<PAGE>
As filed with the Securities and Exchange Commission on March 3, 1999
Registration No. 333-65445
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------------
KEY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
---------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Maryland 6022 52-1723536
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.)
of incorporation or organization) Classification Code Number)
</TABLE>
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. [ ]
-----------------------------------------
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 950,000 Shares of Common Stock
KEY CAPITAL CORPORATION
7F Gwynns Mill Court
Owings Mill, Maryland 21117
(410) 363-7050
================================================================================
The Company is offering up to 950,000 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 ___________,
1999. The Company expects to sell any shares which are not sold in the
Community Offering (along with an additional 450,000 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> <C>
. Price Per Share: $10.00 to $12.00
. Number of Shares: 950,000
. Underwriting Fee (Minimum/Maximum): $0.25 to $0.30
. Estimated Net Proceeds to the Company (Minimum/
Maximum): $9,262,500 to $11,115,000
. 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 ___________, 1999
<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 5
1/2-for-1 stock split effected through a stock dividend payable on
March 15, 1999.
. 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,
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. At December 31, 1998, the Company had $292.0
million in assets, $257.0 million in deposits and $26.7 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.
(i)
<PAGE>
The Company is organized by lending area. Each lending area is run by a
senior officer who has substantial responsibility for their business area and
who is compensated based partly on the profitability of their division. The
Company currently concentrates on five main areas:
. Residential Construction and Development Lending. The Bank has focused
on residential construction and development lending since its
founding. At December 31, 1998, the total outstanding balances on the
Bank's construction and development loans approximated $84.7 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. 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 December 31, 1998, the Bank had
a $47.0 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." 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 December 31, 1998, the Company's commercial
loan portfolio totaled $45.8 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. 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 December 31, 1998, the
Company's subprime automobile loan portfolio totaled $22.5 million.
See "Business -- Lending Activities."
. Mortgage Banking. The Bank originates FHA/VA and conventional loans
for resale in the secondary market. For the year ended December 31,
1998, the Company originated $115.3 million in mortgage loans for sale
in the secondary market. The Bank seeks to minimize credit and
interest rate risk while maximizing profitability by promptly selling
loans on an individual loan basis. The Bank currently 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 margins for the
years ended December 31, 1998, 1997 and 1996 were 7.12%, 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. For the year ended December 31,
1998, noninterest
(ii)
<PAGE>
income amounted to $11.6 million and equaled 37.97% of total revenue
up from 31.37% of total revenue in 1997. 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 over the past
several years. For the year ended December 31, 1998, returns on
average assets and average equity were 1.35% and 14.77%, 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 15 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
approximately $5.0 to $6.0 million 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.
. Establish Credit Card Bank. The Company currently intends to use
approximately $5.0 to $6.0 million of the net proceeds to establish a
credit card bank in Delaware through the acquisition of an existing
bank charter. By establishing a bank in Delaware, the Company can take
advantage of Delaware's more flexible consumer credit laws.
. 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. Through its website at www.keyb-t.com, the Company is also
able to offer its loan and deposit products nationwide.
. 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.
(iii)
<PAGE>
THE OFFERINGS
Common Stock Offered in the Offerings:
- ------------------------------
Community Offering.......... Up to 950,000 shares
Public Offering............. 450,000 shares plus any shares which are not
sold in the Community Offering
Common Stock to be Outstanding
after the Offerings.............. 5,933,265 shares
Use of Proceeds.................. The Company intends to use approximately
$5.0 to $6.0 million of the net proceeds to
charter and capitalize a new bank subsidiary
in Northern Virginia. Another $5.0 to $6.0
million of the net proceeds will be used to
establish a credit card bank in Delaware.
The Company intends to use the remaining
proceeds (approximately $900,000 to $5.6
million) 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. With the
quarter ended March 31, 1999, the Company
will begin paying quarterly dividends at an
annual rate equal to $0.13 per share.
Risk Factors..................... Prospective investors in the Common Stock
should read carefully the information
discussed under the heading "Risk Factors,"
including: (i) credit risks related to
lending specialties; (ii) industry risks
related to construction and development
lending; (iii) risks related to the proposed
new banking subsidiaries and branch
expansion; (iv) Key Operations' dependence
on significant customer; (v) no prior market
for the Common Stock and no assurance of an
active and liquid trading market; (vi)
dependence on key personnel; (vii) control
of the Company; (viii) geographic
concentration
Nasdaq National Market Symbol.... "KCCO"
(iv)
<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 order is 14,000 shares.
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, _____ __,
1999. The Company will accept payment by wire, check or money order. For
wiring instructions, contact the Stock Information Center. 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 1,000 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 refund the difference between $12 and
the final price.
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
(v)
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes consolidated financial data for the Company
and its subsidiaries for the periods indicated. The consolidated financial data
does not purport to be complete and should be read in conjunction with, and is
qualified in its entirety by, the more detailed information, including the
Consolidated Financial information and related Notes appearing elsewhere in this
prospectus. See "Index to Consolidated Financial Statements."
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net Interest Income........... $ 18,939 $ 19,875 $ 20,246 $ 18,641 $ 16,842
Provision for Loan Losses..... 5,179 7,623 7,883 3,812 3,124
Noninterest Income............ 11,595 9,085 7,623 7,036 6,646
Noninterest Expense........... 19,689 16,688 18,950 16,685 14,947
Net Income (1)................ 3,768 2,835 1,246 3,166 3,605
Share Data:
Net Income Per Share:
Basic (1).................. $ 0.84 $ 0.64 $ 0.28 $ 0.71 $ 0.81
Diluted (1)................ 0.81 0.63 0.28 0.70 0.81
Cash Dividends Declared
Per Common Share........... 0.12 0.10 0.10 0.10 0.07
Book Value per Common
Share...................... 5.90 5.20 4.60 4.42 3.69
Weighted Average Basic
Common Shares
Outstanding................ 4,478,298 4,460,715 4,456,821 4,456,782 4,456,782
Financial Condition Data:
Total Assets.................. $ 292,026 $ 268,477 $ 253,038 $ 237,936 $ 203,984
Loans Receivable, net......... 220,957 192,849 200,193 183,928 157,845
Allowance for Loan Losses..... 8,457 8,024 8,254 5,658 5,267
Total Deposits................ 257,024 235,684 226,513 212,285 182,502
Total Stockholders' Equity.... 26,737 23,168 20,509 19,685 16,456
Performance Ratios:
Return on Average Assets (1).. 1.35% 1.10% 0.51% 1.43% 1.79%
Return on Average Equity (1).. 14.77 12.95 6.16 17.30 23.83
Net Interest Margin (2)....... 7.12 8.11 8.78 8.90 8.85
Net Interest Spread (3)....... 6.41 7.52 8.13 8.33 8.46
Dividend Payout Ratio......... 14.05 15.63 35.71 14.08 8.40
Noninterest Income to
Total Revenues (4).......... 37.97 31.37 27.35 27.40 28.29
Noninterest Income to
Average Assets.............. 4.17 3.52 3.13 3.18 3.29
Noninterest Expense to
Average Assets.............. 7.07 6.46 7.79 7.54 7.40
Efficiency Ratio (5).......... 64.48 57.63 68.00 64.98 63.64
</TABLE>
(vi)
<PAGE>
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Capital Ratios:
Average Equity to Average
Assets..................... 9.17% 8.48% 8.32% 8.28% 7.49%
Leverage Ratio................ 9.39 8.61 8.13 8.26 8.08
Total Risk-Based Capital
Ratio...................... 12.96 13.19 12.30 11.41 13.66
Asset Quality Ratios:
Allowance for Loan Losses
and Other Reserves to
Gross Loans................ 3.69% 3.99% 3.96% 2.98% 3.23%
Non-Performing Loans to
Gross Loans................ 2.88 2.42 2.37 3.28 2.47
Non-Performing Assets to
Gross Loans Plus Other
Non-Performing Assets (6).. 3.72 3.81 3.81 4.05 4.72
Allowance for Loan Losses
and Other Reserves to
Non-Performing Loans....... 127.87 165.00 166.95 90.98 130.63
Net Loan Charge-offs to
Average Loans.............. 2.30 3.88 2.67 1.93 1.60
- -------------------------
</TABLE>
(1) The Company's results of operations for the year ended December 31, 1996
were adversely affected by a one-time special assessment imposed by the
FDIC to recapitalize the Savings Association Insurance Fund. Without this
expense of approximately $775,000 (after-tax), the Company's net income for
1996 would have been $2.0 million ($0.45 basic and diluted earnings per
share) and its returns on assets and equity would have been 0.83% and
9.98%, respectively.
(2) Net interest margin is net interest income divided by average interest-
earning assets.
(3) Net interest spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Total revenues equals net interest income plus noninterest income.
(5) Efficiency ratio equals noninterest expense divided by the sum of net
interest income and noninterest income.
(6) Non-performing assets equal non-performing loans plus other non-performing
assets.
(vii)
<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 December 31, 1998, the Company had $47.0 million
in outstanding credit card balances which equaled 20.44% of the loan
portfolio. Partially secured credit card loans to subprime borrowers
equaled $35.6 million of the Company's $47.0 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 tries 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 December 31, 1998, the Bank had
$22.5 million in subprime automobile loans outstanding which equaled
9.78% 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 December 31, 1998, the total outstanding
balances on the Company's residential construction loans equaled $45.8
million, net of loans in process, and comprised 19.91% 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 December 31, 1998, outstanding
development loans totaled $38.9 million, net of loans in process, and
comprised 16.91% 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 December 31, 1998, the Company had $45.8
million in commercial loans which equaled 19.91% 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 New Banking Subsidiaries 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 and to establish
a bank in Delaware to conduct its credit card operations. It is anticipated
that chartering the new Virginia bank will require at least six months and an
initial capitalization of $5.0 to $6.0 million. For the Delaware bank, the
Company is negotiating to acquire an existing bank with $2.0 million in assets.
After capitalizing the new Delaware bank for its intended activities, the
Company estimates that its total investment will be $5.0 to $6.0 million. Until
the new banks are established, the funds set aside by the Company for this
purpose will be invested in short-term investments. For each
2
<PAGE>
of the new banks, the Company will incur one-time start-up costs and ongoing
incremental additional operating expenses which could affect future
profitability.
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.
Key Operations' Dependence on Significant Customer
During 1998, the Company recorded approximately $3.7 million in income from
credit card processing by its Key Operations subsidiary. The majority of this
income was attributable to a single customer. While Key Operations is
continually adding new customers and diversifying its sources of revenue, this
customer is expected to remain a significant contributor to Key Operations'
income. Accordingly, the loss of this customer could have a material adverse
effect on the profitability of Key Operations and the Company as a whole.
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
3
<PAGE>
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."
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 own over 40% 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. In
order to compete, 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
4
<PAGE>
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, 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 Readiness Disclosure."
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 it earns from its interest-earning
assets, such as loans and investment securities, and the interest it must pay on
its interest-bearing liabilities, such as deposits and borrowings. 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 at the maximum offering price of $12.00 per share will be approximately
$15.6 million after deducting underwriting fees and estimated offering expenses
of $512,000. At the minimum offering price of $10.00 per share, net proceeds
would be $12.9 million after deducting underwriting fees and estimated offering
expenses. For purposes of estimating net proceeds, the Company has assumed that
950,000 shares will be sold in the Community Offering, 450,000 shares will be
sold in the Public Offering and no directors or executive officers employees or
their immediate families or employee benefit plans will participate in the
Community Offering.
5
<PAGE>
The Company intends to use approximately $5.0 million to $6.0 million of
the net proceeds to charter and capitalize a new bank subsidiary in Northern
Virginia. Another $5.0 million to $6.0 million of the net proceeds will be used
to establish a credit card bank in Delaware. The Company is negotiating to
acquire a $2.0 million asset credit card bank and relocate it to Delaware. The
Company intends to use the remaining net proceeds (approximately $900,000 to
$5.6 million) 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.
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. No bid or bid quotes are published by any market makers for the
Common Stock. During the year ended December 31, 1998, there were sales of the
Common Stock at prices ranging from $4.55 to $5.64, as adjusted for the 5 1/2-
to-1 stock split effected through a stock dividend payable March 15, 1999.
Because of the historically 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 0.0545 0.0455 0.0545 0.05 0.0227
September 30 -- -- -- -- --
December 31 0.0636 0.0545 0.0455 0.05 0.0455
</TABLE>
Starting with quarter ending March 31, 1999, the Company will begin paying
quarterly dividends at an annual rate equal to $0.13 per share.
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."
6
<PAGE>
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 December 31, 1998, the net tangible book
value of the Common Stock was $5.90 per share. Assuming the sale of 1,400,000
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 December 31,
1998 would have been $6.69 and $7.14 at the minimum and maximum price per share,
respectively. This would represent an immediate increase in tangible book value
of $0.79 and $1.24, respectively, to existing stockholders and an immediate
dilution to new investors of $3.31 and $4.86 per share.
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Initial public offering price per share..................... $10.00 $12.00
Net tangible book value per share before Offering...... 5.90 5.90
Increase per share attributable to new investors....... 0.79 1.24
------ ------
Pro forma net tangible book value per share after Offering.. 6.69 7.14
------ ------
Dilution per share to new investors......................... $ 3.31 $ 4.86
====== ======
</TABLE>
CAPITALIZATION
The following table shows the capitalization of the Company, at December 31,
1998, on both an actual basis and as adjusted for the issuance of 1,400,000
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>
December 31, 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;
4,533,265 shares issued and outstanding; as adjusted 5,933,265
shares issued and outstanding................................... $ 4,533 $ 5,933 $ 5,933
Additional paid-in capital........................................ 0 11,535 14,225
Retained earnings................................................. 22,212 22,212 22,212
Accumulated other comprehensive income, net....................... (8) (8) (8)
------- ------- -------
Total stockholders' equity................................... $26,737 $39,672 $42,362
======= ======= =======
Capital ratios:
Total risk-based capital ratio.................................... 12.96% 18.42% 19.54%
Tier 1 risk-based capital ratio................................... 11.68 17.14 18.26
Leverage ratio.................................................... 9.39 13.34 14.12
- -------------------------
</TABLE>
(1) Assumes in each case the sale of 950,000 shares in Community Offering and
450,000 shares in the Public Offering with no sales to directors, officers,
employees, or employee benefit plans of the Company or immediate families
of such persons, and no exercise of the over-allotment option which is
expected to be granted to Ryan, Beck 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. The
consolidated financial data does not purport to be complete and should be read
in conjunction with, and is qualified in its entirety by, the more detailed
information, including the Consolidated Financial information and related Notes
appearing elsewhere in this prospectus. See "Index to Consolidated Financial
Statements."
