761 3,762
Federal and State Income Taxes Payable 80,116 79,436
- -------------------------------------------------------------------------------------
Total liabilities 1,127,884 83,198
- -------------------------------------------------------------------------------------
Common stock 809,640 810,334
Additional paid-in capital 713,405 740,624
Retained income - substantially restricted 21,715,550 19,326,230
Accumulated other comprehensive income (70,672) (368,167)
- -------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 24,295,807 20,592,219
=====================================================================================
</TABLE>
(Continued)
F-36
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(19) CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable 351,799 272,632 150,985
Federal funds sold 11,920 18,021 -
Other 14,149 109,717 42,992
- -----------------------------------------------------------------------------------------------
Total interest income 377,868 400,370 193,977
- -----------------------------------------------------------------------------------------------
Interest expense - borrowed money 81,354 4,555 1,272
Provision for loan losses 97,810 86,371 50,112
Other expenses 22,899 8,669 12,373
- -----------------------------------------------------------------------------------------------
Income before income taxes 175,805 300,775 130,220
Income tax provision 68,145 116,159 50,291
- -----------------------------------------------------------------------------------------------
Income before equity in net income of
wholly owned subsidiaries 107,660 184,616 79,929
- -----------------------------------------------------------------------------------------------
Equity in income of subsidiaries 2,727,347 1,061,620 3,085,638
- -----------------------------------------------------------------------------------------------
Net income 2,835,007 1,246,236 3,165,567
===============================================================================================
</TABLE>
(Continued)
F-37
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(19) CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,835,007 1,246,236 3,165,567
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income of subsidiaries (2,727,347) (1,061,620) (3,085,638)
Provision for loan losses 97,810 86,371 50,112
Deferred income taxes (49,086) - -
(Increase) decrease in accrued interest receivable (29,813) - -
(Increase) decrease in prepaid expenses
and other assets 40,293 121,128 (129,048)
Increase (decrease) in accrued expenses
and other liabilities 37,999 3,450 (40,249)
Increase in federal and state income
taxes payable 680 25,537 13,591
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 205,543 421,102 (25,665)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Dividend received from subsidiaries 750,000 500,000 1,000,000
Loan disbursements net of principal repayments (853,780) (1,355,332) (140,811)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (103,780) (855,332) 859,189
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 138,819 174 -
Repurchase of stock (166,732) - -
Increase in notes payable 1,006,007 - -
Dividends paid (445,687) (445,684) (445,675)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 532,407 (445,510) (445,675)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 634,170 (879,740) 387,849
Cash and cash equivalents at beginning of year 211,097 1,090,837 702,988
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 845,267 211,097 1,090,837
==============================================================================================================================
</TABLE>
F-38
<PAGE>
GLOSSARY
Allowance for Loan Losses Funds set aside on the Company's books to absorb
probable losses on loans
Bank Key Bank and Trust, the Maryland trust company that
is the principal subsidiary of the Company
Basis Point One one-hundredth of a percentage point
Commissioner The Commissioner of Financial Regulation for the
State of Maryland
Community Offering The best efforts offering of _________ shares of the
Common Stock being undertaken by the Company prior to
the firm commitment Public Offering
Company Key Capital Corporation
Conventional Loan A mortgage loan that is neither insured by the
Federal Housing Administration nor guaranteed by the
Veterans' Administration
Credit Card Processing The administrative services performed by Key
Operations for its clients, including the issuance of
credit cards to their customers, maintenance of
records, tracking card charges, billing, receipt and
posting of payment, mailing of delinquency notices
and other services. The exact services performed for
any particular client will depend on the terms of the
agreement between the customer and Key Operations
Credit Risk The risk that a borrower will not pay back what they
owe
Debt-to-Income Ratio A ratio calculated by adding up the amount which a
borrower is required to pay each month on their
outstanding debt, rent and other obligations and
dividing by their monthly income
Development Loan A loan used to finance the development of unimproved
land into buildable lots
FDIC The Federal Deposit Insurance Corporation, a federal
agency which insures the Bank's deposit accounts up
to applicable limits
FHA The Federal Housing Administration, a federal agency
which insures the repayment of principal and interest
by borrowers on residential mortgages which meet its
criteria
FHLB of Atlanta The Federal Home Loan Bank of Atlanta, one of the
twelve FHLBs established by the U.S. Government to
lend money to member financial institutions to make
residential mortgage loans
FHLMC The Federal Home Loan Mortgage Corporation, a
government-sponsored enterprise which buys
residential mortgages from lenders
FNMA The Federal National Mortgage Association, a
government-sponsored enterprise which buys
residential mortgages from lenders
Indirect Automobile Loan An automobile loan for which the application has been
taken by an automobile dealer and sent to the Bank
for approval
A-1
<PAGE>
Interest Rate Risk The risk that changes in market interest rates will
result in a narrowing of the Company's net interest
spread. When interest-bearing liabilities mature or
reprice more quickly than interest-earning assets in a
given period, a significant increase in market rates of
interest could adversely affect net interest income.
Conversely, when interest-earning assets mature or
reprice more quickly than interest-bearing liabilities,
falling interest rates could result in a decrease in
net interest income.
Key Operations Key Operations Center, Inc., a subsidiary of the Bank
engaged in credit card processing
Net Interest Income The difference between the interest earned on loans and
other interest-earning assets and the interest paid on
deposits and other interest-bearing liabilities
Net Interest Margin A ratio calculated by dividing net interest income by
average interest-earning assets
Net Interest Spread The difference between the average yield on interest-
earning assets and the average rate paid on interest-
bearing liabilities
Offerings The Community Offering and the Public Offering
Over-Allotment Option An option granted by the Company to the underwriters in
the Public Offering allowing them to purchase
additional shares of the Common Stock to cover over-
allotments to customer accounts by the underwriters
Public Offering The firm commitment offering through Ryan, Beck of
_________ shares of the Common Stock and any shares of
the Common Stock offered but not sold in the Community
Offering
Ryan, Beck Ryan, Beck & Co., the registered broker-dealer that
will act as the Company's agent for the sale of the
shares in the Community Offering and that is expected
to purchase any shares which are not sold in the
Community Offering along with _______ other shares of
the Common Stock that the Company has reserved for
resale to the public in the Public Offering
SAIF The Savings Association Insurance Fund of the FDIC
SAIF Special Assessment A special assessment imposed on all SAIF-insured
depository institutions during 1996 to recapitalize the
SAIF
SBA The Small Business Administration, a federal agency
which guarantees the payment of principal and interest
on a portion of commercial loans that meet its criteria
Subprime Loans Loans made to borrowers who are considered more likely
to default on their obligations because of their past
debt repayment history, their high debt-to-income
ratio, lack of employment history, inability to
document their income or other factors
VA The Veterans' Administration, a Federal agency that
partially guarantees the repayment of principal and
interest on certain residential mortgages made to
veterans
A-2
<PAGE>
<TABLE>
<S> <C>
============================================ ================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS
NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, __________ SHARES
AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN KEY CAPITAL CORPORATION
OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. COMMON STOCK
NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY OR THE BANK SINCE ANY OF THE
DATES AS OF WHICH INFORMATION IS FURNISHED
HEREIN OR SINCE THE DATE HEREOF.
TABLE OF CONTENTS
----------------------------
SUMMARY................................ i PROSPECTUS
SUMMARY FINANCIAL DATA................. v -----------------------------
RISK FACTORS........................... 1
USE OF PROCEEDS........................
MARKET FOR THE COMMON STOCK............
DIVIDENDS..............................
DILUTION...............................
CAPITALIZATION.........................
SELECTED CONSOLIDATED FINANCIAL DATA...
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.........................
BUSINESS...............................
SUPERVISION AND REGULATION.............
MANAGEMENT.............................
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT......
DESCRIPTION OF CAPITAL STOCK...........
SHARES ELIGIBLE FOR FUTURE SALE........
THE OFFERINGS..........................
EXPERTS................................
LEGAL MATTERS..........................
ADDITIONAL INFORMATION.................
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS............................
GLOSSARY............................... A-1
UNTIL ___________, 1998, ALL DEALERS THAT Ryan, Beck & Co.
EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING,
MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION ___________, 1998
TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
============================================ ================================================
</TABLE>
<PAGE>
PART II
=======
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities to be registered are as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fees................................... $ 5,310
Legal fees.............................................. 75,000
Printing and engraving.................................. 35,000
Accounting fees......................................... 100,000
Reimbursable underwriter's expenses..................... 45,000
Miscellaneous........................................... 14,690
--------
Total............................................... $275,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XIII of the Registrant's Articles of Incorporation provide that
directors, officers and employees of the Registrant are to be indemnified by the
Registrant to the fullest extent permitted under Maryland law. Section 2-418 of
the Maryland General Corporation Law sets forth circumstances under which
directors, officers, employees and agents may be insured or indemnified against
liability which they may incur in their capacities as such. Section 2-418
provides that a corporation may indemnify any director or officer made a party
to any civil, criminal, administrative or investigative proceeding by reason of
serving in such capacity unless it is established that (a) the act or omission
of such person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty, (b) the person actually received an improper personal benefit, or
(c) in the case of a criminal proceeding, the person had reasonable cause to
believe the act or omission was unlawful. The indemnification may be against
judgments, penalties, fines, settlements, and reasonable expenses (including
attorneys' fees) actually incurred in connection with the proceeding. However,
if the proceeding was by or in the right of the corporation, indemnification may
not be made if the person is adjudged to be liable to the corporation. The
corporation must indemnify directors and officers for expenses incurred in
contesting any such proceeding if such persons are successful on the merits,
unless the corporation's articles of incorporation limit such indemnification
(the Company's Articles do not). Determination that the indemnification is
proper and the amount to be paid in indemnification is to be made by a majority
vote of a quorum of disinterested directors (or a committee of disinterested
directors), by special legal counsel chosen by disinterested directors (or a
committee of disinterested directors) or by a majority vote of disinterested
stockholders. A corporation may purchase and maintain insurance on behalf of
any director or officer against any liability asserted against and incurred by
such person in any such capacity or arising out of such person's position
whether or not the corporation would have the power to indemnify against such
liability under Maryland law. A corporation must report any indemnification or
advance of expenses to a director or officer arising out of a proceeding by or
in the right of the corporation to the stockholders of the corporation.
The Company maintains director and officer liability insurance. The scope
of such insurance is essentially the same as the indemnification provisions
outlined above.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant made the following sales of
common stock pursuant to options issued under its Incentive Stock Option Plan
which were not registered under the Securities Act of 1933. All sales were for
cash at the exercise price per share. No discounts or commissions were
involved. The Registrant believes that in each case the transaction qualified
for the exemption from registration under Rule 701 promulgated under the
Securities Act of 1933.
<TABLE>
<CAPTION>
DATE TITLE OF SECURITIES # OF SHARES PURCHASER AGGREGATE PRICE
- -------- ------------------- ----------- ------------------- ---------------
<S> <C> <C> <C> <C>
06/15/98 Common Stock 600 Kathy A. Snyder $10,461
03/24/98 Common Stock 30 David H. Wells, Jr. 523
03/19/98 Common Stock 600 Ross L. Brown 10,461
09/29/97 Common Stock 1,000 Robert M. Bouza 17,400
09/12/97 Common Stock 1,000 Robert M. Bouza 17,400
08/20/97 Common Stock 1,000 Robert M. Bouza 17,400
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit List
------------
1.1 Agency Agreement *
1.2 Underwriting Agreement *
3.1 Articles of Incorporation of Key Capital Corporation, As Amended
3.2 Bylaws of Key Capital Corporation
5 Opinion of Housley Kantarian & Bronstein, P.C. *
10.1 Key Capital Corporation 1998 Stock Option Plan for Directors
10.2 Key Capital Corporation Incentive Stock Option Plan
10.3 Key Bank and Trust 1998 Cash Incentive Bonus Plan
10.4 Key Bank and Trust 1998 Special Bonus Plan for Division Managers
21 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Housley Kantarian & Bronstein, P.C. (included in their
opinion filed as Exhibit 5) *
24 Power of Attorney (reference is made to the signature page of the
Form S-1)
27 Financial Data Schedule
99 Stock Order Form *
__________
* To be filed by amendment.
ITEM 17. UNDERTAKING
The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be
II-2
<PAGE>
reflected in the form of prospectus filed with the Commission pursuant to Rule
242(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section
do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Owings Mills, State of
Maryland, on October 1, 1998.
KEY CAPITAL CORPORATION
By: /s/ David H. Wells, Jr.
-----------------------
David H. Wells, Jr.
President and Chief Executive Officer
(Duly Authorized Representative)
We, the undersigned Directors of Key Capital Corporation, hereby severally
constitute and appoint David H. Wells, Jr., who may act, with full power of
substitution, as our true and lawful attorney and agent, to do any and all
things in our names in the capacities indicated below which said David H. Wells,
Jr., may deem necessary or advisable to enable Key Capital Corporation to comply
with the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with the
registration of Key Capital Corporation's common stock, including specifically,
but not limited to, power and authority to sign for us in our names in the
capacities indicated below, the registration statement and any and all
amendments (including post-effective amendments) thereto and any related
registration statement that is to be effective upon filing under Rule 462(b)
under the Securities Act of 1933, as amended, and we hereby ratify and confirm
all that said David H. Wells, Jr. shall do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ David H. Wells, Jr. President, Chief Executive Officer October 1, 1998
- ----------------------- and Director
David H. Wells, Jr. (Principal Executive Officer)
/s/ W. Benton Knight Vice President, Treasurer and October 1, 1998
- ----------------------- Director
W. Benton Knight (Principal Financial and
Accounting Officer)
/s/ Bernard Dackman Chairman of the Board and Director October 1, 1998
- -----------------------
Bernard Dackman
/s/ Irwin R. Cohen Director October 1, 1998
- -----------------------
Irwin R. Cohen
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ Joel Dackman Director October 2, 1998
- -----------------------
Joel Dackman
Director _________, 1998
- -----------------------
Jan Cohen Feldman
/s/ Philip Glazer Director October 1, 1998
- -----------------------
Philip Glazer
/s/ Marc S. Rosen Director October 2, 1998
- -----------------------
Marc S. Rosen
/s/ Morton Shapiro Director October 2, 1998
- -----------------------
Morton Shapiro
/s/ Richard D. Sussman Director October 2, 1998
- ----------------------
Richard D. Sussman
/s/ Seymour Sussman Director October 6, 1998
- ----------------------
Seymour Sussman
</TABLE>
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
KEY CAPITAL CORPORATION
AS AMENDED
The undersigned, David H. Wells, Jr., whose address is 7F Gwynns Mills
Court, Owings Mills, Maryland 21117, being of legal age, acting as incorporator,
does hereby form a corporation under the General Laws of the State of Maryland
having the following Articles of Incorporation:
ARTICLE I
NAME
The name of the corporation is Key Capital Corporation (herein the
"Corporation").
ARTICLE II
PRINCIPAL OFFICE
The address of the Corporation's principal office in the State of Maryland
is 7F Gwynns Mill Court, Owings Mills, Maryland 21117 or such other place as may
be designated in the Bylaws.
ARTICLE III
POWERS
The purpose for which the Corporation is organized is to act as a financial
institution holding company and to transact all other lawful business for which
corporations may be incorporated pursuant to the General Laws of the State of
Maryland. The Corporation shall have all the powers of a corporation organized
under the General Laws of the State of Maryland.
ARTICLE IV
RESIDENT AGENT
The name and address of the initial resident agent of the Corporation
in the State of Maryland is David H. Wells, Jr., 7F Gwynns Mill Court, Owings
Mills, Maryland 21117. The resident agent is a citizen of the State of
Maryland and actually resides therein.
1
<PAGE>
ARTICLE V
INITIAL DIRECTORS
The number of directors constituting the initial board of directors of the
Corporation shall be twelve (12), which number may be increased or decreased
pursuant to the bylaws of the Corporation and Article XI of these Articles, but
shall never be less than the minimum number permitted by the General Laws of the
State of Maryland now or hereafter in force. The names of the persons who are
to serve as directors until the first annual meeting of stockholders and until
their successors are elected and qualified, are:
Name
----
Morton Shapiro Joel Dackman
Seymour Sussman Marc Rosen
David H. Wells, Jr. Bernard Dackman
John J. Davis Charles G. Jules
Irwin R. Cohen Jan C. Feldman
Philip Glazer Richard Sussman
ARTICLE VI
CAPITAL STOCK
The aggregate number of shares of all classes of capital stock which the
Corporation has authority to issue is 20,000,000, all of which are to be shares
of common stock, $1.00 par value per share. The aggregate par value of all
shares of capital stock is $20,000,000. The shares may be issued by the
Corporation from time to time as first approved by the board of directors of the
Corporation and then approved by the holders of not less than of a majority of
the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors cast at a meeting of the stockholders
called for that purpose, except as otherwise provided in this Article VI or the
rules of a national securities exchange, if applicable. The consideration for
the issuance of the shares shall be paid to or received by the Corporation in
full before their issuance and shall not be less than the par value per share.
The consideration for the issuance of the shares, other than cash, shall be
determined by the board of directors, and approved by the Corporation's
shareholders as provided above, in accordance with the General Laws of the State
of Maryland. In the absence of actual fraud in the transaction, the judgment of
the board of directors and shareholders as to the value of such consideration
shall be conclusive. Upon payment of such consideration such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend, the
part of the surplus of the Corporation which is transferred to stated capital
upon the issuance of shares as a stock dividend shall be deemed to be the
consideration for their issuance. Shareholder approval for the issuance of
capital stock shall not be required (and the board of directors of the
Corporation shall have sole authority to issue) (i) upon issuance of a pro rata
stock dividend or (ii) upon issuance or sale of any shares of capital stock
acquired pursuant to the provisions of Article VIII herein.
The holders of the common stock shall exclusively possess all voting power.
Each holder of shares of common stock shall be entitled to one vote for each
share held by such holders, except as to the cumulation of votes for the
election of directors.
Dividends may be paid on the common stock out of any assets legally
available for the payment of dividends, but only when as declared by the board
of directors of the Corporation.
2
<PAGE>
In the event of any liquidation, dissolution or winding up of the
Corporation, the holders of the common stock shall be entitled, after payment or
provision for payment of all debts and liabilities of the Corporation, to
receive the remaining assets of the Corporation available for distribution, in
cash or in kind.
Each share of common stock shall have the same relative powers, preferences
and rights as, and shall be identical in all respects with, all the other shares
of common stock of the Corporation.
ARTICLE VII
PREEMPTIVE RIGHTS
No holder of any of the shares, or of options, warrants or other rights to
purchase shares or other securities, of the Corporation shall have any
preemptive right to purchase or subscribe for any unissued stock, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock or carrying any right to purchase
stock of the Corporation.
ARTICLE VIII
REPURCHASE OF SHARES
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE IX
MEETINGS OF STOCKHOLDERS; CUMULATIVE VOTING
A. Notwithstanding any other provision of these Articles or the bylaws of
the Corporation, no action required to be taken or which may be taken at any
annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action is specifically denied.
B. Special meetings of the stockholders of the Corporation for any purpose
or purposes may be called at any time by the President of the Corporation, the
board of directors of the Corporation, by a committee of the board of directors
which has been duly designated by the board of directors, or in accordance with
the bylaws of the Corporation.
C. There shall be cumulative voting by stockholders in the election of
directors of the Corporation.
D. Meetings of stockholders may be held within or without the State of
Maryland, as the bylaws may provide.
3
<PAGE>
ARTICLE X
NOTICE FOR NOMINATIONS AND PROPOSALS
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of stockholders may be
made by the board of directors of the Corporation or by any stockholder of the
Corporation entitled to vote generally in the election of directors. In order
for a stockholder of the Corporation to make any such nominations and/or
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than thirty days nor more than sixty days prior to any such
meeting; provided, however, that if less than forty days' notice of the meeting
is given to stockholders, such written notice shall be delivered or mailed, as
prescribed, to the Secretary of the Corporation not later than the close of the
tenth day following the day on which notice of the meeting was mailed to
stockholders. Each such notice given by a stockholder with respect to
nominations for the election of directors shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or employment of each such nominee,
and (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee. In addition, the stockholder making
such nomination shall promptly provide any other information reasonably
requested by the Corporation.
B. Each such notice given by a stockholder to the Secretary with respect to
business proposals to bring before a meeting shall set forth in writing as to
each matter: (i) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting;
(ii) the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business; (iii) the class and number of shares of
the Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in these Articles to the contrary, no business shall be conducted at the meeting
except in accordance with the procedures set forth in this Article.
C. The Chairman of the annual or special meeting of stockholders may, if
the facts warrant, determine and declare to such meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the next
succeeding adjourned, special or annual meeting of the stockholders taking place
thirty days or more thereafter. This provision shall not require the holding of
any adjourned or special meeting of stockholders for the purpose of considering
such defective nomination or proposal.
ARTICLE XI
DIRECTORS
A. Number; Vacancies. The number of directors of the Corporation shall be
-----------------
such number, not less than 3 nor more than 25 as shall be provided from time to
time in or in accordance with the bylaws, provided that no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director. A majority of the remaining directors, whether or not
sufficient to constitute a quorum, may fill a vacancy on the board of directors
which results from any cause except an increase in the number of directors. A
majority of the entire board of directors may fill a vacancy which results from
an increase in the number of directors. A director elected by the board of
directors to fill a vacancy serves until the next annual meeting of stockholders
and until his successor is elected and qualifies.
B. Classified Board. The board of directors of the Corporation shall be
----------------
divided into three classes of directors which shall be designated Class I, Class
II and Class III. The members of each class shall be elected for a term of
three years and until their successors are elected and qualified. Such classes
shall be as nearly equal in number as the then total number of directors
constituting the entire board of directors shall permit, with the terms of
office of
4
<PAGE>
all members of one class expiring each year. Should the number of directors not
be equally divisible by three, the excess director or directors shall be
assigned to Classes I or III as follows: (i) if there shall be an excess of one
directorship over a number equally divisible by three, such extra directorship
shall be classified in Class I; and (ii) if there be an excess of two
directorships over a number equally divisible by three, one shall be classified
in Class I and the other in Class III. At the first annual meeting of
stockholders, directors of Class I shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. At the second annual
meeting of stockholders, directors of Class II shall be elected to hold office
for a term expiring at the third succeeding annual meeting thereafter. At the
third annual meeting of stockholders, directors of Class III shall be elected to
hold office for a term expiring at the third succeeding annual meeting
thereafter. Thereafter, at each succeeding annual meeting, directors of each
class shall be elected for three year terms. Notwithstanding the foregoing, the
director whose term shall expire at any annual meeting shall continue to serve
until such time as his successor shall have been duly elected and shall have
qualified unless his position on the board of directors shall have been
abolished by action taken to reduce the size of the board of directors prior to
said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
ARTICLE XII
REMOVAL OF DIRECTORS
Notwithstanding any other provision of these Articles or the bylaws of the
Corporation, any director or the entire board of directors of the Corporation
may be removed, at any time, but only for cause and only by the affirmative vote
of the holders of at least 75% of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors cast at a
meeting of the stockholders called for that purpose. If less than the entire
board of directors is to be removed, no one of the directors may be removed if
the votes cast against the removal would be sufficient to elect a director if
then cumulatively voted at an election of the class of directors of which such
directors is a part.
ARTICLE XIII
INDEMNIFICATION
The Corporation shall indemnify to the fullest extent permissible under the
Maryland General Corporation Law any individual who is or was a director,
officer, employee, or agent of the Corporation, and any individual who serves or
has served at the Corporation's request as a director, officer, partner,
trustee, employee, or agent of another corporation, partnership, joint venture,
trust or other enterprise, in any proceeding in which the individual is made a
party as a result of his service in such capacity. An individual will not be
indemnified if it is proved that the act or ommission at issue was material to
the cause of action adjudicated in the subject proceding and that (i) it was
committed in bad faith, or (ii) it was the result of active and deliberate
dishonesty, or (iii) the individual actually received an improper personal
benefit in money, property, or services, or (iv) in the case of a criminal
proceeding, the individual had reasonable cause to believe that the act or
ommission was unlawful.
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ARTICLE XIV
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
An officer or director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of their
fiduciary duty as an officer or director, unless: (i) it is proved that the
individual officer or director actually received an improper benefit or profit
in money, property or services from the Corporation; or (ii) a judgment or other
final adjudication adverse to the individual officer or director is entered in a
proceeding based on a finding in the proceeding that the individual's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. If the Maryland
General Corporation Law is amended to further eliminate or limit the personal
liability of officers and directors, then the liability of officers and
directors of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Maryland General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the Corporation shall not adversely affect any right or protection of a director
of the Corporation existing at the time of such repeal or modification.