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net Interest Income........... $ 18,939 $ 19,875 $ 20,246 $ 18,641 $ 16,842
Provision for Loan Losses..... 5,179 7,623 7,883 3,812 3,124
Noninterest Income............ 11,595 9,085 7,623 7,036 6,646
Noninterest Expense........... 19,689 16,688 18,950 16,685 14,947
Net Income (1)................ 3,768 2,835 1,246 3,166 3,605
Share Data:
Net Income Per Share:
Basic (1).................. $ 0.84 $ 0.64 $ 0.28 $ 0.71 $ 0.81
Diluted (1)............... 0.81 0.63 0.28 0.70 0.81
Cash Dividends Declared
Per Common Share........... 0.12 0.10 0.10 0.10 0.07
Book Value per Common
Share...................... 5.90 5.20 4.60 4.42 3.69
Weighted Average Basic
Common Shares
Outstanding................ 4,478,298 4,460,715 4,456,821 4,456,782 4,456,782
Financial Condition Data:
Total Assets.................. $ 292,026 $ 268,477 $ 253,038 $ 237,936 $ 203,984
Loans Receivable, net......... 220,957 192,849 200,193 183,928 157,845
Allowance for Loan Losses..... 8,457 8,024 8,254 5,658 5,267
Total Deposits................ 257,024 235,684 226,513 212,285 182,502
Total Stockholders' Equity.... 26,737 23,168 20,509 19,685 16,456
Performance Ratios:
Return on Average Assets (1).. 1.35% 1.10% 0.51% 1.43% 1.79%
Return on Average Equity (1).. 14.77 12.95 6.16 17.30 23.83
Net Interest Margin (2)....... 7.12 8.11 8.78 8.90 8.85
Net Interest Spread (3)....... 6.41 7.52 8.13 8.33 8.46
Dividend Payout Ratio......... 14.05 15.63 35.71 14.08 8.40
Noninterest Income to
Total Revenues (4).......... 37.97 31.37 27.35 27.40 28.29
Noninterest Income to
Average Assets.............. 4.17 3.52 3.13 3.18 3.29
Noninterest Expense to
Average Assets.............. 7.07 6.46 7.79 7.54 7.40
Efficiency Ratio (5).......... 64.48 57.63 68.00 64.98 63.64
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Capital Ratios:
Average Equity to Average
Assets..................... 9.17% 8.48% 8.32% 8.28% 7.49%
Leverage Ratio................ 9.39 8.61 8.13 8.26 8.08
Total Risk-Based Capital
Ratio...................... 12.96 13.19 12.30 11.41 13.66
Asset Quality Ratios:
Allowance for Loan Losses
and Other Reserves to
Gross Loans................ 3.69% 3.99% 3.96% 2.98% 3.23%
Non-Performing Loans to
Gross Loans................ 2.88 2.42 2.37 3.28 2.47
Non-Performing Assets to
Gross Loans Plus Other
Non-Performing Assets (6).. 3.72 3.81 3.81 4.05 4.72
Allowance for Loan Losses
and Other Reserves to
Non-Performing Loans....... 127.87 165.00 166.95 90.98 130.63
Net Loan Charge-offs to
Average Loans.............. 2.30 3.88 2.67 1.93 1.60
- -------------------------
</TABLE>
(1) The Company's results of operations for the year ended December 31, 1996
were adversely affected by a one-time special assessment imposed by the
FDIC to recapitalize the Savings Association Insurance Fund. Without this
expense of approximately $775,000 (after-tax), the Company's net income for
1996 would have been $2.0 million ($0.45 basic and diluted earnings per
share) and its returns on assets and equity would have been 0.83% and
9.98%, respectively.
(2) Net interest margin is net interest income divided by average interest-
earning assets.
(3) Net interest spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Total revenues equals net interest income plus noninterest income.
(5) Efficiency ratio equals noninterest expense divided by the sum of net
interest income and noninterest income.
(6) Non-performing assets equal 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.
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 main areas:
. Residential Construction and Development Lending. The Bank has focused
on residential construction and development lending since its
founding. At December 31, 1998, the total outstanding balances on the
Bank's construction and development loans approximated $84.7 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 December 31, 1998, the Bank had
a $47.0 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, 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 December 31, 1998, the Company's commercial
loan portfolio totaled $45.8 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 1997 and 1996, the Bank was
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
10
<PAGE>
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 December 31, 1998, the
Company's subprime automobile loan portfolio totaled $22.5 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 year ended December 31,
1998, the Company originated $115.3 million in mortgage loans for sale
in the secondary market. The Bank seeks to minimize credit and
interest rate risk while maximizing profitability by promptly selling
loans on an individual loan basis. The Bank currently 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. Net interest margins for the years ended
December 31, 1998, 1997 and 1996 were 7.12%, 8.11% and 8.78%, respectively.
Returns on average assets for the years ended December 31, 1998, 1997 and 1996
were 1.35%, 1.10%, and 0.51%, respectively. For the years ended December 31,
1998, 1997 and 1996, the Company's returns on average equity were 14.77%, 12.95%
and 6.16%, 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 approximately
$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 December 31, 1998 and 1997
At December 31, 1998, the Company's total assets were $292.0 million, a
$23.5 million, or 8.8%, increase from $268.5 million at December 31, 1997. The
Company's asset growth during 1998 was due mainly to a $28.1 million, or 14.6%,
growth in the loan portfolio which increased from $192.8 million at December 31,
1997 to $221.0 million at December 31, 1998. The increase of the Company's loan
portfolio was due to a $24.0 million increase in residential construction and
development loans and $7.6 million increase in commercial loans. During fiscal
1998, the Company focused its portfolio lending activities on residential
construction and development lending. The Company's portfolio of these loans
grew from $60.6 million at December 31, 1997 to $84.7 million at December 31,
1998. The Company has also devoted a significant portion of its portfolio
lending activities to small business lending. In the years ended December 31,
1997 and 1998, the Company originated $14.6 million and $8.1 million,
respectively, in these loans. During 1998, the partially secured credit card
portfolio increased to $35.6 million from $35.2 million at December 31, 1997,
due to the purchase of an $8.0 million credit card portfolio secured by junior
liens on residential real estate partially offset by the continued run-off in
the rest of the portfolio. Indirect automobile loans declined over the past
fiscal year from a total of $24.3 million at December 31, 1997 to $22.5 million
at December 31, 1998. This decline was a direct result of tightening of the
Company's credit standards in October 1996 which has reduced new loan
originations.
11
<PAGE>
The Company funded its asset growth from several sources. Since December
31, 1997, deposits have grown from $235.7 million to $257.0 million at December
31, 1998. The bulk of deposit growth has been in certificates which have grown
from $162.7 million at December 31, 1997 to $185.1 million at December 31, 1998.
In addition, during the year ended December 31, 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 $3.6 million, or 15.4%, from $23.2 million at
December 31, 1997, to $26.7 million at December 31, 1998. The Company's common
stock account grew from $810,000 at December 31, 1997 to $4.5 million at
December 31, 1998 as the result of the capitalization of earnings in connection
with the 5 1/2-for-1 stock split effected through a stock dividend declared
March 1, 1999. Stockholders' equity as a percentage of total assets was 8.63%
at December 31, 1997 and 9.16% at December 31, 1998.
Comparison of Results of Operations For the Year Ended December 31, 1998, 1997
and 1996
General. For the year ended December 31, 1998, the Company reported net
income of $3.8 million ($0.81 per diluted share) compared to $2.8 million ($0.63
per diluted share) for the year ended December 31, 1997 and $1.2 million ($0.28
per diluted share) for the year ended December 31, 1996. The improvement in
earnings was primarily attributable to a lower provision for loan losses and
higher noninterest income which more than offset declines due to decreases in
net interest income and higher noninterest expenses. 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.
Net income for 1996 was adversely affected by a one-time nonrecurring after-tax
expense of approximately $775,000 to help recapitalize SAIF. Without this one-
time expense, net income would have been $2.0 million ($0.45 per diluted share).
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.
12
<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>
Year Ended December 31,
-------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- Net ------------------ Net
Average Average Increase/ Average Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------------------- -------- ---------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans (net of unearned income)
Permanent one- to four-family
residential.................... $ (418) $ (6) $ (424) $ (142) $(185) $ (327)
Residential construction and
development.................... 1,679 (393) 1,286 114 308 422
Commercial loans.................... 443 (215) 228 1,200 (448) 752
Consumer:
Indirect automobile.............. (692) (51) (743) (339) (303) (642)
Other consumer loans............. 73 (108) (35) (43) 6 (37)
Credit card......................... (1,121) (267) (1,388) (501) (154) (655)
Loans held for sale................. 585 7 592 59 (4) 55
Mortgage-backed securities
available for sale.................... 11 124 135 (105) (87) (192)
Interest-bearing bank balances......... 114 91 205 87 3 90
Treasury notes and agencies held
to maturity.......................... 413 (52) 361 641 91 732
Other earning assets.................. 2 3 5 3 1 4
------- ----- ------- ------ ----- ------
Total interest income............ 1,089 (867) 222 974 (772) 202
------- ----- ------- ------ ----- ------
Interest Expense:
Savings............................... 7 (27) (20) (26) (12) (38)
Interest-bearing demand and money
market accounts..................... (27) 0 (27) 4 (19) (15)
Certificates of deposit............... 1,131 46 1,177 1,269 (189) 1,080
Deposits collateralizing credit card
loans............................... (79) 10 (69) (148) (375) (523)
Other borrowed funds.................. 117 (20) 97 57 12 69
------- ----- ------- ------ ----- ------
Total interest expense........... 1,149 9 1,158 1,156 (583) 573
------- ----- ------- ------ ----- ------
Change in net interest income............ $ (60) $(876) $ (936) $ (182) $(189) $ (371)
======= ===== ======= ====== ===== ======
</TABLE>
13
<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. 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>
Year Ended December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- ---------------------------
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:
Interest-earning assets:
Loans (net of unearned income) (1):
Permanent one- to four-family
residential..................... $ 25,965 $ 2,326 8.96% $ 30,612 $ 2,750 8.98% $ 32,138 $ 3,077 9.57%
Residential construction and
development..................... 69,550 8,106 11.65 55,307 6,820 12.33 54,344 6,398 11.77
Commercial loans.................... 41,710 4,764 11.42 37,879 4,536 11.97 28,150 3,784 13.44
Consumer:
Indirect automobile............. 23,244 4,469 19.23 26,838 5,212 19.42 28,540 5,854 20.51
Other consumer loans............ 3,026 300 9.91 2,419 335 13.85 2,727 372 13.64
Credit card......................... 42,429 7,053 16.62 49,146 8,441 17.18 52,046 9,096 17.48
-------- ------- -------- ------- -------- -------
Total............................... 205,924 27,018 13.12 202,201 28,094 13.89 197,945 28,581 14.44
-------- ------- -------- ------- -------- -------
Loans held for sale..................... 10,813 814 7.53 3,036 222 7.31 2,233 167 7.48
Mortgage-backed securities available
for sale............................. 4,271 246 5.76 3,912 111 2.84 6,863 303 4.41
Interest-bearing bank balances.......... 16,650 932 5.60 14,524 727 5.01 12,763 637 4.99
Treasury notes and agencies held
to maturities........................ 27,572 1,637 5.94 20,659 1,276 6.18 10,117 544 5.38
Other earning assets.................... 815 61 7.48 782 56 7.16 739 52 7.04
-------- ------- -------- ------- -------- -------
Total earning assets............... 266,045 30,708 11.54 245,114 30,486 12.44 230,660 30,284 13.13
------- ------- -------
Allowance for loan losses............... (8,285) (8,222) (6,475)
Other assets............................ 20,617 21,392 19,016
-------- -------- --------
Total assets....................... $278,377 $258,284 $243,201
======== ======== ========
Liabilities and stockholders' equity:
Deposits
Savings........................... $ 14,960 437 2.92 $ 14,739 $ 457 3.10% $ 15,585 $ 495 3.18%
Interest-bearing demand and
money market accounts......... 19,250 534 2.77 20,231 561 2.77 20,094 576 2.87
Certificates of deposit........... 172,418 10,330 5.99 153,538 9,153 5.96 132,252 8,073 6.10
Deposits collateralizing credit
card loans..................... 20,618 290 1.41 26,243 359 1.37 32,574 882 2.71
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits................. 227,246 11,591 5.10 214,751 10,530 4.90 200,505 10,026 5.00
Other borrowed funds............... 2,285 178 7.79 823 81 9.84 200 12 6.00
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........... 229,531 11,769 5.13 215,574 10,611 4.92 200,705 10,038 5.00
Demand deposits......................... 15,215 14,104 15,835
Other liabilities....................... 8,113 6,709 6,417
Stockholders' equity.................... 25,518 21,897 20,244
-------- -------- --------
Total liabilities and stockholders'
equity......................... $278,377 $258,284 $243,201
======== ======== ========
Interest rate spread (average yield less
average rate)........................ 6.41% 7.52% 8.13%
======= ======= =======
Net interest income (interest income
less interest expense)............... $18,939 $19,875 $20,246
======= ======= =======
Net interest margin (net interest
income/total earning assets)......... 7.12% 8.11% 8.78%
======= ======= =======
- ----------
</TABLE>
(1) Includes nonaccrual loans.
14
<PAGE>
The Company's net interest income for the year ended December 31, 1998 was
$18.9 million compared to $19.9 million during the year ended December 31, 1997,
a decrease of $936,000, or 4.7%. The reduction in the Company's net interest
income was driven by a $1.2 million, or 10.9%, increase in interest expense
which offset a $222,000, or 0.7%, increase in interest income. Average loans
outstanding increased by $3.7 million, or 1.8%, between the periods and the
average yield decreased to 13.12% during the year ended December 31, 1998
compared to a 13.89% yield during the year ended December 31, 1997. This 77
basis point reduction in yield was primarily due to a $6.7 million, or 13.7%,
decline in average credit card outstandings to $42.4 million with a 16.62%
average yield for the year ended December 31, 1998 from $49.1 million with a
17.18% average yield for the year ended December 31, 1997. The Company also
experienced a $3.6 million, or 13.4%, decline in average indirect automobile
loans to $23.2 million with a 19.23% yield for 1998 from $26.8 million with a
19.42% average yield for 1997. By contrast, the increase in loan volume
consisted of $14.2 million or 25.8% increase in residential construction and
development loans, to $69.6 million with a yield of 11.65% during 1998 from
$55.3 million with an average yield of 12.33% during 1997. Interest-bearing
liabilities increased to $229.5 million during 1998 from $215.6 million during
1997 primarily as a result of an increase in certificates of deposit to $172.4
million at an average cost of 5.99% during 1998 from $153.5 million at an
average cost of 5.96% during 1997 and a reduction of $5.6 million in deposits
collateralizing credit card loans at an average cost of 1.41% during 1998. The
decline in deposits collateralizing credit card loans is directly related to the
decline in partially secured credit card loans. As a result of these factors,
the Company's net interest margin decreased from 8.11% during 1997 to 7.12%
during the year ended December 31, 1998. An increase in average mortgage loans
held for sale of $7.8 million with an average yield of 7.53% during 1998 along
with an increase of $2.1 million in interest-bearing bank balances and an
increase of $6.9 million in treasury notes and agencies held to maturity
contributed to a $20.9 million increase in interest-earning assets to $266.0
million for 1998 from $245.1 million for 1997.