ARTICLE XV
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by statute, the
board of directors of the Corporation is expressly authorized to make, repeal,
alter, amend and rescind the bylaws of the Corporation, except as expressly
provided herein. Notwithstanding any other provision of these Articles or the
bylaws of the Corporation (and notwithstanding the fact that some lesser
percentage may be specified by law), the bylaws shall not be made, repealed,
altered, amended or rescinded by the stockholders of the Corporation except by
the vote of the holders of not less than a majority of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
adoption, repeal, alteration, amendment or rescission is included in the notice
of such meeting), or, as set forth above, by the board of directors; provided
that only the shareholders (by the vote specified above) and not the directors
shall be authorized to make, repeal, alter, amend and rescind the following
Bylaws provisions: Article II, Sections 3, 8, 10 and 12(c); Article III,
Sections 2, 10 and 11; and Article XI.
ARTICLE XVI
AMENDMENT OF ARTICLES OF INCORPORATION
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in these Articles in the manner now or hereafter prescribed
by law, and all rights conferred on stockholders herein are granted subject to
this reservation. Notwithstanding the foregoing, the provisions set forth in
Articles XII, XIII, XIV and this Article XVI of these Articles may not be
repealed, altered amended or rescinded in any respect unless the same is
approved by the affirmative vote of the holders of not less than 66-2/3% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors cast at a meeting of the stockholders
called for that purpose (provided that notice of such proposed adoption, repeal,
alteration, amendment or rescission is included in the notice of such meeting).
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I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Laws of the State of
Maryland, do make these Articles, hereby declaring and certifying that this is
my act and deed and the facts herein stated are true, and accordingly have
hereunto set my hand this 9th day of August, 1990.
/s/David H. Wells, Jr.
---------------------------------------
David H. Wells, Jr., Incorporator
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EXHIBIT 3.2
BYLAWS
OF
KEY CAPITAL CORPORATION
ARTICLE I
HOME OFFICE
The home office of Key Capital Corporation (herein the "Corporation") shall
be at 7F Gwynns Mills Court in the Town of Owings Mills, in the State of
Maryland.
ARTICLE II
STOCKHOLDERS
SECTION 1. Place of Meetings. All annual and special meetings of
-----------------
stockholders shall be held at the home office of the Corporation or at such
other place within or without the State in which the home office of the
Corporation is located as the board of directors may determine and as designated
in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
--------------
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date as the board of
directors may determine during the 30-day period beginning on April 1 and ending
on April 30 of each year.
SECTION 3. Special Meetings. Special meetings of the stockholders for any
----------------
purpose or purposes may be called at any time by the president of the
Corporation, a majority of the board of directors or by a committee of the board
of directors in accordance with the provisions of the Corporation's Articles of
Incorporation or a special meeting may be called by the Secretary of the
Corporation upon the written request of the holders of not less than 25 percent
of all votes of shareholders entitled to be cast at the meeting. Such written
request shall state the purpose or purposes of the meeting and the matters
proposed to be acted on at the meeting and shall be delivered at the home office
of the Corporation addressed to the chairman of the board, the president or the
secretary. The secretary shall inform the stockholders who make the request of
the reasonably estimated cost of preparing and mailing a notice of the meeting
and upon payment of these costs to the Corporation, the secretary shall then
notify each stockholder entitled to notice of the meeting.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
-------------------
conducted in accordance with the rules and procedures established by the board
of directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
SECTION 5. Notice of Meeting. Written notice stating the place, day and
-----------------
hour of the meeting and the purpose or purposes for which the meeting is called
shall be mailed by the secretary or the officer performing his duties, not less
than ten days nor more than 90 days before the meeting to each stockholder of
record entitled to vote at such meeting and to each other stockholder entitled
to notice of the meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail, addressed to the stockholder
at his address as it appears on the stock transfer books or records of the
Corporation as of the record date prescribed in Section 6 of this Article II,
with postage thereon prepaid. If a stockholder be present at a meeting, or in
writing waive notice thereof before or
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after the meeting and such waiver is filed with the records of the stockholders
meeting, notice of the meeting to such stockholder shall be unnecessary. When
any stockholders' meeting, either annual or special, is adjourned for 30 days,
notice of the adjourned meeting shall be given as in the case of an original
meeting. It shall not be necessary to give any notice of the time and place of
any meeting adjourned for less than 30 days or of the business to be transacted
at such adjourned meeting, other than an announcement at the meeting at which
such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
---------------------
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than 90 days, and in case of a meeting of stockholders, not less than
ten days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a determination of stock
holders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
SECTION 7. Voting Lists. The officer or agent having charge of the stock
------------
transfer books for shares of a Corporation shall make, at least ten days before
each meeting of shareholders, a complete record of the stockholders entitled to
vote at such meeting or any adjournment thereof, arranged in alphabetical order,
with the address of and the number of shares held by each. The record, for a
period of ten days before such meeting, shall be kept on file at the principal
office of the Corporation. The original stock transfer books shall be prima
facie evidence as to who are the stockholders entitled to examine such record or
transfer books or to vote at any meeting of stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the
------
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stock holders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
-------
vote by proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after eleven months from the date of its execution unless otherwise provided in
the proxy.
SECTION 10. Voting. At each election for directors every stockholder
------
entitled to vote at such election shall be entitled to one vote for each share
of stock held by him except as to the cumulation of votes for the election of
directors. Unless otherwise provided by these Bylaws, the Articles of
Incorporation, or the General Laws of the State of Maryland, a majority of those
votes cast by stockholders at a lawful meeting shall be sufficient to pass on a
transaction or matter.
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
---------------------------------------------------
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
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SECTION 12. Voting of Shares by Certain Holders. (a) Shares standing in
-----------------------------------
the name of another corporation may be voted by any officer, agent or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine. Shares
held by an administrator, executor, guardian or conservator may be voted by him,
either in person or by proxy, without a transfer of such shares into his name.
Shares standing in the name of a trustee may be voted by him, either in person
or by proxy, but no trustee shall be entitled to vote shares held by him without
a transfer of such shares into his name. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without the transfer thereof into
his name if authority to do so is contained in an appropriate order of the court
or other public authority by which such receiver was appointed.
(b) A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
(c) Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
----------------------
stockholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three. If
the board of directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 14. Nominating Committee. The board of directors shall act as a
--------------------
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least twenty days prior to the
date of the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by stockholders are
made in writing and delivered to the secretary of the Corporation in accordance
with the provisions of the Corporation's Articles of Incorporation.
Section 15. New Business. Any new business to be taken up at the annual
------------
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Articles of
Incorporation. This provision shall not prevent the consideration and approval
or disapproval at the annual meeting of reports of officers, directors and
committees, but in connection with such reports no new business shall be acted
upon at such annual meeting unless stated and filed as provided in the
Corporation's Articles of Incorporation.
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ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the Corporation
--------------
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meet ings.
SECTION 2. Number, Term and Election. The board of directors shall
-------------------------
initially consist of twelve (12) members and thereafter shall consist of such
number of members as determined from time to time in accordance with the
Articles of Incorporation by a majority of the entire board of directors;
provided that any action in determining the number of directors shall not affect
the tenure of office of any director and if the board of directors shall fail to
establish the number of directors prior to any annual meeting of stockholders
then the number of directors then in effect shall remain operative. The board
of directors shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected or qualified. The board of directors
shall be classified in accordance with the provisions of the Corporation's
Articles of Incorporation.
SECTION 3. Regular Meetings. A regular meeting of the board of directors
----------------
shall be held without other notice than this Bylaw immediately after, and at the
same place as, the annual meeting of stockholders. The board of directors may
provide, by resolution, the time and place for the holding of additional regular
meetings without other notice than such resolution.
SECTION 4. Special Meetings. Special meetings of the board of directors
----------------
may be called by or at the request of the chairman of the board or the
president, or by one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place as the place for
holding any special meeting of the board of directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person.
SECTION 5. Notice. Written notice of any special meeting shall be given
------
to each director at least two days previous thereto delivered personally or by
telegram or at least seven days previous thereto delivered by mail at the
address at which the director is most likely to be reached. Such notice shall
be deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid if mailed or when delivered to the telegraph
company if sent by telegram. Any director may waive notice of any meeting by a
writing filed with the secretary. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any meeting of the board of
directors need be specified in the notice or waiver of notice of such meeting.
SECTION 6. Quorum. A majority of the number of directors fixed by Section
------
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors, but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in the
same manner as prescribed by Section 5 of this Article III.
SECTION 7. Manner of Acting. The act of the majority of the directors
----------------
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Articles of Incorporation, or the General Laws of the State of Maryland.
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SECTION 8. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors and filed with the minutes of the proceedings of the board.
SECTION 9. Resignation. Any director may resign at any time by sending a
-----------
written notice of such resignation to the home office of the Corporation
addressed to the chairman of the board or the president. Unless otherwise
specified herein such resignation shall take effect upon receipt thereof by the
chairman of the board or the president.
SECTION 10. Vacancies. Any vacancy occurring in the board of directors
---------
shall be filled in accordance with the provisions of the Corporation's Articles
of Incorporation. Any directorship to be filled by reason of an increase in the
number of directors may be filled by the affirmative vote of a majority of the
entire board of directors provided that no more than four additional
directorships may be created in this fashion during any year. The term of such
director shall be in accordance with the provisions of the Corporation's
Articles of Incorporation.
SECTION 11. Removal of Directors. Any director or the entire board of
--------------------
directors may be removed only in accordance with the provisions of the
Corporation's Articles of Incorporation.
SECTION 12. Compensation. Directors, as such, may receive a stated salary
------------
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine. Nothing herein shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
remuneration therefor.
SECTION 13. Presumption of Assent. A director of the Corporation who is
---------------------
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to
a director who votes in favor of such action.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, as they may determine to be necessary
or appropriate for the conduct of the business of the Corporation, and may
prescribe the duties, constitution and procedures thereof. Each committee shall
consist of two or more directors of the Corporation. The board may designate
one or more directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting of the committee.
The board of directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of, to fill vacancies in, and to discharge any committee of the board.
Any member of any such committee may resign at any time by giving notice to the
Corporation; provided, however, that notice to the board, the chairman of the
board, the chief executive officer, the chairman of such committee, or the
secretary shall be deemed to constitute notice to the Corporation. Such
resignation shall take effect upon receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective. Any member of any such
committee may be removed at any
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time, either with or without cause, by the affirmative vote of a majority of the
authorized number of directors at any meeting of the board called for that
purpose.
ARTICLE V
OFFICERS
SECTION 1. Positions. The officers of the Corporation shall be a
---------
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The president of the
Corporation shall be the chief executive officer, unless the board of directors
designates another person as the chief executive officer. The offices of the
secretary and treasurer may be held by the same person and a vice president may
also be either the secretary or the treasurer. The board of directors may
designate one or more vice presidents as executive vice president or senior vice
president. The chairman of the board of directors may also be an officer, and
the board of directors may also elect or authorize the appointment of such other
officers as the business of the Corporation may require. The officers shall
have such authority and perform such duties as the board of directors may from
time to time authorize or determine. In the absence of action by the board of
directors, the officers shall have such powers and duties as generally pertain
to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
---------------------------
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the shareholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Corporation to enter
into an employment contract with any officer in accordance with state law; but
no such contract shall impair the right of the board of directors to remove any
officer at any time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote of a majority of
-------
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
------------
from time to time by the board of directors and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the Corporation.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts. To the extent permitted by applicable law, and
---------
except as otherwise prescribed by the Corporation's Articles of Incorporation or
these Bylaws with respect to certificates for shares, the board of directors may
authorize any officer, employee, or agent of the Corporation to enter into any
contract or execute and deliver any instrument in the name of and on behalf of
the Corporation. Such authority may be general or confined to specific
instances.
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SECTION 2. Loans. No indebtedness shall be contracted on behalf of the
-----
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
-------------------
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the Corporation in any of
its duly authorized depositories as the board of directors may select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for Shares. The shares of the Corporation shall
-----------------------
be represented by certificates signed by the chairman or vice chairman of the
board of directors or by the president or a vice president and by the treasurer
or an assistant treasurer or by the secretary or an assistant secretary of the
Corporation, and may be sealed with the seal of the Corporation or a facsimile
thereof. Any or all of the signatures upon a certificate may be facsimiles if
the certificate is countersigned by a transfer agent, or registered by a
registrar, other than the Corporation itself of an employee of the Corporation.
If any officer who has signed or whose facsimile signature has been placed upon
such certificate shall have ceased to be such officer before the certificate is
issued, it may be issued by the Cor poration with the same effect as if he were
such officer at the date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
--------------------------
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any stockholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the variations in
the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine the relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
that the Corporation is organized under the laws of the State of Maryland; the
name of the person to whom issued; the number and class of shares; the date of
issue; the designation of the series, if any, which such certificate represents;
the par value of each share represented by such certificate, or a statement that
the shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
------------------
shares until the agreed upon consideration for such shares is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the issuance
--------------------------
of shares shall be paid in accordance with the provisions of the Corporation's
Articles of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the
------------------
Corporation shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Corporation. Such transfer shall be made only on surrender for cancellation
of the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Corporation shall be deemed by the Corporation
to be the owner thereof for all purposes.
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SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be the
------------
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of Article II of these Bylaws or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 7. Lost Certificates. The board of directors may direct a new
-----------------
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 8. Beneficial Owners. The Corporation shall be entitled to
-----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not the Corporation shall have express
or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 30th day of September
of each year. The Corporation shall be subject to an annual audit as of the end
of its fiscal year by independent public accountants appointed by and
responsible to the board of directors.
ARTICLE IX
DIVIDENDS
Subject to the provisions of the Articles of Incorporation and applicable
law, the board of directors may, at any regular or special meeting, declare
dividends on the Corporation's outstanding capital stock. Dividends may be paid
in cash, in property or in the Corporation's own stock.
ARTICLE X
CORPORATE SEAL
The corporate seal of the Corporation shall be in such form as the board of
directors shall prescribe.
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ARTICLE XI
AMENDMENTS
In accordance with the Corporation's Articles of Incorporation, these
Bylaws may be repealed, altered, amended or rescinded by the stockholders of the
Corporation only by vote of not less than a majority of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such
meeting). In addition, except as expressly reserved for the shareholders of the
Corporation in the Articles of Incorporation, the board of directors may repeal,
alter, amend or rescind these Bylaws by vote of a majority of the board of
directors at a legal meeting held in accordance with the provisions of these
Bylaws.
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EXHIBIT 10.1
KEY CAPITAL CORPORATION
1998 STOCK OPTION PLAN FOR DIRECTORS
1. PURPOSE OF THE PLAN.
The purpose of this Plan is to advance the interests of the Company through
providing its Directors with the opportunity to acquire Shares. By encouraging
such stock ownership, the Company seeks to attract, retain, and motivate the
best available Directors and to provide additional incentives to Directors of
the Company to promote the success of the business.
2. DEFINITIONS.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Sections 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).
(c) "Bank" shall mean Key Bank & Trust or any other affiliate bank.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Common Stock" shall mean the common stock of the Company.
(g) "Company" shall mean Key Capital Corporation.
(h) "Continuous Service" shall mean the absence of any interruption or
termination of service as a Director of the Company or an Affiliate. Continuous
Service shall not be considered interrupted in the case of sick leave, military
leave or any other leave of absence approved by the Company, in the case of
transfers between payroll locations of the Company or between the Company, an
Affiliate or a successor, or in the case of a Director's performance of services
in an emeritus or advisory capacity.
(i) "Director" shall mean any non-employee member of the Board or advisory
director as well as any non-employee member of the board of directors or
advisory director of an Affiliate as determined by the Board in its discretion.
(j) "Disability" shall mean a physical or mental condition, which
in the sole and absolute discretion of the Board, is reasonably expected to be
of indefinite duration and to substantially prevent a Participant from
fulfilling his or her duties or responsibilities to the Company or an Affiliate.
(k) "Effective Date" shall mean the date specified in Paragraph 12 hereof.
(l) "Employee" shall mean any person employed by the Company, the Bank, or
an Affiliate.