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.
Provision for Loan Losses. The Company's provision for loan losses for the
year ended December 31, 1998 was $5.2 million compared to $7.6 million for the
year ended December 31, 1997, and $7.9 million in provisions during the year
ended December 31, 1996. 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. Management performs detailed monthly reviews of the Company's loan
portfolios to identify risks inherent in the loan portfolios and assess overall
quality of the portfolios. In determining the adequacy of the allowance,
management considers a number of factors including changes in the size and
composition of the loan portfolio, historical loss experience, the present and
prospective financial condition of borrowers, the estimated value of the
underlying collateral, geographic concentrations, current and prospective
economic conditions, delinquency experience and status of non-performing assets.
During 1997 and 1996, loan loss provisions were increased in response
15
<PAGE>
to increased charge-offs and delinquencies in the Company's partially secured
credit card and indirect automobile loan portfolios. Net charge-offs in the
consumer loan portfolio totaled $1.8 million and $1.1 million during 1997 and
1996, respectively, compared to a net recovery of $41,000 in 1995. Net charge-
offs in the credit card portfolio were $4.7 million and $3.4 million in 1997 and
1996, respectively. These trends, however, reversed in late 1997, due to
tightened underwriting standards and lower balances in these portfolios, leading
to lower provisions in 1998. Net charge-offs in the consumer and credit card
portfolios declined to $969,000 and $3.4 million, respectively, during 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>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------ ------
(In thousands)
<S> <C> <C> <C>
Service fees on deposits...................... $ 441 $ 408 $ 323
Credit card processing income................. 3,674 316 52
Credit card fees, service charges and
related income............................. 5,054 6,191 5,700
Gain on sale of SBA loans..................... 481 544 483
Gain on sale of mortgage loans held for sale.. 814 756 322
Other operating income........................ 1,131 870 743
------- ------ ------
Total noninterest income............ $11,595 $9,085 $7,623
======= ====== ======
</TABLE>
Noninterest income for the year ended December 31, 1998 increased $2.5
million, or 27.6%, compared to the prior year due mainly to a $3.4 million, or
1,162.7%, increase in credit card processing income and a $261,000, or 30.0%,
increase in other operating 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 reflects the growth in the Company's credit card processing
business. The bulk of the increase was attributable to a credit card marketing
firm with which Key Operations began doing business in 1998. Other operating
income increased primarily due to increased fee income from the construction and
development lending activities at the holding company level.
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.
16
<PAGE>
Noninterest Expense. The following table sets forth the Company's
noninterest expense for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Salaries and employee benefits.............. $ 8,009 $ 6,952 $ 6,514
Occupancy and equipment, net................ 1,876 1,545 1,450
Professional services....................... 1,919 1,494 1,092
Credit card related expenses................ 3,968 2,584 2,443
Data processing............................. 524 402 359
Advertising................................. 485 733 2,618
Deposit insurance premiums.................. 151 136 1,818
Loss on sale of real estate and investment
securities............................... 177 443 44
Provision for REO losses.................... 45 64 30
Other....................................... 2,535 2,335 2,582
------- ------- -------
Total noninterest expense......... $19,689 $16,688 $18,950
======= ======= =======
</TABLE>
For the year ended December 31, 1998, noninterest expense increased $3.0
million, or 18.0%, compared to the prior year primarily due to a $1.4 million,
or 53.6%, increase in credit card related expenses, a $1.1 million, or 15.2%
increase in salaries and employee benefits expense and a $425,000, or 28.4%,
increase in professional services expense. The increase in credit card related
expenses is primarily attributable to expenses related to higher processing
related volume. The increase in salaries and benefits expense was attributable
to increased staffing in the lending area. The increase in professional services
expense includes approximately $400,000 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 net
occupancy and equipment expense increased $331,000, or 21.4%, due to the opening
of a new branch, the remodeling of Key Operations' offices and expenses related
to equipment upgrades. Noninterest expense was also affected by a $200,000, or
8.6%, increase in other noninterest expense which includes increases in a
variety of miscellaneous expense categories. The increase in these expense
categories were partially offset by $248,000, or 33.8%, decrease in advertising
expense and a $266,000, or 60.0% decline in loss on sale of real estate and
investment securities due to a write down of $256,000 in 1997. Advertising
expense decreased due to de-emphasizing partially secured credit card issuance
which had required significant marketing expense. Total noninterest expenses
are also expected to increase in future periods due to the proposed new bank
subsidiaries, 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 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
17
<PAGE>
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.
Income Taxes. The Company provided $1.9 million for income taxes for the
year ended December 31, 1998 and $1.8 million for income taxes for the year
ended December 31, 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 and restructuring its operations
among several states. As a result of the restructuring, the Company determined
in 1998 that it had a state tax accrual of $207,000 that was no longer required.
The Company provided $1.8 million for income taxes during 1997 compared to a
$210,000 tax benefit during 1996. 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 December 31, 1998.
<TABLE>
<CAPTION>
Change in Interest Rates Market Value of Portfolio Equity at December 31, 1998
------------------------------------------------------
in Basis Points (Rate Shock) Dollar Amount Percent Change from Base
- ------------------------------ -------------------- --------------------------------
(In thousands)
<S> <C> <C>
+ 400....................... $44,409 11.90%
+ 300....................... 43,348 9.23
+ 200....................... 42,288 6.56
+ 100....................... 40,987 3.28
Base........................ 39,686 0.00
- 100....................... 38,852 (2.10)
- 200....................... 38,019 (4.20)
- 300....................... 36,689 (7.55)
- 400....................... 35,359 (10.90)
</TABLE>
18
<PAGE>
As the above table illustrates, the market value of the Company's portfolio
equity is expected to increase in the event of an increase in market interest
rates and to decline in the event of a decline in interest rates. The degree of
decline in the event of a decrease in rates would not be great as the gain in
the event of a rate rise. In either event, the Bank would continue to be "well-
capitalized" with the meaning of the regulations of the FDIC. The lower market
value of portfolio equity in a rate decline reflects in part the assumption in
the model that the Bank's funding costs will not decline below a minimum level.
Management believes that its interest rate risk profile is appropriate in view
of the low current level of interest rates and the potential for increases in
interest rates.
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 Readiness Disclosure
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 non-information 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.
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 two years. The Company's Year 2000 plan
calls for the identification of all systems that could be affected by the Year
2000 problem, the systematic assessment of their Year 2000 readiness and the
institution of appropriate remedial measures and contingency planning. As part
of its Year 2000 plan, the Company has ranked its various computer systems
according to their importance to the continued functioning of the Bank.
Assessment procedures range from actual testing for the Company's most mission
critical systems to seeking written self assessments from individual borrowers.
Based on these assessments, the Company has instituted appropriate remedial
measures which include software upgrades and the replacement of vendors and
hardware where necessary. The Company's Year 2000 plan includes contingency and
back-up plans for mission-critical systems. As
19
<PAGE>
of December 31, 1998, the Company had spent approximately $667,000 on Year 2000
issues, including $482,000 on computer hardware and software, $83,000 on
communications and the remaining $162,000 in personnel expense.
The committee has reviewed all of the Company's internal hardware and
software and assessed its outside vendors, including third party vendors and is
taking appropriate steps to ensure that these systems and vendors are Year 2000
compliant. The Company has obtained letters from all of its identified vendors
regarding their Year 2000 compliance. The Company has obtained upgrades from
vendors who did not certify their compliance and has done compliance testing on
the others. Before acquiring new software, the Company requires formal
certification of Year 2000 compliance. The Company has replaced a portion of the
computers used by the Bank and has hired consultants for Year 2000 review and
contingency planning.
The Company has relied on separate outside data processors for the Bank and
for its Key Operations credit card subsidiary. The Bank has tested its current
data processor and based on the testing results, believes that it is Year 2000
compliant. The Company, however, will convert the Bank from its current outside
data processor to an in-house system that has been certified as Year 2000
compliant. This conversion is anticipated to be completed in July 1999. Key
Operations has converted to a new data processor. All testing has been internal
with the processor's staff and is 76-99% complete. Key Operations will conduct
client testing of their processor in April 1999. The Company has tested all
other systems material to its operation, including third party service
providers, and believes that they are now Year 2000 prepared. The Company is
analyzing the readiness of its commercial loan customers and considers Year 2000
readiness when underwriting new loans.
The Company has developed extensive contingency plans for various
operating systems. For short-term disruptions to its account processing systems,
the Bank will record transactions off-line until the systems are operating
again. Visa/Mastercard will conduct stand-in processing for Key Operation's
processor. In the event of longer-term disruptions of mission critical systems,
the Company has prepared for the possible conversion to alternate vendors. For
less critical systems, the Company believes that it can manually process items
such as paychecks for a short period of time and move to alternate vendors in
the event of a longer disruption.
The Year 2000 problem creates risk for the Company from unforeseen problems
in its own computer systems and from problems at 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. While the Company has
taken and is continuing to take steps to ensure that the systems in which it
relies are Year 2000 compliant, there can be no assurance that the Company has
identified all potential sources of Year 2000 problems or that the failure of a
system or a third party vendor will not disrupt the Company's operations.
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
December 31, 1998, the Company had approximately $125.6 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 $5.0 to $6.0 million which the Company will fund out of the
net proceeds from the
20
<PAGE>
Offerings. The Company anticipates making an additional capital commitment of
approximately $5.0 million to $6.0 million to establish a credit card bank in
Delaware through the acquisition of an existing bank charter.
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 December 31, 1998, totaled
$13.6 million, a decrease of $8.5 million, or 38.5%, from the December 31, 1997
total of $22.2 million. The decrease in cash and cash equivalents during the
year ended December 31, 1998 was principally driven by loan growth. Cash and
cash equivalents as of December 31, 1997 were $22.2 million, an increase of $8.2
million, or 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 blanket lien on the Bank's
qualifying residential mortgage loans and securities. As of December 31, 1998,
$2.0 million was outstanding under this line of credit.
Recently Adopted Accounting Standards
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 of 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 is not currently approved
to 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.
21
<PAGE>
In addition, the Bank's credit card processing subsidiary, Key Operations
Center, Inc., maintains offices in Havre de Grace, Maryland.
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 lending areas with each lending area
run by a senior officer who is given substantial responsibility for their
business area and who is compensated in part based on the profitability of their
division. The Company currently concentrates on five main areas:
. Residential Construction and Development Lending. The Bank has focused
on residential construction and development lending since its
founding. At December 31, 1998, the total outstanding balances on the
Bank's construction and development loans approximated $84.7 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 December 31, 1998, the Bank had
a $47.0 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, the Bank de-
emphasized the issuance of partially secured credit cards in favor of
purchasing portfolios and processing credit cards for others. In 1998,
the Company purchased an $8.0 million portfolio of credit cards
secured by junior liens on residential real estate and purchased an
additional $4.5 million portfolio in January 1999. 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 December 31, 1998, the Company's commercial
loan portfolio totaled $45.8 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. During 1997 and 1996, the Bank
was 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
22
<PAGE>
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 December 31, 1998, the
Company's subprime automobile loan portfolio totaled $22.5 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 year ended December 31,
1998, the Company originated $115.3 million in mortgage loans for sale
in the secondary market. The Bank seeks to minimize credit and
interest rate risk while maximizing profitability by promptly selling
loans on an individual loan basis. The Bank currently 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.
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
23
<PAGE>
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.
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 Company's loan portfolio grew $28.1 million in 1998 after experiencing a
$7.3 million decline in 1997. Since December 31, 1996, 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 December 31, 1998, construction and development loans (net of
loans in process) totaled $84.7 million (36.82% of the portfolio), compared to
$60.6 million (30.14% 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 the
portfolio) at December 31, 1996 to $45.8 million (19.91% of the portfolio) at
December 31, 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 residential mortgage and indirect automobile loan portfolios. The
Company's partially secured credit card portfolio has declined from $43.8
million ( 20.96% of the portfolio) at December 31, 1996 to $35.6 million
(15.48%, of the portfolio) at December 31, 1998 notwithstanding the purchase of
a $8.0 million portfolio of credit card loans secured by junior liens on
residential real estate in 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 the portfolio)
at December 31, 1996 to $22.5 million (9.78% of the portfolio) at December 31,
1998 as the result of the adoption of tighter underwriting standards after the
Company experienced an unacceptable level of charge-offs in this portfolio.
24
<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 December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Permanent one- to four-family
residential (1)............... $ 25,749 11.20% $ 30,257 15.04% $ 32,357 15.50% $ 32,663 17.18% $ 37,570 22.96%
Residential construction and
development (2)............... 84,665 36.82 60,643 30.14 54,368 26.04 58,576 30.82 48,170 29.44
Commercial loans.................... 45,777 19.91 38,080 18.92 35,179 16.85 21,637 11.38 13,208 8.07
Consumer loans:
Indirect automobile............. 22,488 9.78 24,251 12.05 29,931 14.34 22,433 11.80 11,969 7.32
Other consumer loans............ 4,254 1.85 2,506 1.25 1,486 0.71 3,016 1.59 3,293 2.01
Credit card loans:
Partially secured accounts (3).. 35,591 15.48 35,164 17.48 43,761 20.96 39,782 20.93 38,214 23.35
Unsecured....................... 11,392 4.96 10,315 5.12 11,681 5.60 11,970 6.30 11,209 6.85
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
229,916 100.00% 201,216 100.00% 208,763 100.00% 190,077 100.00% 163,633 100.00%
====== ====== ====== ====== ======
Less:
Unearned loan fees................ 502 343 316 491 521
Allowance for loan losses......... 8,457 8,024 8,254 5,658 5,267
-------- -------- -------- -------- --------
Loans receivable, net............. $220,957 $192,849 $200,193 $183,928 $157,845
======== ======== ======== ======== ========
- --------------------------
</TABLE>
(1) Does not include loans held for sale.
(2) Shown net of loans in process of $72.0 million, $51.9 million, $45.6
million, $32.6 million and $31.2 million at December 31, 1998, 1997, 1996,
1995 and 1994, respectively.
(3) Secured by savings accounts and, at December 31, 1998, junior liens on
residential real estate.