(m) "Exercise Price" shall mean the price per Optioned Share at which an
Option may be exercised.
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(n) "Market Value" shall mean the fair market value of the Common Stock, as
determined under Paragraph 7(b) hereof.
(o) "Non-Employee Director" shall have the meaning provided in Rule 16b-3.
(p) "Option" means a stock option granted pursuant to the Plan. Options
granted pursuant to the Plan are not intended to be "incentive stock options"
within the meaning of Section 422 of the Code.
(q) "Optioned Shares" shall mean Shares purchased pursuant to the exercise
of an Option.
(r) "Participant" shall mean any Director who at the time receives an
Option grant pursuant to Paragraph 6.
(s) "Plan" shall mean this Key Capital Corporation 1998 Stock Option Plan
for Directors.
(t) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
(u) "Share" shall mean one share of Common Stock.
3. TERM OF THE PLAN AND OPTIONS.
(a) Term of the Plan. The Plan shall continue in effect for a term of five
years from the Effective Date, unless sooner terminated pursuant to Paragraph 14
hereof. No Option shall be granted under the Plan more than five years after
from the Effective Date.
(b) Term of Options. The term of each Option granted under the Plan shall
be established by the Board, but shall not exceed five years.
4. SHARES SUBJECT TO THE PLAN.
Subject to the adjustments required under Paragraph 9, the aggregate number
of Shares deliverable pursuant to Options shall not exceed 60,000 Shares. Such
Shares may either be authorized but unissued Shares, Shares held in treasury, or
Shares held in a grantor trust created by the Company. If any Options should
expire, become unexercisable, or be forfeited for any reason without having been
exercised, the Optioned Shares shall, unless the Plan shall have been
terminated, be available for the grant of additional Options under the Plan.
5. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Board or a committee appointed by
the Board. In the absence at any time of a duly appointed committee, the Plan
shall be administered by the Board.
(b) The Board or a committee appointed by the Board shall have sole and
complete authority and discretion (i) to select Participants and grant Options,
(ii) to determine the form and content of Options to be issued in the form of
Agreements under the Plan, (iii) to interpret the Plan, (iv) to prescribe,
amend, and rescind rules and re gulations relating to the Plan, and (v) to make
other determinations necessary or advisable for the administration of the Plan.
(c) Agreement. Each Option shall be evidenced by a written agreement
containing such provisions as may be approved by the Board. Each such Agreement
shall constitute a binding contract between the Company and the Participant, and
every Participant, upon acceptance of such Agreement, shall be bound by the
terms and
2
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restrictions of the Plan and of such Agreement. The terms of each such Agreement
shall be in accordance with the Plan, but each Agreement may include such
additional provisions and restrictions determined by the Board, in its
discretion, provided that such additional provisions and restrictions are not
inconsistent with the terms of the Plan. In particular, the Board shall set
forth in each Agreement (i) the Exercise Price of an Option, (ii) the number of
Shares subject to the Option, and its expiration date, (iii) the manner, time,
and rate (cumulative or otherwise) of exercise or vesting of such Option, and
(iv) the restrictions, if any, to be placed upon such Option, or upon Shares
which may be issued upon exercise of such Option. The Chairman of the Board and
such other Directors and officers as shall be designated by the Board are hereby
authorized to execute Agreements on behalf of the Company and to cause them to
be delivered to the recipients of Options.
(d) Effect of the Board's Decisions. All decisions, determinations, and
interpretations of the Board shall be final and conclusive on all persons
affected thereby.
(e) Indemnification. In addition to such other rights of indemnification
as they may have, the members of the Board shall be indemnified by the Company
in connection with any claim, action, suit, or proceeding relating to any action
taken or failure to act under or in connection with the Plan or any Option,
granted hereunder to the full extent provided for under the Company's governing
instruments with respect to the indemnification of Directors.
6. GRANT OF OPTIONS.
(a) General Rule. Subject to Paragraph 12 hereof, the Board shall have the
discretion to grant Options to Directors (including members of the Board).
(b) Terms of Grants. Every Option granted hereunder shall (i) have an
Exercise Price determined in Paragraph 7 of the Plan, (ii) shall be immediately
exercisable, in accordance with Paragraph 8, (iii) shall have a term of five
years from the Effective Date, and (iv) shall be subject to the general rule set
forth in Paragraph 8(c) with respect to the effect of a Participant's
termination of Continuous Service on the Participant's right to exercise his or
her Options.
7. EXERCISE PRICE FOR OPTIONS.
(a) Limits on Board Discretion. The Exercise Price as to any particular
Option shall equal 100% of the Market Value of the Optioned Shares on the date
of grant.
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National Market
System) on the date in question, then the Market Value per Share shall be the
average of the highest and lowest selling price on such exchange on such date,
or if there were no sales on such date, then the Market Value shall be the mean
between the bid and asked price on such date. If the Common Stock is traded
otherwise than on a national securities exchange on the date in question, then
the Market Value per Share shall be the mean between the bid and asked price on
such date, or, if there is no bid and asked price on such date, then on the next
prior business day on which there was a bid and asked price. If no such bid and
asked price is available, then the Market Value per Share shall be its fair
market value as determined by the Board, in its sole and absolute discretion.
8. EXERCISE OF OPTIONS.
(a) Generally. Subject to Paragraph 12 hereof, each Option shall become
fully (100%) exercisable immediately upon the date of its grant. An Option may
not be exercised for a fractional Share.
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise, only
by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the
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number of Shares with respect to which the Option is then being exercised. Each
such notice (and payment where required) shall be delivered, or mailed by
prepaid registered or certified mail, addressed to the Treasurer of the Company
at its executive offices. Common Stock utilized in full or partial payment of
the Exercise Price for Options shall be valued at its Market Value at the date
of exercise, and may consist of Shares subject to the Option being exercised.
(c) Period of Exercisability. Except to the extent otherwise provided in
the terms of an Agreement, an Option may be exercised by a Participant only
while he has maintained Continuous Service, or within 90 days after termination
of such Continuous Service for a reason other than his death or Disability (but
not later than the date on which the Option would otherwise expire). In the
event of a Participant's Continuous Service terminates due to the Participant's
death or Disability, his Option may be exercised within two years from that date
only by the Participant while living (or by the personal representatives of his
estate or person or persons to whom his rights under such Option shall have
passed by will or by laws of descent and distribution), but in no event later
than the date on which such Option would otherwise expire.
(d) Mandatory Six-Month Holding Period. Notwithstanding any other
provision of this Plan to the contrary, Optioned Shares may not be sold within
the six-month period following the grant of that Option, provided that such six-
month holding period shall not apply in the event of a transaction described in
Paragraph 9(b) hereof.
9. EFFECT OF CHANGES IN COMMON STOCK SUBJECT TO THE PLAN.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares subject
to outstanding Options, and the Exercise Price thereof, shall be proportionately
adjusted for any increase, decrease, change, or exchange of Shares for a
different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In the
event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding
Options, together with the Exercise Price thereof, shall be equitably adjusted
for any change or exchange of Shares for a different number or kind of shares or
other securities which results from the Transaction.
(c) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Paragraph, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the Shares pursuant to the Option before the adjustment was made.
(d) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect, and no adjustment
shall be made with respect to, the number, class, or Exercise Price of Shares
then subject to Options or reserved for issuance under the Plan.
10. NON-TRANSFERABILITY OF OPTIONS.
Options may not be sold, pledged, assigned, hypothecated, transferred, or
disposed of in any manner other than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, or any other provision of this
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Plan, a Participant who holds Options may transfer such Options to his or her
spouse, lineal ascendants, lineal descendants, or to a duly established trust
for the benefit of one or more of these individuals. Options so transferred may
thereafter be transferred only to the Participant who originally received the
grant or to an individual or trust to whom the Participant could have initially
transferred the Options pursuant to this Paragraph 10. Options which are
transferred pursuant to this Paragraph 10 shall be exercisable by the transferee
according to the same terms and conditions as applied to the Participant.
11. TIME OF GRANTING OPTIONS.
The date of grant of an Option shall, for all purposes, be the date on
which the Board makes the determination of granting such Option. Notice of the
determination shall be given to each Participant to whom an Option is so granted
within a reasonable time after the date of such grant.
12. EFFECTIVE DATE.
The Plan shall become effective upon its adoption by the Board, subject to
approval of the Plan by a favorable vote of stockholders owning at least a
majority of the total votes cast at a duly called meeting of the Company's
stockholders held in accordance with applicable laws. Any Options granted prior
to approval of the Plan by the stockholders of the Company shall be contingent
on such approval, and shall not be exercisable prior thereto.
13. MODIFICATION OF OPTIONS.
At any time, and from time to time, the Board may direct execution of an
instrument providing for the modifica tion of any outstanding Option, provided
no such modification shall confer on the holder of said Option any right or
benefit which could not be conferred on him by the grant of a new Option at such
time, or impair the Option without the consent of the holder of the Option.
14. AMENDMENT AND TERMINATION OF THE PLAN.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Options, suspend, or terminate
the Plan. No amendment, suspension, or termination of the Plan shall, without
the consent of any affected holders of an Option, alter or impair any rights or
obligations under any Option theretofore granted.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Compliance with Securities Laws. Shares of Common Stock shall not be
issued with respect to any Option unless the issuance and delivery of such
Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applic able state securities law, and the
requirements of any stock exchange upon which the Shares may then be listed.
(b) Special Circumstances. The inability of the Company to obtain
approval from any regulatory body or authority deemed by the Company's counsel
to be necessary to the lawful issuance and sale of any Shares hereunder shall
relieve the Company of any liability in respect of the non-issuance or sale of
such Shares. As a condition to the exercise of an Option, the Company may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(c) Board Discretion. The Board shall have the discretionary authority to
impose in Agreements such restrictions on Shares as it may deem appropriate or
desirable, including but not limited to the authority to impose a right of first
refusal or to establish repurchase rights or both of these restrictions.
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16. RESERVATION OF SHARES.
The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
17. NO EMPLOYMENT OR OTHER RIGHTS.
In no event shall a Director's eligibility to participate or participation
in the Plan create or be deemed to create any legal or equitable right of the
Director to continue service as a Director with the Company, the Bank, or any
Affiliate of such corporations. No Director shall have a right to be granted an
Option or, having received an Option, the right to again be granted an Option.
However, a Director who has been granted an Option may, if otherwise eligible,
be granted an additional Option or Options.
18. GOVERNING LAW.
The Plan shall be governed by and construed in accordance with the laws of
the State of Maryland, except to the extent that federal law shall be deemed to
apply.
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EXHIBIT 10.2
KEY CAPITAL CORPORATION
INCENTIVE STOCK OPTION PLAN
1. Purpose. The Purpose of this Incentive Stock Option Plan ( the
-------
"Plan") is to further the interests of Key Capital Corporation, a Maryland
corporation (the "Company") by providing incentives for certain officers and
employees of the Company and any 50% or more owned subsidiary of the Company who
may be designated for participation in the Plan and to provide additional means
of attracting and maintaining competent personnel. The Plan is intended to
qualify as an incentive stock option plan within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
2. Administration. The Plan shall be administered by the
--------------
Compensation Committee (referred to herein as the "Committee"). Subject to the
provisions of the Plan and applicable law, the Committee is also authorized to
interpret the Plan and to prescribe, amend and rescind rules and regulations
relating to the Plan and to any options granted under the Plan, and to make all
other determinations necessary or advisable for the administration of the Plan.
3. Participants and Grants of Options. The Committee shall, subject
----------------------------------
to the approval of the Board of Directors, determine and designate from time to
time those officers and employees to whom options are to be granted and who
thereby become participants in the Plan. The Committee may, subject to the
approval of the Board of Directors, grant to such participants options to
purchase Shares of the common stock, par value $.10 per Share, of the Company
("Shares") in such amounts as the Committee shall from time to time determine.
However, if the aggregate fair market value (determined as of the time the
option is granted) of all Shares which an optionee may purchase upon the
exercise of an option during the calendar year in which the option first becomes
exercisable (under all such plans of the Company and its subsidiaries) exceeds
$100,000 the options, to the extent of such excess, shall not be treated as
incentive stock options under the Code. The granting of an option shall take
place only when a written option agreement substantially in the form of
Exhibit A hereto (the Option Agreement") is executed by an officer of the
- ------- -
Company and the participant and is delivered to the Company. Participation in
the Plan shall not confer any right of continuation of service as an officer or
employee.
4. Shares Subject to the Plan. Under this Plan, the Committee may
--------------------------
from time to time, subject to the approval of the Board of Directors, grant
options to officers and employees entitling the holders of such options to
purchase, upon the exercise of such options, up to an aggregate of 120,000
Shares. If any option granted under the Plan shall terminate or expire
unexercised, in whole or in part, the Shares so released from the option may be
made the subject of additional options granted under the Plan. The Company
shall reserve and keep available such number of Shares as will satisfy the
requirements of all outstanding options granted under the Plan.
5. Share Restructure. In the event of a change in the Company's
-----------------
Shares, as by stock splits, reverse stock splits, stock dividends,
reclassification or recapitalization, the number and
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type of Shares available for the grant of options and subject to outstanding
options shall be proportionately adjusted.
6. Corporate Reorganization. In the case of any capital
------------------------
reorganization, recapitalization, consolidation, merger or share exchange of the
Company with another person, entity or group, or any sale or other transfer of
all or substantially all of the Company's assets in one or a series of
transactions (an "Extraordinary Event"), the Company shall take such action as
may be necessary to enable each optionee to receive upon any subsequent exercise
of options, in whole or in part, securities or other assets as were issuable or
payable upon such reorganization, recapitalization, consolidation, merger, share
exchange or sale or other transfer in respect of, or in exchange for, such
Shares as may have been purchased upon the exercise of the option under the
Plan.
7. Option Price. The option price per Share shall be equal to at
------------
least the fair market value per Share of Shares on the date the option is
granted; provided, however, that if the participant, at the time the option is
granted, owns stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company (or any parent or subsidiary) (a "10%
Shareholder"), then the option price shall not be less then 110% of the fair
market value of the Shares on the date the option is granted. For the purposes
of this Plan "fair market value" shall mean the fair market value of the Shares
as determined by the Committee at the date the option is granted.
8. Exercise. Each option granted under the Plan will be exercisable
--------
at any time, and from time to time, from and after the date of the grant of the
option, subject to any limitations imposed by the Option Agreement; provided,
however, that no option may be exercised after the expiration of 10 years from
and after the date the option is granted and if a participant is a 10%
Shareholder, no option may be exercised after the expiration of 5 years from the
date the option is granted.
9. Transfer of Options. No option shall be transferable by any
-------------------
optionee otherwise than by will and the laws of descent and distribution.
Options granted under the Plan shall be exercisable during the optionee's
lifetime only by the optionee and only in the manner set forth in this Plan.
10. Termination and Forfeiture of Options. All unexercised options
-------------------------------------
of an optionee will terminate, be forfeited and will lapse immediately if (i)
such optionee's employment with the Company is terminated for cause, as
determined by the Committee, or (ii) such optionee accepts employment with a
competitor of the Company without the written consent of the Company.
11. Exercise of Options. To exercise an option, the optionee or his
-------------------
successor shall give written notice to the Company's Secretary at the Company's
principal offices, accompanied by full payment for the Shares being purchased.
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12. Disposition of Shares. If the optionee (other than the
---------------------
optionee's estate where the optionee has died holding the option) makes any
disposition of Shares acquired upon the exercise of options granted under this
Plan prior to the later of (i) 2 years from and after the date the option is
granted, or (ii) 1 year after the date the Shares are issued to the optionee,
the optionee will notify the Secretary of the Company in writing of such
disposition.
13. Manner of Payment. An optionee shall pay the purchase price
-----------------
for the Shares being purchased upon exercise of the option either in cash or by
check made payable to the order of the Company.
14. Registration. If the Company shall be advised by its counsel
------------
that Shares deliverable upon any exercise on an option are required to be
registered under the Securities Act of 1933, or that the consent of any other
authority is required for their issuance, the Company may effect such
registration or obtain such consent, and delivery of the Shares by the Company
may be deferred until registration is effected or consent obtained.