Loan Maturity Schedule
The following table sets forth certain information at December 31, 1998
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.. $ 5,201 $ 6,803 $13,745 $ 25,749
Residential construction and development... 55,457 28,908 300 84,665
Commercial loans............................. 16,543 15,011 14,223 45,777
Consumer loans............................... 2,014 23,995 733 26,742
Credit card loans............................ 46,983 -- -- 46,983
-------- ------- ------- --------
Total................................... $126,198 $74,717 $29,001 $229,916
======== ======= ======= ========
</TABLE>
25
<PAGE>
The following table sets forth at December 31, 1998, the dollar amount of
all loans due one year or more after December 31, 1998 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.. $15,848 $ 4,700
Residential construction and development... -- 29,208
Commercial loans............................. 2,000 27,234
Consumer loans............................... 24,580 148
Credit card loans............................ -- --
------- -------
Total................................. $42,428 $61,290
======= =======
</TABLE>
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. At
December 31, 1998, the Bank's current largest commitment on any construction
loan was $4.0 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 December 31, 1998, the Company
had approximately $1.7 million and the Bank had $44.1 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. At
December 31, 1998, the largest funding commitment on a development loan was $3.5
million. In limited circumstances, the Company may make development loans that
do not meet the Bank's lending criteria due to loan-to-
26
<PAGE>
value ratios or other considerations. At December 31, 1998, the Company had
approximately $900,000 and the Bank had approximately $38.0 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
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 December 31, 1998, the Bank's total outstanding credit lines under
credit cards were $76.3 million of which $47.0 million was outstanding. At
December 31, 1998, the Bank held approximately 87,000 in partially secured and
unsecured credit card accounts. 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 is in negotiations to purchase a national bank with
approximately $2.0 million in assets which consist primarily of government
securities. If these negotiations are successful, the Company would relocate
this bank in Delaware and move certain credit card activities to the new banking
subsidiary. The Company believes that Delaware offers a more flexible operating
environment for a consumer credit organization than the states in which the Bank
currently operates. The Company anticipates that the total costs of acquiring
the bank and capitalizing it to a level that would support its planned
activities would be $5.0 to $6.0 million.
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."
27
<PAGE>
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 December 31, 1998, the Bank had approximately $21.5 million of
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. During the year ended December 31, 1998, the Bank
originated $8.1 million in SBA loans.
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, 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 December 31, 1998, the Bank was servicing $36.3 million in SBA loans for
investors and had approximately $35.6 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
28
<PAGE>
loans have run off. At December 31, 1998, the Bank had $22.5 million in such
loans outstanding or 84.1% 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.
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 74% 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 $112,000. 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,
29
<PAGE>
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
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.
30
<PAGE>
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 December 31,
--------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real estate:
Permanent one- to four-family residential... $2,395 $1,294 $ 654 $ 265 $ 244
Residential construction and
development............................. 1,431 1,385 1,425 4,492 2,257
Commercial loans.............................. 798 122 365 104 497
Consumer loans................................ 104 212 260 98 48
Credit card loans (2)......................... 8 298 417 24 --
------ ------ ------ ------ ------
Total....................................... $4,736 $3,311 $3,121 $4,983 $3,046
====== ====== ====== ====== ======
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)......................... 1,878 1,552 1,823 1,236 986
------ ------ ------ ------ ------
Total....................................... $1,878 $1,552 $1,823 $1,236 $ 986
====== ====== ====== ====== ======
Total nonperforming loans....................... $6,614 $4,863 $4,944 $6,219 $4,032
====== ====== ====== ====== ======
Percentage of total loans....................... 2.88% 2.42% 2.37% 3.28% 2.47%
====== ====== ====== ====== ======
Other nonperforming assets (3).................. $1,991 $2,895 $3,114 $1,513 $3,841
====== ====== ====== ====== ======
Non-performing assets to total loans
plus other non-performing assets.............. 3.72% 3.81% 3.81% 4.05% 4.72%
====== ====== ====== ====== ======
- -------------------------
</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.
Nonperforming loans at December 31, 1998 increased by $1.8 million, or
36.01% over December 31, 1997 primarily as a result of a $1.1 million, increase
in non-accrual one- to four-family residential mortgages. The Company's non-
accrual one- to four-family loans at December 31, 1998 were geographically
dispersed and consisted of seasoned loans. The Company believes that these
loans are well-secured and does not anticipate any material loss. 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.
During the year ended December 31, 1998, gross interest income of $792,000
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 $308,000.
31
<PAGE>
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 $1.2
million at December 31, 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 Year Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
beginning of period............................ $ 8,024 $ 8,254 $ 5,658 $ 5,267 $ 4,362
-------- -------- -------- -------- --------
Charge-offs:
Real estate mortgage:
Permanent one- to four-family residential... $ 163 $ 333 $ 90 $ 11 $ 308
Residential construction and development.... 282 619 882 908 268
Commercial loans............................... 211 713 297 835 229
Consumer loans................................. 3,296 4,652 2,365 172 301
Credit card loans.............................. 6,764 9,002 7,412 5,257 4,816
-------- -------- -------- -------- --------
Total loans charged-off................... 10,716 15,319 11,046 7,183 5,922
-------- -------- -------- -------- --------
Recoveries:
Real estate mortgage:
Permanent one- to four-family residential.. 11 132 63 35 82
Residential construction and development... 164 105 259 256 256
Commercial loans............................... 154 72 206 200 139
Consumer loans (1)............................. 2,327 2,837 1,250 213 422
Credit card loans (2).......................... 3,314 4,320 3,981 3,058 2,601
-------- -------- -------- -------- --------
Total recoveries......................... 5,970 7,466 5,759 3,762 3,500
-------- -------- -------- -------- --------
Net charge-offs.......................... 4,746 7,853 5,287 3,421 2,422
-------- -------- -------- -------- --------
Provision for loan losses........................ 5,179 7,623 7,883 3,812 3,124
-------- -------- -------- -------- --------
Valuation allowance related to acquired loans.... -- -- -- -- 203
-------- -------- -------- -------- --------
Allowance for loans losses, end of period....... $ 8,457 $ 8,024 $ 8,254 $ 5,658 $ 5,267
======== ======== ======== ======== ========
Loans (net of premiums and discounts)
Period-end balance............................. $229,414 $200,873 $208,447 $189,586 $163,112
Average balance during period.................. 205,924 202,201 197,945 177,549 151,494
Allowance for loan losses as percentage
of period-end loan balance..................... 3.69% 3.99% 3.96% 2.98% 3.23%
Percent of average loans:
Provision for loan losses...................... 2.52% 3.77% 3.98% 2.15% 2.06%
Net charge-offs................................ 2.30% 3.88% 2.67% 1.93% 1.60%
- -------------------------
</TABLE>
(1) Recoveries primarily consist of amounts realized from repossession and sale
of vehicles securing the loans.
(2) For the years ended December 31, 1998, 1997, 1996, 1995 and 1994, the
Company estimates that $2.8 million, $3.7 million, $3.4 million, $2.7
million and $2.3 million, respectively, of recoveries on credit card loans
consisted of offsets against deposits pledged by borrowers to partially
secure credit cards.
32
<PAGE>
The Company's net charge-offs decreased during 1998 due to decreased
charge-offs in its partially secured credit card and consumer loan portfolios.
This was done by increasing the credit standards in the indirect auto and credit
card areas. In the prior four fiscal years, the Company's charge-offs increased
due to the credit card and indirect auto 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, which
attributed to lower charge-offs in 1998. The Company also ceased lending to
first-time buyers.
The following table presents information regarding the net charge-offs in
each category of loan.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net charge-offs:
Real estate mortgage:
Permanent one- to four-family residential.. $ 152 $ 201 $ 27 $ (24) $ 226
Residential construction and development.... 118 514 623 652 12
Commercial loans............................... 57 641 91 635 90
Consumer loans................................. 969 1,815 1,115 (41) (121)
Credit card loans.............................. 3,450 4,682 3,431 2,199 2,215
------ ------ ------ ------- ------
Total..................................... $4,746 $7,853 $5,287 $ 3,421 $2,422
====== ====== ====== ======= ======
Net charge-offs to average loans outstanding:
Real estate mortgage:
Permanent one- to four-family residential... 0.59% 0.66% 0.08% (0.06)% 0.52%
Residential construction and development.... 0.17 0.93 1.15 1.26 0.03
Commercial loans............................... 0.14 1.69 0.32 3.71 0.84
Consumer loans................................. 3.69 6.20 3.57 (0.19) (1.11)
Credit card loans.............................. 8.13 9.53 6.59 4.54 4.68
------ ------ ------ ------- ------
Total........................... 2.30% 3.88% 2.67% 1.93% 1.60%
====== ====== ====== ======= ======
</TABLE>
Historically, the Company has recorded its most significant levels of
charge-offs, both in dollar amount and as a percentage of loans outstanding, in
its credit card and consumer loan portfolios. For the year ended December 31,
1998, the Company had $3.5 million in net charge-offs in the credit card
portfolio (8.13% of average credit card loans outstanding) and $969,000 in net
charge-offs (3.69% of consumer loans outstanding). These charge-off levels
represent a decline from the previous year when the Company had $4.7 million in
credit card loan charge-offs (9.53% of average credit card loans) and $1.8
million in net consumer loan charge-offs (6.20% of average consumer loans). The
decline in each case was attributable to tightened lending standards. Net
charge-offs in each of the other portfolios was less than 1.0% of average loans
outstanding. Commercial loan charge-offs increased during 1997, due primarily
to a $300,000 charge-off of a loan purchased as part of a pool from RTC. The
Company attributes the decline in charge-offs in the residential construction
and development loan portfolio during 1998 to the improved market for new homes.
33
<PAGE>
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,
--------------------------------------------------------------------
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......................... $ 386 11.20% $ 453 14.95% $ 485 15.50%
Residential construction and
development......................... 2,057 36.82 1,639 30.02 1,594 26.04
Commercial loans........................ 1,460 19.91 988 18.87 1,056 16.85
Consumer loans.......................... 1,399 11.63 1,890 13.25 2,245 15.05
Credit card loans....................... 3,155 20.44 3,054 22.91 2,874 26.56
------ ------- ------- ------- ------ -------
Total allowance for loan losses and
other reserves...................... $8,457 100.00% $ 8,024 100.00% $8,254 100.00%
====== ======= ======= ======= ====== =======
<CAPTION>
At December 31,
-------------------------------------------------------------
1995 1994
-------------------------- -----------------------
Percent of Percent of
Loans in Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage:
Permanent one- to four-family
residential......................... $ 483 17.18% $ 564 22.96%
Residential construction and
development........................... 1,561 30.82 1,620 29.44
Commercial loans........................ 617 11.38 747 8.07
Consumer loans.......................... 889 13.39 369 9.33
Credit card loans....................... 2,108 27.23 1,967 30.20
------- ------- ------- ------
Total allowance for loan losses
and other reserves................. $ 5,658 100.00% $ 5,267 100.00%
======= ======= ======= ======
</TABLE>
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 December 31, 1998,
Key Operations was processing approximately 236,000 credit card accounts
34
<PAGE>
including approximately 87,000 accounts for the Bank. Credit card processing
revenue increased to $3.7 million for the year ended December 31, 1998 from
$316,000 in 1997.
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 December 31,
-------------------------
1998 1997 1996
------- ------- ------
(In thousands)
<S> <C> <C> <C>
U.S. government and federal agency securities.. $24,548 $21,099 $ 5,986
Adjustable-rate mortgage mutual fund........... 1,612 4,707 8,811
Mortgage-backed securities:
FHLMC...................................... 1,645 1,930 2,785
FNMA....................................... 1,689 3,308 2,871
Asset-backed securities........................ 1,004 -- --
------- ------- -------
Total.................................... $30,498 $31,044 $20,453
======= ======= =======
</TABLE>
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 December 31, 1998.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- -------------------- ---------------------- --------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- --------- --------- --------- ---------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and federal
agency securities....... $-- --% $24,497 5.88% $ -- --% $ -- --%
Adjustable-rate mortgage
mutual funds............. -- -- -- -- -- -- 1,667 5.10
Mortgage-backed securities:
FHLMC................... 69 4.97 691 6.00 -- -- 903 6.07
FNMA.................... -- -- 1,684 6.58 -- -- -- --
Asset-backed securities.... -- -- 1,000 6.35 -- -- -- --
----- ------- ----- -------
Total................ $69 4.97 $27,872 5.94 $ -- -- $2,570 5.44
===== ======= ===== =======
<CAPTION>
Total Investment Portfolio
------------------------------
Weighted
Amortized Market Average
Cost Value Yield
--------- ------- ---------
<S> <C> <C> <C>
U.S. government and federal
agency securities....... $24,497 $24,548 5.88%
Adjustable-rate mortgage
mutual funds............. 1,667 1,612 5.10
Mortgage-backed securities:
FHLMC................... 1,663 1,645 5.99
FNMA.................... 1,684 1,689 6.58
Asset-backed securities.... 1,000 1,004 6.35
------- -------
Total................ $30,511 $30,498 5.90
======= =======
</TABLE>
At December 31, 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.
35
<PAGE>
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 $257.0 million as of December 31, 1998. 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 December 31, 1998, approximately $18.8 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 year ended December 31, 1998, the average rate paid on these
funds was 1.41%. 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 deposit accounts collateralizing partially secured
credit card loans declines.
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,
------------------------------------------------------------
1998 1997 1996
-------------------- ------------------ ------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings..................................... $ 14,960 2.92% $ 14,739 3.10% $ 15,585 3.18%
Interest-bearing demand and money
market accounts.......................... 19,250 2.77 20,231 2.77 20,094 2.87
Certificates of deposit..................... 172,418 5.99 153,538 5.96 132,252 6.10
Deposits collateralizing credit card loans.. 20,618 1.41 26,243 1.37 32,574 2.71
-------- -------- --------
Total interest-bearing deposits....... 227,246 5.10 214,751 4.90 200,505 5.00
Demand deposits............................. 15,215 -- 14,104 -- 15,835 --
-------- -------- --------
Total average deposits................. $242,461 4.78 $228,855 4.60 $216,340 4.63
======== ======== ========
</TABLE>
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 December 31, 1998, the Bank had approximately
$21.6 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 December 31, 1998.
<TABLE>
<CAPTION>
Amount
--------------
(In thousands)
<S> <C>
Three months or less........... $ 2,158
Over three through six months.. 860
Over six through 12 months..... 8,680
Over 12 months................. 9,914
-------
Total...................... $21,612
=======
</TABLE>
36
<PAGE>
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 December 31, 1998, the Company had $1.0 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 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 Year Ended December 31,
-----------------------------------------
1998 1997 1996
-------------- ------------ -----------
(In thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances............................. $2,000 $ -- $ --
Notes payable............................. 1,000 1,000 --
Weighted average rate paid on:
FHLB advances............................. 5.51% --% --%
Notes payable............................. 9.70 9.60 --
Maximum amount of borrowings outstanding
at any month end:
FHLB advances............................. $2,000 $ -- $ --
Notes payable............................. 1,500 1,000 --
Approximate average amounts outstanding:
FHLB advances............................. $1,077 $ -- $ --
Notes payable............................. 1,208 1,000 --
Approximate weighted average rate paid on:
FHLB advances............................. 5.51% --% --%
Notes payable............................. 9.86 9.60 --
</TABLE>
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
37
<PAGE>
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 December 31, 1998, the Company and its subsidiaries had 275 full-time
equivalent employees.
Properties
The following table shows the location and certain additional information
regarding the offices of the Company and its subsidiaries at December 31, 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>
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
38
<PAGE>
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 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.
39
<PAGE>
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 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
40
<PAGE>
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.
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
41
<PAGE>
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 December
31, 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 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.
42
<PAGE>
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.
43
<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 or the Bank 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 72 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 50 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 45 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 Chairman of 1961 2001
the Company and the Bank
Marc S. Rosen 44 Director of the Company 1985 2001
and the Bank
Morton Shapiro 69 Director of the Company 1961 1999
and the Bank
Richard D. Sussman 42 Director of the Company 1985 2000
and the Bank
Seymour Sussman 71 Director of the Company 1961 1999
and the Bank
Ejner J. Johnson, Jr. 40 Director of the Bank 1997 1999
J. Joseph McAleer, IV 32 Director of the Bank 1997 1999
Steven M. Rosen 40 Director of the Bank 1997 1999
Alan R. Silver 41 Director of the Bank 1997 1999
- -------------------------
</TABLE>
(1) At December 31, 1998.
(2) Includes service as director of the Bank.
44
<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 Construction and Development 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
Construction and Development 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
45
<PAGE>
Baltimore, Maryland. Mr. Sussman, who serves on the Bank's Construction and
Development Loan Committee, is the son of Seymour Sussman.
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
Construction and Development 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
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 40 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 December 31, 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.
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.
46
<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 Construction and
Development Loan Committee, and to the Chairman of the Board of Key Operations.
Director Stock Option Plan. The Company has reserved 330,000 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. Each non-
employee director of the Company and the Bank has been granted a five-year
option to purchase 5,500 shares of Common Stock at the final offering price in
this Offering contingent upon completion of the Offering.
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, 1998, 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."
47
<PAGE>
Executive Compensation
The following table sets forth the compensation paid by the Company and the
Bank to their chief executive officer and to the four most highly-compensated
executive officers whose salary and bonus earned in the fiscal year ended
December 31, 1998 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
------------------ ---- ------ ----- --------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
David H. Wells, Jr. 1998 $113,000 $63,865 $ -- - 16,500 $4,000 (2)
President 1997 105,000 53,597 -- - 22,000 4,000
W. Benton Knight 1998 105,000 63,865 -- - 13,750 4,000 (2)
Executive Vice 1997 97,000 53,597 -- - 16,500 3,000
President
George G. Wachter 1998 90,000 57,483 -- - 8,250 2,950 (2)
Senior Vice President 1997 85,000 52,400 -- - 11,000 2,767
Thomas J. Juranich 1998 80,000 35,343 -- - 5,500 2,307 (2)
Senior Vice President 1997 70,600 5,651 -- - 5,500 1,525
Ross L. Brown 1998 76,000 25,546 -- - 8,250 2,031 (2)
Senior Vice President 1997 70,000 24,145 -- - 11,000 1,883
- -------------------------
</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 for
Messrs. Wells, Knight, Wachter, Juranich and Brown in the amounts of
$3,000, $3,000, $2,950, $2,307 and $2,031, respectively. Also includes
$1,000 in director fees received by Mr. Wells and Mr. Knight for their
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 1998. 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(2)
Options Employees in or Base Expiration -----------------------
Name Granted(1) Fiscal Year Price Date 5% 10%
- ---- ---------- ------------ ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
David H. Wells, Jr. 16,500 18.99% $ * 12/31/03 54,698 $120,879
W. Benton Knight 13,750 15.82 * 12/31/03 45,581 100,733
George G. Wachter 8,250 9.49 * 12/31/03 27,349 60,440
Thomas J. Juranich 5,500 6.33 * 12/31/03 18,233 40,293
Ross L. Brown 8,250 9.49 * 12/31/03 27,349 60,440
- -------------------------
</TABLE>
* Exercise price will equal the final sales price for the Common Stock in
this offering.
(1) All options are immediately exercisable.
(2) Assumes that exercise price will equal $12 per share.
48
<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 1998 of options held by the Chief Executive Officer and Named
Executive Officers and the options such persons exercised during 1998.
<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. 21,945 $59,850 104,500 -- $118,780 $ --
W. Benton Knight 16,500 45,000 79,750 -- 89,085 --
George G. Wachter 11,000 30,000 52,250 -- 59,390 --
Thomas J. Juranich -- -- 14,300 -- 6,702 --
Ross L. Brown 3,300 9,000 33,550 -- 27,767 --
- -------------------------
</TABLE>
(1) Based on the difference between the book value per share of the Common Stock
on December 31, 1998 and the exercise price per share of the option.
(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, 1998 ($5.90 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,
1998, 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,
1998, Dackman, Heyman & Margolies, LLP, received $275,000 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, represents the Bank in various litigation-matters. During the year
ended December 31, 1998, Scanlan, Rosen & Shar, LLC, received $144,000 for
litigation-related services.
From time to time, the Company has borrowed funds from directors and
principal stockholders 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 such loan which was either
made since January 1, 1998 or was outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Relation Interest
Date Amount Payee to Company Rate Maturity
---- ------ ----- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
02/07/97 $400,000 Hopkins Bancorp, Inc. A 10.0% 03/07/99
04/02/98 200,000 Hopkins Bancorp, Inc. A 10.0 05/01/00*
04/07/98 200,000 Irwin R. Cohen B 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. D 9.5 10/14/99
09/21/98 100,000 Diversions, Inc. D 9.5 03/21/00
- -------------------------
</TABLE>
* Repaid on November 10, 1998.
A: Controlled by Alvin R. Lapidus, a beneficial owner of more than 5% of the
Common Stock.
B: Director
C: Controlled by Seymour Sussman, a director of the Company.
D: Controlled by the spouse of Morton Shapiro, a director of the Company.
49
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of December 31, 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> <C>
Directors and Named Executive Officers:
Irwin R. Cohen /5/ 552,200 /6/ 12.18%
Bernard Dackman /5/ 673,398 14.85
Joel Dackman 57,893 1.28
Jan C. Feldman 14,410 *
Philip Glazer /5/ 433,972 /7/ 9.57
W. Benton Knight 112,200 /8/ 2.43
Marc S. Rosen 52,030 /9/ 1.15
Morton Shapiro 17,600 /10/ *
Richard D. Sussman 87,670 1.93
Seymour Sussman /5/ 380,853 8.40
David H. Wells, Jr. /5/ 246,620 /11/ 5.32
George G. Wachter 77,990 /12/ 1.70
Thomas J. Juranich 14,300 /13/ *
Ross L. Brown 36,850 /14/ *
All directors and executive officers
as a group (18 persons) 2,791,921 /15/ 57.95
Other Beneficial Owners:
Estate of Charles G. Jules /5/ 282,788 /16/ 6.24
Alvin Lapidus 309,892 /17/ 6.84
Burton Rosen 364,628 /18/ 8.04
- -------------------------
</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 December
31, 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 calculating 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 December
31, 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 Ryan, Beck's over-allotment option.
/5/ The address of the named individual is 7F Gwynns Mill Court, Owings Mills,
Maryland.
/6/ Includes 165,000 shares held by Capital Industries, Inc. of which he is
president and 112,200 shares held jointly. Excludes 14,410 shares held by
his daughter Jan C. Feldman.
/7/ Includes 20,570 shares held jointly, 19,283 shares held by Associated
Partners, Co., Inc., 163,438 shares held in an individual retirement
account and 50,699 shares held by his spouse as to which he disclaims
beneficial ownership.
/8/ Includes 32,450 shares held jointly. Includes 79,750 shares which Mr.
Knight has the right to acquire pursuant to the exercise of options.
50
<PAGE>
/9/ Includes 3,850 shares held jointly.
/10/ Includes 17,463 shares held jointly.
/11/ Includes 141,955 shares held jointly. Includes 104,500 shares which Mr.
Wells has the right to acquire pursuant to the exercise of options.
/12/ Includes 25,740 shares held jointly and 52,250 shares that he has the
right to acquire pursuant to the exercise of options.
/13/ Consists of shares that he has the right to acquire pursuant to the
exercise of options.
/14/ Includes 3,300 shares held jointly and 33,500 shares which Mr. Brown has
the right to acquire pursuant to the exercise of options.
/15/ Includes 284,350 shares which directors and executive officers have the
right to acquire pursuant to the exercise of options.
/16/ Includes 78,540 shares held jointly.
/17/ Includes 153,846 shares held jointly and 2,200 shares held by spouse as to
which he disclaims beneficial ownership. Does not include 174,306 shares
held by Hopkins Bancorp, Inc. of which Mr. Lapidus is Chairman and as to
which he disclaims beneficial ownership. Mr. Lapidus' address is 19707
Turnberry Way, Apt. 5E, North Miami Beach, Florida 33180.
/18/ Includes 179,564 shares held by spouse as to which he disclaims beneficial
ownership. Mr. Rosen's address is 8204 Anita Road, Baltimore, Maryland
21208.
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 20,000,000 shares of Common Stock. As
of December 31, 1998, there were 4,533,265 shares outstanding and 180
stockholders of record. Upon the closing of the Offering, there will be
5,933,265 shares of Common Stock outstanding (assuming no exercise of Ryan
Beck's 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.
51
<PAGE>
Transfer Agent and Registrar. _____________________ will act as transfer
agent and registrar for the Common Stock.
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.
52
<PAGE>
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 5,933,265 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, 3,464,879 shares of Common Stock currently held by directors,
executive officers and greater than 5% stockholders and any additional shares
acquired by them will be treated as "control shares" and 478,467 additional
shares of Common Stock issuable upon the exercise of options (including 71,500
options that will become effective upon the completion of this Offering) that
the Company has granted or agreed to grant would 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 990,000
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
53
<PAGE>
agreed, subject to certain exceptions, that it will 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 1,400,000 shares of the Common
Stock in two stages. In the first stage, the Company will offer 950,000 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 450,000 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 950,000 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 14,000 shares. 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
_____________, 1999. See "Escrow Account and Release of Funds" below. 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 that the Company rejects, or subsequently elects to cancel,
all of a subscription, the Company will refund the entire amounted remitted and
no interest will be earned thereon. In the event that the Company rejects, or
subsequently elects to cancel, part of a subscription, the Company will retain
an amount equal the product of the number of shares for which the subscription
is accepted multiplied by the per share price of the Common Stock and will
refund the difference between such amount and the amount remitted.
54
<PAGE>
If the per share price of the Common Stock is set at less than $12.00 per
share, the Company may, at its sole discretion, refund the difference between
the amount remitted and the aggregate price of the Common Stock subscribed for
or retain such amount and issue the additional number of whole shares of Common
Stock which may be purchased with such amount.
The Company reserves the right to terminate the Community Offering at any
time.
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.
55
<PAGE>
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 $10,000 of its
itemized and reasonable out-of-pocket expenses, and will pay legal fees up to
$60,000 plus associated expenses. The Company has agreed in the Agency
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 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 450,000 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 450,000 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
56
<PAGE>
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.
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.
If Ryan, Beck creates a short position in the Common Stock in connection
with the Public Offering, i.e., it sells a greater aggregate number of shares
of Common Stock then is anticipated, Ryan, Beck may reduce the short position by
purchasing shares of Common Stock in the open market. Ryan, Beck may also elect
to reduce any short position by exercising all or part of the over-allotment
option described above.
Ryan, Beck may also impose a penalty bid on certain selling group members.
This means that if Ryan, Beck purchases shares of Common Stock in the open
market to reduce Ryan, Becks' short position or to stabilize the price of the
Common Stock, it may reclaim the amount of the selling concession from the
selling group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor Ryan, Beck makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the Common Stock. In addition, neither the
Company nor Ryan, Beck makes any representation that Ryan, Beck will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Ryan, Beck and dealers may engage in passive market making transactions in
the shares of Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not nor
bid for, or purchase, shares of Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive
market maker generally may not exceed (i) 30% of its average daily trading
volume in the Common Stock during a specified two month period, or (ii) 200
shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
Common Stock above independent market levels. Ryan, Beck and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock will
be determined by negotiations between the Company and Ryan, Beck. Among the
factors considered in such negotiations are prevailing market and general
economic conditions, the market capitalizations, trading histories and
performance of other traded companies that the Company and Ryan, Beck believed
to be comparable to the Company, the results of operations of the Company in
recent periods, the current financial position of the Company and estimates of
the business potential of the Company. Additionally, consideration was given to
the general status of the securities market, the market conditions for new
issues of securities and the demand for securities of comparable companies at
the time the Offering was made.
The Company has also applied to have Common Stock on the Nasdaq National
Market under the symbol KCCO.
57
<PAGE>
EXPERTS
The Consolidated Financial Statements of Key Capital Corporation and
subsidiaries as of December 31, 1998 and 1997 and for each of the years in the
three-year period ended December 31, 1998 have been included herein and in the
Registration Statement on Form S-1 in reliance upon the report of KPMG 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.
58
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Table of Contents
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-1
Consolidated Financial Statements:
Statements of Financial Condition F-2
Statements of Income and Comprehensive Income F-3
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
<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,
1998 and 1997, and the related consolidated statements of income and
comprehensive income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
Baltimore, Maryland
February 5, 1999, except as to note 19
which is as of March 1, 1999
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------- -----------------
Assets
<S> <C> <C>
Cash on hand and due from banks $ 4,632,607 7,008,538
Short-term investments (note 1) 9,009,389 14,980,475
Securities purchased under agreements to resell (note 2) -- 187,518
Investment securities available-for-sale (note 3) 27,163,586 25,805,514
Mortgage-backed securities available-for-sale (note 3) 3,334,054 5,238,594
Loans receivable, net (notes 4 and 8) 220,957,325 192,849,470
Mortgage loans held for sale 9,099,184 4,775,250
Accrued interest receivable 2,828,017 2,597,936
Investment in Federal Home Loan Bank stock, at cost (note 10) 799,000 752,100
Other real estate owned and other foreclosed
assets, net (note 5) 1,990,915 2,894,827
Property and equipment, net (note 6) 7,545,293 6,517,634
Prepaid expenses and other assets 2,297,712 2,213,351
Deferred federal and state income taxes (note 9) 2,369,386 2,655,651
------------------- --------------------
Total assets $ 292,026,468 268,476,858
=================== ====================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 7) $ 257,023,645 235,684,160
Notes payable (note 8) 1,000,000 1,000,000
Federal Home Loan Bank advances (note 8) 2,000,000 --
Advance payments by borrowers for taxes
and insurance 427,091 333,663
Accrued expenses and other liabilities 4,839,049 8,291,112
------------------- --------------------
Total liabilities 265,289,785 245,308,935
------------------- --------------------
Stockholders' equity (notes 9, 10, 13, 14, 15 and 19):
Common stock $1 par value per share:
20,000,000 shares authorized; 4,533,265* and
809,640 shares issued and outstanding, respectively 4,533,265 809,640
Additional paid-in capital -- 713,405
Retained earnings 22,211,364 21,715,550
Accumulated other comprehensive income (7,946) (70,672)
------------------- --------------------
Total stockholders' equity 26,736,683 23,167,923
Commitments (notes 4, 6 and 16)
Total liabilities and stockholders' equity $ 292,026,468 268,476,858
=================== ====================
</TABLE>
* Reflects 5 1/2-for-1 common stock split declared March 1, 1999, described in
note 19.