15. Execution of Stockholders'Agreement. The exercise of the
-----------------------------------
options and the purchase of the Shares by the optionee is conditioned upon the
optionee's acceptance of, and agreement to be bound by, all the terms of the
Company's Stock Option Agreement as then in effect, if any, among the Company
and the employee stockholders of the Company. Accordingly, each optionee
undertakes and agrees to be bond by all the terms and provision of the Stock
Option Agreement, regardless of whether the Stock Option Agreement is actually
executed and delivered by the optionee.
16. Amendments and Termination. The board of Directors may amend,
--------------------------
suspend, discontinue or terminate the Plan, but no action may, without the
consent of the holder of any option granted under the Plan, alter or impair such
option.
17. Period of Plan.
--------------
(a) This Plan has been adopted by the Board of Directors of
the Company on February 17, 1998, subject to approval of the Plan by the
stockholders of the Company within 12 months of the date the Plan was adopted.
The stockholders of the Company approved the Plan on March 20, 1998.
(b) No Option shall be granted on or after the 10th anniversary
of the date of adoption of the Plan by the Board of Directors of the Company.
The Plan shall expire on the later of such 10th anniversary date or the date on
which all options granted under the Plan have expired or have been exercised in
full.
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EXHIBIT 10.3
KEY BANK AND TRUST
1998 CASH INCENTIVE BONUS PLAN
A Cash Incentive Bonus is to be paid to certain designated Officers based on the
profitability of the Bank.
The Cash Incentive Bonus shall be calculated on results of operations of Key
Bank and Trust and subsidiaries for calendar year 1998.
All sums shall be calculated based on the final audited statements, in
accordance with GAAP standards before income taxes, as set forth by the Bank's
independent auditors for the year end December 31, 1998.
The Cash Incentive Bonus shall be calculated on the Bank's consolidated net pre-
income tax profits, to the extent that such net profits exceed one (1%) percent
of assets. As listed below, each Officer shall receive a Cash Incentive Bonus
based on the designated percentage beside each name. However, no eligible
individual shall receive more than two and one half percent (2 1/2%) of profits.
Example One - Assets December 31, 1998 - $270 million, Net pre-tax profits
$4,700,000 - Calculate 1% of $270 million = $2,700,000 - then deduct $2,700,000
from $4,700,000 = $2 million available for bonus and calculation based on each
Officer's designated percentage. Example Two - same assets as above, but pre-
tax profits are $1,200,000 - No bonus because 1% of assets is more than net pre-
tax profits.
The payment of this Cash Incentive Bonus is also conditioned upon the Bank
increasing its net worth after taxes as a percent of total liabilities, by at
least 35 basis point during calendar 1998. Cash dividends paid on capital
stock, if any, will be added back to net worth for purposes of determining
attainment of this goal.
The bonus shall be payable in cash in the manner following:
1. Two thirds of the amount earned for calendar 1998 shall be paid between 15
and 30 days after completion of the year end audit and issuance of financial
reports by our independent auditors.
2. One third of the amount earned for calendar 1998 shall be paid between 15
and 30 days after completion of the year end audit and issuance of financial
reports for 1999 by our independent auditors, provided further that the
Bank's net worth after taxes as a percent of total liabilities increases by
at least 35 basis points during 1999. Again, cash dividends on capital
stock, if any will be added back to net worth for purposes of determining
attainment of this goal.
<PAGE>
Page 2
Key Bank and Trust
Bonus Plans
The following Officers are eligible for a Cash Incentive Bonus:
<TABLE>
<S> <C>
David H. Wells, Jr., Pres. 2.5%
W. Benton Knight, EVP 2.5%
Thomas Juranich, VP 1.0%
George G. Wachter, SRVP 1.0%
Ross L. Brown, VP 1.0%
Daniel W. Hume, VP .4%
Henry Schreiber, VP .4%
Louise Adams, VP .4%
Anne Marie Willis, VP/Treas. .4%
Judith A. Frank, VP .4%
Kathy L. Snyder, VP .4%
Eileen Gant, VP .2%
</TABLE>
As stated in the 1996 Plan, the Committee has recommended a cap on the amount
available for bonuses of 12% of excess profits which may require readjustment of
these individual percentages as additional Officers are added to this list.
If an eligible person under this plan, for any reason, leaves the employ of Key
Bank and Trust prior to the close of December 31, 1998, then such person shall
not be entitled to share in any bonus, unless otherwise directed by the Board of
Directors of Key Bank and Trust and to the extent determined by the Board in its
absolute discretion.
<PAGE>
EXHIBIT 10.4
KEY BANK AND TRUST
1998 SPECIAL BONUS PLAN FOR DIVISION MANAGERS
Irrespective of the overall profitability of the Bank, certain individual
officers in charge of revenue producing division have the ability to earn
additional individual bonuses based on the profitability of their Divisions.
These bonuses shall equal 1.5% of the pre-tax profitability of their Division
based on the Bank's internally prepared profit center reports (subject to any
audit adjustments by our independent auditor). In order to receive a bonus,
however, a Division Manager's Division must attain a minimum pre-tax return on
average assets of 1.5%. The methodology used by the Bank's Chief Financial
Officer in preparation of these internal profit center reports is binding on all
parties to this arrangement.
Example One - Consumer Loan Division assets at December 31, 1998 - $30 million,
net pre-tax profits $1,000,000 - calculate 1.5% of $30 million = $450,000 - pre-
tax income exceeds this and Division Manager is eligible for bonus. Example
Two- same assets as above but pre-tax profits are $350,000 - no bonus because
1.5% of assets are more than pre-tax profits.
The following officers are eligible as Division Managers under this Special
Bonus Plan:
Thomas Juranich, VP - Credit Card Division
George G. Wachter, SRVP - Residential Constr. Lending Div.
Ross L. Brown, VP - Commercial Lending Division
George Harrison, VP - Consumer Lending Division
The bonus shall be payable in cash in the manner following:
1. Two thirds of the amount earned for calendar 1998 shall be paid between 15
and 30 days after completion of the year end audit and issuance of financial
reports by our independent auditors.
2. One third of the amount earned for calendar 1998 shall be paid between 15
and 30 days after completion of the year end audit and issuance of financial
reports for 1999 by our independent auditors.
If an eligible person under this plan, for any reason, leaves the employ of Key
Bank and Trust prior to the close of December 31, 1998, then such person shall
not be entitled to share in any bonus, unless otherwise directed by the Board of
Directors of Key Bank and Trust and to the extent determined by the Board in its
absolute discretion.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PARENT
- ------
Key Capital Corporation
STATE OR OTHER
JURISDICTION OF PERCENTAGE
SUBSIDIARY INCORPORATION OWNERSHIP
- ---------- --------------- ----------
Key Bank and Trust Maryland 100%
SUBSIDIARIES OF KEY BANK AND TRUST
- ----------------------------------
Key Operations Center, Inc. Maryland 100%
Key West Financial Corporation Maryland 100%
<PAGE>
EXHIBIT 23.1
Independent Auditors' Consent
-----------------------------
The Board of Directors
Key Capital Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Baltimore, Maryland
October 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,592
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,172
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 192,640
<ALLOWANCE> 8,101
<TOTAL-ASSETS> 277,688
<DEPOSITS> 243,467
<SHORT-TERM> 1,510
<LIABILITIES-OTHER> 5,827
<LONG-TERM> 0
0
0
<COMMON> 813
<OTHER-SE> 24,069
<TOTAL-LIABILITIES-AND-EQUITY> 277,688
<INTEREST-LOAN> 13,982
<INTEREST-INVEST> 891
<INTEREST-OTHER> 463
<INTEREST-TOTAL> 15,336
<INTEREST-DEPOSIT> 5,629
<INTEREST-EXPENSE> 5,690
<INTEREST-INCOME-NET> 9,646
<LOAN-LOSSES> 2,545
<SECURITIES-GAINS> (13)
<EXPENSE-OTHER> 8,355
<INCOME-PRETAX> 2,964
<INCOME-PRE-EXTRAORDINARY> 1,858
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,858
<EPS-PRIMARY> 2.29
<EPS-DILUTED> 2.25
<YIELD-ACTUAL> 7.35
<LOANS-NON> 3,935
<LOANS-PAST> 1,127
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 500
<ALLOWANCE-OPEN> 8,024
<CHARGE-OFFS> 5,760
<RECOVERIES> 3,293
<ALLOWANCE-CLOSE> 8,101
<ALLOWANCE-DOMESTIC> 8,101
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