See accompanying notes to consolidated financial statements.
F-2
(Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 27,831,549 28,315,645 28,747,988
Mortgage-backed securities 246,646 110,709 303,049
Investment securities 1,637,193 1,275,939 544,327
Federal funds sold 931,621 726,286 635,164
Dividends on Federal Home Loan Bank stock 58,669 54,666 50,956
Other 2,077 2,297 2,035
---------------- ---------------- ----------------
Total interest income 30,707,755 30,485,542 30,283,519
---------------- ---------------- ----------------
Interest expense:
Deposits:
Certificates 10,329,832 9,153,193 8,072,880
NOW and money market deposit accounts 534,739 561,147 575,929
Savings 437,033 456,422 494,493
Collateralized savings accounts 289,664 358,433 882,599
---------------- ---------------- ----------------
11,591,268 10,529,195 10,025,901
Borrowed funds 177,834 81,354 11,994
---------------- ---------------- ----------------
Total interest expense 11,769,102 10,610,549 10,037,895
---------------- ---------------- ----------------
Net interest income 18,938,653 19,874,993 20,245,624
Provision for loan losses (note 4) 5,178,532 7,623,136 7,883,024
---------------- ---------------- ----------------
Net interest income after
provision for loan losses 13,760,121 12,251,857 12,362,600
---------------- ---------------- ----------------
Noninterest income:
Service fees on deposits 440,580 408,312 322,608
Credit card processing income 3,673,879 316,144 52,033
Credit card fees, service charges
and related income 5,054,344 6,190,565 5,699,859
Gain on sale of SBA loans 481,478 544,069 483,228
Gain on sale of mortgage loans held for sale 813,960 755,916 322,447
Other 1,130,773 869,605 743,191
---------------- ---------------- ----------------
Total noninterest income 11,595,014 9,084,611 7,623,366
---------------- ---------------- ----------------
</TABLE>
(Continued)
F-3
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Noninterest expense:
Salaries and employee benefits $ 8,009,457 6,952,333 6,514,297
Credit card related expenses 3,968,004 2,583,948 2,442,893
Federal Deposit Insurance
Corporation premiums (note 10) 150,836 135,602 1,817,779
Professional services 1,918,747 1,494,382 1,092,474
Occupancy and equipment 1,875,720 1,545,149 1,450,146
Data processing expense 524,171 402,370 359,380
Loss on sale of other real estate owned, net 159,989 48,803 43,606
Loss on investment securities, net 17,776 393,621 --
Advertising expense 485,301 732,648 2,617,584
Provision for losses on other
real estate owned (note 5) 44,667 64,000 30,000
Other 2,534,607 2,335,219 2,581,888
---------------- ---------------- ----------------
Total noninterest expense 19,689,275 16,688,075 18,950,047
---------------- ---------------- ----------------
Income before income taxes 5,665,860 4,648,393 1,035,919
Income tax provision (benefit) (note 9) 1,897,740 1,813,386 (210,317)
---------------- ---------------- ----------------
Net income 3,768,120 2,835,007 1,246,236
---------------- ---------------- ----------------
Changes in accumulated other comprehensive
income - unrealized holding gains/losses on
securities available-for-sale 62,726 297,495 23,719
Less: reclassification adjustment for losses
included in net income -- (181,599) --
---------------- ---------------- ----------------
Total comprehensive income $ 3,830,846 2,950,903 1,269,955
================ ================ ================
Earnings per common share (note 13)*:
Basic $ 0.84 0.64 0.28
Diluted 0.81 0.63 0.28
================ ================ ================
</TABLE>
* Reflects 5 1/2-for-1 common stock split declared March 1, 1999, described in
note 19.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated Total
Additional other stock-
Common paid-in Retained comprehensive holders'
stock capital earnings income equity
---------------- -------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
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 -- -- 3,768,120 -- 3,768,120
Other comprehensive
income -- -- -- 62,726 62,726
Exercise of stock options 11,190 183,954 -- -- 195,144
Issuance of stock 3,400 71,512 -- -- 74,912
Dividends paid -
$.65 per share -- -- (532,142) -- (532,142)
5 1/2-for-1 common
stock split (note 19) 3,709,035 (968,871) (2,740,164) -- --
---------------- ---------------- ----------------- ----------------- --------------
Balance at
December 31, 1998 $ 4,533,265 -- 22,211,364 (7,946) 26,736,683
=============== ================ ================= ================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,768,120 2,835,007 1,246,236
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 897,734 820,312 737,777
Provision for losses on loans and other real estate owned 5,223,199 7,687,136 7,913,024
Loss on investment securities, net 17,776 393,621 --
Gain on sale of SBA loans (481,478) (544,069) (483,228)
Loss on sale of other real estate owned, net 159,989 48,803 43,606
Deferred income taxes 247,014 483,808 (2,110,283)
Amortization of loan fees and premiums and discounts, net (989,578) (1,103,024) (1,287,703)
Loan fees deferred 1,233,848 925,413 656,271
Sales of mortgage loans held for sale 111,818,086 46,780,466 29,305,914
Gain on sale of mortgage loans held for sale (813,960) (755,916) (322,447)
Originations of mortgage loans held for sale (115,328,060) (49,759,750) (26,958,350)
(Increase) decrease in prepaid expenses and other assets (84,361) (220,878) 1,579,923
Increase in accrued interest receivable (230,081) (68,435) (573,412)
Increase (decrease) in accrued expenses and other liabilities (3,452,063) 2,920,022 (97,132)
Increase (decrease) in federal and state income taxes payable -- (271,607) 106,211
---------------- --------------- ---------------
Net cash provided by operating activities 1,986,185 10,170,909 9,756,407
---------------- --------------- ---------------
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale (38,599,229) (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 30,080,000 -- 1,000,000
Proceeds from sales of investment securities available-for-sale 7,180,931 4,089,037 --
Principal repayments of mortgage-backed
securities available-for-sale 1,959,594 3,725,471 4,155,377
Proceeds from sales of mortgage-backed
securities available-for-sale -- 269,224 --
Loan disbursements net of principal repayments (32,878,589) (14,357,656) (37,220,497)
Purchases of loans receivable (7,419,192) (467,366) (3,242,488)
Sales of loans receivable 4,966,693 10,304,559 8,207,615
Increase in investment in Federal Home Loan Bank stock (46,900) (17,500) (123,000)
Costs capitalized to other real estate owned (136,106) (702,903) (569,101)
Proceeds from disposition of property and equipment 11,845 11,731 8,896
Purchases of property and equipment (1,937,238) (909,257) (1,947,789)
Proceeds from sales of other real estate owned 1,513,587 2,366,513 882,533
Proceeds from sales of other foreclosed assets 1,613,057 2,683,234 6,318,160
---------------- --------------- ---------------
Net cash used in investing activities (33,691,547) (11,670,555) (30,030,294)
---------------- --------------- ---------------
</TABLE>
(Continued)
F-6
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in savings accounts $ 21,339,485 9,246,938 14,228,466
Increase (decrease) in advance payments by borrowers for
taxes and insurance 93,428 (115,472) 40,050
Proceeds from issuance of stock and exercise of stock options 270,056 138,819 174
Repurchase of stock -- (166,732) --
Increase in notes payable -- 1,000,000 --
Increase in Federal Home Loan Bank advances 2,000,000 -- --
Dividends paid (532,142) (445,687) (445,684)
---------------- --------------- ---------------
Net cash provided by financing activities 23,170,827 9,657,866 13,823,006
---------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (8,534,535) 8,158,220 (6,450,881)
Cash and cash equivalents at beginning of year 22,176,531 14,018,311 20,469,192
---------------- --------------- ---------------
Cash and cash equivalents at end of year $ 13,641,996 22,176,531 14,018,311
================ =============== ===============
Supplemental information:
Interest paid on savings deposits and borrowed funds $ 11,571,000 10,546,000 10,069,000
Income taxes paid 1,830,000 1,690,000 1,794,000
================ =============== ===============
Non-cash transactions:
Transfers of balances from loans to other real estate owned, net $ 899,275 2,332,855 1,730,000
Transfers of balances from loans to other foreclosed assets 1,392,007 2,234,128 6,577,000
================ =============== ===============
Loans to facilitate the sale of other real estate owned acquired
through foreclosure $ 367,746 516,500 726,000
================ =============== ===============
Decrease in unrealized holding losses on securities available
for sale, net of income tax effect $ 62,726 297,495 23,719
================ =============== ===============
Retirement of property and equipment $ 159,184 -- --
================ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) 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.
(B) 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.
(C) 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
(Continuted)
F-8
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
changes in economic conditions and their effect on borrowers,
particularly in the Maryland and Virginia areas. In addition, various
regulatory agencies, 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.
(D) 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, 1998 and 1997, the required reserve balances were
$365,000 and $474,000, respectively.
(E) SHORT-TERM INVESTMENTS
Short-term investments consist of Federal funds sold and interest-
bearing overnight investment accounts of $1,300,000 and $7,709,389 at
December 31, 1998 and $11,371,948 and $3,608,527 at December 31, 1997,
respectively.
(F) 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
December 31, 1998, 1997 and 1996
(G) 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.
(H) 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.
(I) 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.
(Continued)
F-10
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(J) LOAN FEES
Loan fees and certain direct loan origination costs are deferred and
the net fee or cost is recognized in interest income using a method
that approximates the interest method. Amortization of loan fees is
discontinued for non-accrual loans.
(K) 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 generally
recognized as noninterest expense as incurred.
(L) CREDIT CARD PROCESSING INCOME
Credit card processing fees are assessed on a monthly basis and are
recognized as noninterest income as the services are performed.
Approximately $2,800,000 of the credit card processing income earned
during 1998 was attributable to a single customer.
(M) 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.
(N) 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.
(Continued)
F-11
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(O) 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.
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 No.
114, Accounting by Creditors for Impairment of a Loan (SFAS No. 114)
and No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition Disclosures (SFAS No. 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.
SFAS No. 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.
(Continued)
F-12
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 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 $344,034 and $481,559 at
December 31, 1998 and 1997, 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.
(P) 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.
(Continued)
F-13
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Q) 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 (SFAS No. 125). SFAS No. 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, SFAS No. 127 was issued which deferred the effective
date of certain provisions of SFAS No. 125 related to repurchase
agreements, securities lending and similar transactions until January
1, 1998. The Company adopted the currently effective portions of SFAS
No. 125 as of January 1, 1997. Adoption did not have a material impact
on the Company's financial statements.
(R) 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 holding
gains and losses on available-for-sale securities in other
comprehensive income.
(S) 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.
(Continued)
F-14
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(T) NEW ACCOUNTING STANDARDS
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 of 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 as the Company is currently not involved in such
activities.
(U) RECLASSIFICATIONS
Certain amounts have been reclassified to conform to the 1998
presentation.
(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 are 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. There were no agreements outstanding at
December 31, 1998. At December 31, 1997, agreements outstanding totaled
$187,518. Securities purchased under agreements to resell averaged $111,000
and $259,000 during 1998 and 1997, respectively. The maximum amounts
outstanding at any month-end were $690,000 and $606,000 during 1998 and
1997, respectively.
(Continued)
F-15
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(3) INVESTMENTS 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>
1998
-----------------------------------------------------------------------------------
Amortized Gross unrealized Fair Carrying
----------------------------
cost gains losses value amount
--------------- ------------ ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government
and federal
agencies $ 24,496,928 51,261 -- 24,548,189 24,548,189
Asset-backed securities 1,000,000 3,750 -- 1,003,750 1,003,750
Adjustable rate
mortgages -
mutual funds 1,667,150 -- (55,503) 1,611,647 1,611,647
--------------- ------------ ------------ --------------- ----------------
$ 27,164,078 55,011 (55,503) 27,163,586 27,163,586
=============== ============ ============ =============== ================
1997
-----------------------------------------------------------------------------------
Amortized Gross unrealized Fair Carrying
----------------------------
cost gains losses value amount
--------------- ------------ ------------ --------------- ----------------
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>
F-16 (Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Amortized Gross unrealized Fair Carrying
----------------------
cost gains losses value amount
---------------- ---------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation $ 1,662,666 4,318 (21,787) 1,645,197 1,645,197
Federal National
Mortgage Association 1,683,841 5,016 -- 1,688,857 1,688,857
---------------- --------- ---------- ------------- -------------
$ 3,346,507 9,334 (21,787) 3,334,054 3,334,054
================ ========= ========== ============= =============
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------
Amortized Gross unrealized 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>
Investments securities at December 31 mature as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------- --------------------------------
Amortized Fair Amortized Fair
cost value cost value
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Due after one through
five years $ 25,496,928 25,551,939 $ 21,097,915 21,098,715
============== ============== =============== =============
</TABLE>
Contractual maturities of mortgage-backed securities are as follows at December
31:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ------------------------------
Amortized Fair Amortized Fair
cost value cost value
--------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Due within one year $ 68,826 68,923 -- --
Due after one through
five years 2,374,733 2,384,067 4,189,087 4,139,365
Due after ten years 902,948 881,064 1,130,812 1,099,229
--------------- ------------- -------------- ------------
$ 3,346,507 3,334,054 5,319,899 5,238,594
=============== ============= ============== ============
</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
December 31, 1998, 1997 and 1996
The proceeds from the sales of securities available for sale and the gross
realized gains and losses were $7,180,931, $1,097 and $18,873,
respectively, for the year ended December 31, 1998. 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. In 1997, the gross realized losses included $256,000
recognized when management established a plan to sell certain mutual funds
included in investment securities available-for-sale.
(4) Loans Receivable
Loans receivable are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Loans secured by mortgages on real estate:
Conventional residential $ 25,749,104 30,256,994
Residential construction and development 156,672,441 112,542,416
----------------- ----------------
Total mortgage loans 182,421,545 142,799,410
Commercial 45,777,134 38,079,673
Consumer 26,742,097 26,757,040
Credit card loans:
Partially secured 35,591,576 35,164,730
Unsecured 11,391,802 10,314,822
----------------- ----------------
301,924,154 253,115,675
Less:
Undisbursed portion of loans in process -
construction and development 72,007,924 51,899,031
Unearned loan fees 501,887 343,418
Allowance for loan losses 8,457,018 8,023,756
----------------- ----------------
Loans receivable, net $ 220,957,325 192,849,470
================= ================
</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
December 31, 1998, 1997 and 1996
Conventional 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 (savings accounts and real estate) 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, 1998:
<TABLE>
<CAPTION>
Fixed Floating
rate rate
----------- ----------
<S> <C> <C>
Mortgage loans $ 4,806,000 17,360,000
Commerical loans -- 1,100,000
=========== ==========
</TABLE>
Commitments for mortgage loans generally expire in 90 days. The Company had
commitments to sell loans of $12,757,000 and $9,090,000 at December 31, 1998 and
1997, respectively. The Company had commitments to purchase credit card loans of
approximately $4,000,000 at December 31, 1998. The Company had no commitments to
purchase loans at December 31, 1997.
As of December 31, 1998 and 1997 the Company was servicing participations sold
and loans for the benefit of others of approximately $107,019,000 and
$57,272,000, respectively.
Loans in arrears three months or more (non-accrual loans) or in process of
foreclosure were approximately $4,736,000 and $3,311,000 at December 31, 1998
and 1997, respectively.
(Continued)
F-19
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 1997 and 1996
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>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Interest income that would have been recorded $ 792,218 558,518 402,763
Interest income recognized (307,774) (266,996) (177,143)
------------- ------------- -------------
Interest income foregone $ 484,444 291,522 225,620
============= ============= =============
</TABLE>
Included in the Company's nonaccrual loans above are certain impaired loans as
defined SFAS No. 114. Impaired loans and the allocated valuation allowances at
December 31 were as by follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ----------------------------
Loan Valuation Loan Valuation
balance allowance balance allowance
--------------- ------------------------- --------------
<S> <C> <C> <C> <C>
Impaired with valuation allowance $ 171,220 91,815 132,000 93,000
Impaired without valuation allowance -- -- -- --
--------------- ---------- ------------ --------------
$ 171,220 91,815 132,000 93,000
=============== ========== ============ ==============
</TABLE>
The allocated valuation allowance for impaired loans at December 31, 1998 and
1997, and activity related thereto for the years ended December 31, 1998 and
1997, 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>
1998 1997 1996
---------- ------------ --------------
<S> <C> <C> <C>
Average recorded investment in impaired loans $ 86,000 170,000 1,725,000
Interest income recognized during impairment -- 16,000 --
========== ============ ==============
</TABLE>
F-20
(Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998,1997 and 1996
An analysis of the allowance for losses for the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<S> <C>
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
Provision for loan losses 5,178,532
Recoveries 5,970,218
Charge-offs (10,715,488)
-------------
Balance at December 31, 1998 $ 8,457,018
=============
</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>
1998 1997
------------- -------------
<S> <C> <C>
Other real estate owned acquired through foreclosure $ 1,763,925 2,442,164
Other foreclosed assets 226,990 452,663
============= =============
$ 1,990,915 2,894,827
============= =============
</TABLE>
F-21
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Balance at beginning of period $ -- -- --
Provision for losses 44,667 64,000 30,000
Charge-offs, net of recoveries (44,667) (64,000) (30,000)
----------- ----------- ----------
Balance at end of period $ -- -- --
=========== =========== ==========
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
Estimated
1998 1997 useful lives
--------------- --------------- ----------------
<S> <C> <C> <C>
Land $ 1,626,955 1,626,955 --
Buildings and improvements 4,139,193 4,008,472 25 - 40 years
Leasehold improvements 1,212,022 848,837 5 - 10 years
Furniture, fixtures and equipment 6,383,199 5,110,896 5 - 10 years
--------------- --------------- ----------------
Total, at cost 13,361,369 11,595,160
Less accumulated depreciation and amortization 5,816,076 5,077,526
-------------- ---------------
Property and equipment, net $ 7,545,293 6,517,634
============== ===============
</TABLE>
At December 31, 1998, 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:
1999 $ 284,206
2000 277,643
2001 223,259
2002 95,475
2003 24,583
Thereafter 66,666
============
F-22
(Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Total rent expense was approximately $286,000, $194,000 and $193,000 for
1998, 1997 and 1996, respectively.
(7) DEPOSITS
Savings accounts are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- --------------------------------------------
Weighted Weighted
Type of average average
account rate Amount % rate Amount %
---------------------------------------- ---------------- ---------- ------------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit 6.13% $ 185,086,041 72.0% 6.35% $ 162,691,945 69.0%
Non-certificate:
Savings 2.68% 15,237,145 5.9 2.92% 15,044,847 6.4
Demand deposits 0.00% 16,942,284 6.6 0.00% 13,674,522 5.8
Interest bearing
demand and
money market
accounts 2.74% 20,983,710 8.2 2.85% 21,428,392 9.1
Deposits
collateralizing
credit card loans 1.42% 18,774,465 7.3 1.35% 22,844,454 9.7
---------------- ---------- ----------------- ----------
Total non-certificate 71,937,604 28.0 72,992,215 31.0
---------------- ---------- ----------------- ----------
$ 257,023,645 100.0% $ 235,684,160 100.0%
================ ========== ================= ==========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------------------------------ ----------------------------
Amount % Amount %
------------------ ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Certificate accounts maturing:
Under 12 months $ 110,675,171 59.8% $ 87,564,938 53.8%
12 months to 24 months 50,926,812 27.5 36,027,866 22.1
24 months to 36 months 8,596,539 4.6 24,811,294 15.3
36 months to 48 months 5,823,974 3.2 7,686,445 4.7
48 months to 60 months 8,805,681 4.8 5,496,028 3.4
Over 60 months 257,864 0.1 1,105,374 0.7
------------------ ---------- ---------------- ---------
$ 185,086,041 100.0% $ 162,691,945 100.0%
================== ========== ================ ==========
</TABLE>
F-23 (Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1996 and 1996
Certificates of $100,000 or more were approximately $21,612,000 and
$19,010,000 as of December 31, 1998 and 1997.
(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, 1998 and 1997, there
were no agreements to repurchase.
There were no borrowings under reverse repurchase agreements during the
years ended December 31, 1998 and 1997.
Under a blanket floating lien security agreement with the Federal Home
Loan Bank (FHLB), the Company is required to maintain, as collateral for
its advances, qualifying first mortgage loans and securities in an amount
equal to 100% of the advances. At December 31, 1998, the Company had
$2,000,000 in FHLB advances outstanding which are due June, 2008. These
advances have an interest rate of 5.51% at December 31, 1998. There were
no FHLB advances outstanding at December 31, 1997.
In connection with a repurchase of the Company stock and other lending
and investing activities, the Company borrowed from related parties.
Interest rates and maturities on these notes payable are as follows:
<TABLE>
<CAPTION>
Due Date 1998 1997
------------------------ ------------ ------------
<S> <C> <C>
9.00% due March 1998 $ -- 200,000
9.50% due September 1998 -- 400,000
10.00% due March 1999 400,000 400,000
9.00% due May 1999 200,000 --
9.50% due October 1999 100,000 --
9.50% due March 2000 100,000 --
10.00% due May 2000 200,000 --
</TABLE>
F-24
(Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(9) INCOME TAXES
The income tax provision (benefit) is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ 1,627,212 1,088,587 1,569,128
State 23,514 240,991 330,838
--------------- -------------- ---------------
1,650,726 1,329,578 1,899,966
--------------- -------------- ---------------
Deferred:
Federal 143,736 396,116 (1,727,787)
State 103,278 87,692 (382,496)
-------------- -------------- ---------------
247,014 483,808 (2,110,283)
-------------- -------------- ---------------
$ 1,897,740 1,813,386 (210,317)
============== ============== ===============
</TABLE>
SFAS No. 109 Accounting for Income Taxes 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
$1,384,000 at December 31, 1998. 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.
F-25
(Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The net deferred tax asset as of December 31, 1998 and 1997 consists of
total deferred tax assets of approximately $3,039,048 and $3,145,542 and
total deferred tax liabilities of approximately $669,662 and $489,891,
respectively. The tax effects of temporary 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>
1998 1997
-------- --------
<S> <C> <C>
Bad debt reserve $ 2,695,116 2,460,038
Deferred fees 289,296 395,000
Loans receivable (354,361) (262,336)
Depreciation (175,900) (146,838)
Goodwill 49,726 42,911
FHLB stock (79,268) (80,717)
Unrealized holding losses on debt securities
available-for-sale 4,999 44,250
Other, net (60,222) 203,343
----------- ---------
Net deferred tax asset $ 2,369,386 2,655,651
=========== =========
</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, 1998 and 1997.
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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal income tax provision
at the statutory rate $ 1,926,392 1,580,454 352,212
State income taxes, net of
Federal income tax benefit 177,038 216,931 (34,094)
Tax bad debt reserve adjustment,
net of state income taxes -- (548,261)
Reversal of state income taxes no
longer required (206,986) -- --
Other 1,296 16,001 19,826
----------- --------- --------
Income tax provision (benefit) $ 1,897,740 1,813,386 (210,317)
=========== ========= ========
</TABLE>
As a result of restructuring its operation among several states, the
Company determined in 1998 that it had a state tax accrual that was no
longer required.
F-26
(Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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, 1998, 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
December 31, 1998, 1997 and 1996
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, 1998:
Tier 1 core capital (a) $ 23,285 8.32% $11,200 4.00% $ 13,999 * 5%
Tier 1 risk-based capital (b) 23,285 10.38 8,976 4.00 13,463 * 6%
Total risk-based capital (b) 26,157 11.66 17,951 8.00 22,439 *10%
=========== ============ =========== =========== ============ ============
As of December 31, 1997:
Tier 1 core capital (a) 20,832 7.84 10,635 4.00 13,294 * 5%
Tier 1 risk-based capital (b) 20,832 10.89 7,654 4.00 11,481 * 6%
Total risk-based capital (b) 23,295 12.17 15,308 8.00 19,135 *10%
============ ============ =========== =========== ============ ============
---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Percentage of capital to average assets
(b) Percentage of total capital to risk-weighted assets
* Greater than.
(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 the years ended December 31, 1998 and 1997,
respectively, as a retainer. In addition, the firm regularly performs loan
closing services for borrowers from the Company. The law firm received
approximately $267,000, $214,000, and $280,000 from borrowers for legal
services rendered in connection with loan closings for the years ended
December 31, 1998, 1997 and 1996, respectively. Another director is a
member of a law firm which received approximately $144,000, $80,000, and
$9,000 in the years ended December 31, 1998, 1997 and 1996, respectively,
as payment for litigation-related legal services.
F-28 (Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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, 1998, 1997 and 1996 was approximately
$62,000, $47,000, and $56,000, respectively.
(13) COMMON STOCK
The Company adopted SFAS No. 128, Earnings Per Share, (SFAS No. 128)
during the year ended December 31, 1997. SFAS No. 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 SFAS No. 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>
Year ended December 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net income used in EPS calculation $ 3,768,120 2,835,007 1,246,236
-------------- -------------- --------------
Weighted-average shares outstanding - basic 4,478,298 4,460,715 4,456,821
Dilutive securities - options 196,891 72,067 55,539
-------------- -------------- --------------
Adjusted weighted-average shares used in EPS
computation - diluted 4,675,189 4,532,782 4,512,360
============== ============== ==============
</TABLE>
F-29 (Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(14) STOCK OPTION PLAN
Under the terms of the Company's qualified stock option plan, options may
be granted (to a maximum of 660,000* 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.
A summary of changes in stock options outstanding to officers and certain
key employees is as follows for the years ended December 31:
<TABLE>
<CAPTION>
Number of Exercise Average
shares prices exercise price
------------ --------------------- ------------------
<S> <C> <C> <C>
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
------------ --------------------- -------------------
Granted 15,800 $12.00 $12.00
Expired (1,800) $17.44 to $24.24 $20.60
Exercised (11,190) $17.44 $17.44
5 1/2-for-1 common stock split 332,973
------------ --------------------- ----------------
Balance at December 31, 1998* 406,967 $ 3.66 to $12.00 $ 6.19
------------ --------------------- ----------------
Exercisable at December 31, 1998* 406,967 $ 3.66 to $12.00 $ 6.19
============ ===================== ================
</TABLE>
The options issued during 1998 were at the estimated market price of the
stock offering to the public and are subject to change based upon the final
stock offering price.
*Reflects 5 1/2-for-1 common stock split declared on March 1, 1999,
described in note 19.
F-30 (Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
During 1998, the Company approved a non-incentive stock option plan for
directors. Under the terms of the plan, options may be granted (to a maximum of
330,000* shares) to non-employee directors and advising directors of the Company
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. During 1998, 71,500*
options were granted to directors at the market price of the stock offering to
the public provided the Company completes its planned public offering during
1999.
The options outstanding are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998*
- -----------------------------------------------------------------------------------------------------------------
Options exercisable
- ---------------------------------------------------------------------------- ---------------------------
Weighted Weighted Weighted
Option average average average
price Number remaining exercise Number exercise
per share of shares contractual life price of shares price
- -------------- ------------- ---------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 3.66 62,667 1 year $ 3.66 62,667 $ 3.66
4.41 82,500 2 years 4.41 82,500 4.41
4.78 89,100 3 years 4.78 89,100 4.78
5.35 85,800 4 years 5.35 85,800 5.35
12.00 86,900 5 years 12.00 86,900 12.00
- -------------- ------------- ---------------------------- ------------ ------------ ------------
406,967 3.2 years $ 6.19 406,967 $ 6.19
============= ============================ ============ ============ ============
1997
- -----------------------------------------------------------------------------------------------------------------
Options exercisable
- ---------------------------------------------------------------------------- ---------------------------
Weighted Weighted Weighted
Option average average average
price Number remaining exercise Number exercise
per share of shares contractual life price of shares price
- -------------- ------------- ---------------------------- ------------ ------------ ------------
$ 17.44 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>
*Reflects 5 1/2-for-1 common stock split declared on March 1, 1999, described in
note 19.
(Continued)
F-31
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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
1998, 1997 and 1996, the Company's net income or earnings per share amounts
would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net income:
As reported $ 3,768,120 2,835,007 1,246,236
Pro forma 3,717,720 2,768,207 1,184,836
Net income per common share - basic:
As reported 0.84 0.64 0.28
Pro forma 0.83 0.62 0.27
Net income per common share - diluted:
As reported 0.81 0.63 0.28
Pro forma 0.80 0.61 0.26
============== ============== =============
</TABLE>
The weighted average fair values of options granted during 1998, 1997 and
1996 were $50,000, $67,000, and $62,000 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 1998, 1997 and 1996: 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, 1998,
approximately $8,195,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
(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.
F-32 (Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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)
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Commercial loan commitments $ 1,100 400
Mortgage loan commitments 22,166 23,856
Undisbursed lines of credit (primarily credit cards) 29,388 29,727
Secured standby letters of credit 6,165 3,745
Unsecured standby letters of credit 520 466
=========== ===========
</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.
(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, 1998 and 1997.
F-33
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The carrying value and estimated fair value of financial instruments is
summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- -----------------------------------
Carrying Fair Carrying Fair
amount value amount value
-------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Assets:
Cash on hand and due
from banks $ 4,632,607 4,633,000 7,008,538 7,009,000
Short-term investments 9,009,389 9,009,000 14,980,475 14,980,000
Securities purchased under
agreements to resell -- -- 187,518 188,000
Investment securities
available-for-sale 27,163,586 27,164,000 25,805,514 25,806,000
Mortgage-backed
securities
available-for-sale 3,334,054 3,334,000 5,238,594 5,239,000
Loans receivable 220,957,325 224,120,000 192,849,470 213,249,000
Mortgage loans held
for sale 9,099,184 9,099,000 4,775,250 4,775,000
Accrued interest receivable 2,828,017 2,828,000 2,597,936 2,598,000
Federal Home Loan
Bank Stock 799,000 799,000 752,100 752,000
Liabilities:
Savings accounts 257,023,645 258,998,000 235,684,160 237,450,000
Notes payable 1,000,000 1,000,000 1,000,000 1,000,000
Advances payments
by borrowers for
taxes and insurance 427,091 427,000 333,663 334,000
==================== ================= ================= =================
</TABLE>
CASH AND SHORT-TERM INVESTMENTS - For cash, short-term investments consisting of
Federal funds sold and interest-bearing overnight investment accounts and
securities purchased under agreements to resell, 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.
F-34 (Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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.
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.
(Continued)
F-35
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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.
(19) STOCK SPLIT
On March 1, 1999, the Board of Directors authorized a 5 1/2-for-1 common
stock split, distributable March 15, 1999 to stockholders of record on
March 1, 1999. All per share amounts, weighted-average shares outstanding
used in the earnings per share calculation and data as to outstanding and
exercisable common stock options at December 31, 1998, have been adjusted
for the common stock split.
(Continued)
F-36
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(20) FINANCIAL INFORMATION OF PARENT COMPANY
The following is financial information of Key Capital Corporation (parent
company only) as of and for the years ended December 31:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Assets
Cash on hand and due from banks $ 151,009 657,749
Securities purchased under agreements to resell 300,000 187,518
Loans receivable, net 3,497,047 2,416,772
Accrued interest receivable 41,354 29,813
Investment in subsidiaries 23,604,964 20,928,369
Prepaid expenses and other assets 274,340 26,500
Deferred federal and state income taxes 84,026 49,086
--------------- ---------------
Total assets $ 27,952,740 24,295,807
--------------- ---------------
Liabilities and Stockholders' Equity
Notes payable $ 1,000,000 1,000,000
Accrued expenses and other liabilities 129,924 47,768
Federal and state income taxes payable 86,133 80,116
--------------- ---------------
Total liabilities 1,216,057 1,127,884
--------------- ---------------
Common stock * 4,533,265 809,640
Additional paid-in capital -- 713,405
Retained income - substantially restricted 22,211,364 21,715,550
Accumulated other comprehensive income (7,946) (70,672)
--------------- ---------------
Total liabilities and stockholders' equity $ 27,952,740 24,295,807
=============== ===============
</TABLE>
* Reflects 5 1/2-for-1 common stock split declared March 1, 1999, described
in note 19.
F-37 (Continued)
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Interest income:
Loans receivable $ 548,032 351,799
Federal funds sold 29,763 11,920
Other 5,734 14,149
---------- ---------
Total interest income 583,529 377,868
---------- ---------
Interest expense - borrowed money 119,061 81,354
Provision for loan losses 94,997 97,810
Other expenses 118,407 22,899
---------- ---------
Income before income taxes 251,064 175,805
Income tax provision 96,813 68,145
---------- ---------
Income before equity in net income of
wholly owned subsidiaries 154,251 107,660
---------- ---------
Equity in income of subsidiaries 3,613,869 2,727,347
---------- ---------
Net income $ 3,768,120 2,835,007
========== =========
</TABLE>
F-38
<PAGE>
KEY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,768,120 2,835,007 1,246,236
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income of subsidiaries (3,613,869) (2,727,347) (1,061,620)
Provision for loan losses 94,997 97,810 86,371
Deferred income taxes (34,940) (49,086) --
Increase in accrued interest receivable (11,541) (29,813) --
(Increase) decrease in prepaid expenses
and other assets (247,840) 40,293 121,128
Increase in accrued expenses and other liabilities 82,156 44,006 3,450
Increase in federal and state income taxes payable 6,017 680 25,537
------------- ----------- -----------
Net cash provided by operating
activities 43,100 211,550 421,102
------------- ----------- -----------
Cash flows from investing activities:
Dividend received from subsidiaries 1,000,000 750,000 500,000
Loan disbursements net of principal repayments (1,175,272) (853,780) (1,355,332)
------------- ----------- -----------
Net cash used in operating activities (175,272) (103,780) (855,332)
------------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 270,056 138,819 174
Repurchase of stock -- (166,732) --
Increase in notes payable -- 1,000,000 --
Dividends paid (532,142) (445,687) (445,684)
------------- ----------- -----------
Net cash provided by (used in)
financing activities (262,086) 526,400 (445,510)
------------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (394,258) 634,170 (879,740)
Cash and cash equivalents at beginning of year 845,267 211,097 1,090,837
------------- ----------- -----------
Cash and cash equivalents at end of year $ 451,009 845,267 211,097
============= =========== ===========
</TABLE>
F-39
<PAGE>
<TABLE>
<CAPTION>
GLOSSARY
<S> <C>
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 950,000 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
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
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
450,000 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 450,000
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
</TABLE>
A-2
<PAGE>
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, 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 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. 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
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 ___________, 1999, all dealers that 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 to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
950,000 Shares
KEY CAPITAL CORPORATION
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
Ryan, Beck & Co.
___________, 1999
<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:
SEC registration fees................ $ 5,310
Legal fees........................... 90,000
Printing and engraving............... 35,000
Accounting fees...................... 100,000
Reimbursable underwriter's expenses.. 70,000
Insurance premiums................... 197,000
Miscellaneous 14,690
--------
Total............................ $512,000
========
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. Share amounts have been adjusted for the 5 1/2-for-1
stock split effected through a stock dividend payable March 15, 1999.
<TABLE>
<CAPTION>
Date Title of Securities # of Shares Purchaser Aggregate Price
----------- ------------------- ----------- ------------------- ---------------
<S> <C> <C> <C> <C>
12/31/98 Common Stock 5,500 Daniel W. Hume $17,440
12/07/98 Common Stock 16,500 W. Benton Knight 52,320
12/04/98 Common Stock 21,780 David H. Wells, Jr. 69,062
12/01/98 Common Stock 11,600 George Wachter 34,880
06/19/98 Common Stock 3,300 Kathy A. Snyder 10,461
03/24/98 Common Stock 165 David H. Wells, Jr. 523
03/19/98 Common Stock 3,300 Ross L. Brown 10,461
11/18/97 Common Stock 1,650 Louise Adams 5,232
10/16/97 Common Stock 1,650 Louise Adams 5,232
09/29/97 Common Stock 5,500 Daniel W. Hume 20,120
09/29/97 Common Stock 5,500 Robert M. Bouza 17,400
09/12/97 Common Stock 5,500 Robert M. Bouza 17,400
09/09/97 Common Stock 3,300 Anne Marie Willis 10,464
08/20/97 Common Stock 5,500 Robert M. Bouza 17,400
07/29/97 Common Stock 3,300 Louise Adams 12,072
02/12/97 Common Stock 3,333 Judith Frank 10,585
05/16/96 Common Stock 55 David H. Wells, Jr. 174
</TABLE>
Item 16. Exhibits and Financial Statement Schedules
Exhibit List
------------
1.1 Form of Agency Agreement
1.2 Form of 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 1999 Cash Incentive Bonus Plan
10.4 Key Bank and Trust 1999 Special Bonus Plan for Division Managers
21 Subsidiaries of the Registrant*
23.1 Consent of KPMG 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
__________
* Previously filed.
II-2
<PAGE>
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 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 March 1, 1999.
KEY CAPITAL CORPORATION
By: /s/ David H. Wells, Jr.
-----------------------
David H. Wells, Jr.
President and Chief Executive Officer
(Duly Authorized Representative)
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.
Signatures Title Date
/s/ David H. Wells, Jr. President, Chief Executive Officer March 1, 1999
- ----------------------- and Director
David H. Wells, Jr. (Principal Executive Officer)
/s/ W. Benton Knight * Vice President, Treasurer and
- ----------------------- Director
W. Benton Knight (Principal Financial and Accounting
Officer)
/s/ Bernard Dackman * Chairman of the Board and Director
- -----------------------
Bernard Dackman
/s/ Irwin R. Cohen * Director
- ---------------------
Irwin R. Cohen
<PAGE>
/s/ Joel Dackman * Director
- -----------------------
Joel Dackman
Director
- -----------------------
Jan Cohen Feldman
/s/ Philip Glazer * Director
- -----------------------
Philip Glazer
/s/ Marc S. Rosen * Director
- -----------------------
Marc S. Rosen
/s/ Morton Shapiro * Director
- -----------------------
Morton Shapiro
/s/ Richard D. Sussman * Director
- ------------------------
Richard D. Sussman
/s/ Seymour Sussman * Director
- -----------------------
Seymour Sussman
* By: /s/ David H. Wells, Jr. March 1, 1999
-----------------------
David H. Wells, Jr.
Attorney-in-Fact
<PAGE>
Exhibit 1.1
KEY CAPITAL CORPORATION
(a bank holding company)
___ Shares of Common Stock
Par Value $1.00 Per Share
AGENCY AGREEMENT
----------------
_________, 1999
Ryan, Beck & Co., Inc.
220 South Orange Avenue
Livingston, New Jersey 07039
Ladies and Gentlemen:
Key Capital Corporation (the "Company" or "KCC"), a Maryland corporation
which is registered as the holding company for Key Bank and Trust, a Maryland
chartered trust company (the "Bank," or when used together with KCC, the
"Company"), hereby confirms its agreement (the "Agreement") with Ryan, Beck &
Co., Inc. (the "Agent"), as follows:
Introduction
------------
The Company is offering up to ___ authorized but unissued shares of its
common stock, par value $1.00 per share (the "Common Stock"), to certain members
of the community in which the Company operates in a community offering (the
"Community Offering"). The Common Stock offered in the Community Offering will
be subject to a minimum order requirement of 100 shares and a maximum purchase
limitation of $____ (provided, however, that the Company may, in its sole
-------- -------
discretion, accept a subscription for a lesser or greater number of shares).
The Company reserves the right, in its sole discretion, to accept or reject any
order, either in whole or in part, for Common Stock in the Community Offering.
The Agent is not required to sell any specific number or dollar amount of shares
of Common Stock but will use its best efforts to sell the Common Stock offered
in the Community Offering. Following the Community Offering, it is anticipated
that the Company will enter into an underwriting agreement (the "Underwriting
Agreement") with the Agent whereby any shares which remain unsold in the
Community Offering, plus an additional _____ shares, will be purchased by the
----
Agent for resale to the general public (the "Public Offering").
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-62667) covering the registration of the Common Stock under the Securities
Act of 1933, as amended (the "1933 Act"), including the
<PAGE>
related preliminary prospectus, and, if such registration statement has not
become effective, the Company will prepare and file, prior to the effective date
of such registration statement, an amendment to such registration statement,
including a final prospectus. Each prospectus used before the time such
registration statement becomes effective is herein called a "preliminary
offering circular." Such registration statement, including the exhibits thereto
and the documents incorporated by reference therein pursuant to the 1933 Act, at
the time it becomes effective, is herein called the "Registration Statement,"
and the prospectus, including the documents incorporated by reference therein
pursuant to the 1933 Act, included in the Registration Statement at the time it
becomes effective is herein called the "Offering Circular," except that if any
revised offering circular provided to the Agent by the Company for use in
connection with the offering of the Common Stock differs from the offering
circular included in the Registration Statement at the time it becomes effective
(whether or not such prospectus is required to be filed pursuant to Rule 424(b)
under the 1933 Act ("Rule 424(b)"), the term "Offering Circular" shall refer to
such revised offering circular from and after the time it is first furnished to
the Agent for such use.
The Community Offering will commence on or after the effective date of the
Registration Statement and will end at 5:00 p.m., Eastern time, on _______,
1999, subject to extension in the discretion of the Company and the Agent.
Section 1. Appointment of the Agent; Compensation to the Agent.
---------------------------------------------------
(a) Subject to the terms and conditions set forth below, the Company hereby
appoints the Agent as its agent to consult with, advise and assist the Company,
and to solicit purchase orders for Common Stock on behalf of the Company, in
connection with the Community Offering. On the basis of the representations,
warranties and agreements contained herein, and subject to the terms and
conditions herein set forth, the Agent accepts such appointment and agrees to
consult with and advise the Company as to the matters set forth in Exhibit A
---------
attached hereto and to use its best efforts to solicit purchase orders for
Common Stock according to this Agreement; provided, however, that the Agent
-------- -------
shall not be responsible for obtaining purchase orders for any specific number
of shares of Common Stock, shall not be required to purchase any Common Stock in
connection with the Community Offering, and shall not be obligated to take any
action which is inconsistent with all applicable laws, regulations, decisions or
orders. This Agreement supersedes that certain letter agreement, dated August
11, 1998, between the Company and the Agent (the "Engagement Letter").
The Company acknowledges that, having appointed the Agent hereunder, only
personnel employed by the Agent and such other personnel as are assigned for
specific purposes or services contemplated hereunder to be performed by the
Agent, will be involved in providing the services described herein.
The appointment of the Agent hereunder shall terminate upon termination of
the Community Offering and satisfaction of the obligations of the Company
hereunder or as provided in Section 9 hereof.
---------
In addition to the reimbursement of the expenses specified in Section 5
---------
hereof and other matters described in Section 7 hereof, the Company will pay to
---------
the Agent a fee for its services in connection with the marketing and sale of
the Common Stock equal to two and one-half percent
-2-
<PAGE>
(2.50%) of the aggregate dollar amount of all Common Stock sold in the Community
Offering; provided, however, that no such fee will be payable with respect to
--------- -------
Common Stock sold to officers, directors, employees or immediate family of such
persons (the "Insiders") and employee benefit plans of the Company or the
Insiders.
If (i) the Company abandons or terminates the Community Offering or
defaults on its obligations hereunder prior to or as of consummation of the
transactions contemplated herein, (ii) the Closing Time does not occur on or
before ______________, or (iii) the Agent terminates this Agreement pursuant to
the terms of Section 8 hereof, the Company shall pay a fee to the Agent in the
---------
amount of $25,000 for advisory and administrative services, which fee shall be
in addition to the to the reimbursement of the expenses specified in Section 5
---------
hereof, including, without limitation, the reasonable fees and disbursements of
counsel for the Agent, and other matters described in Section 7 hereof.
---------
In the event there is a resolicitation of subscriptions or purchase orders
for any reason, the Company and the Agent agree to negotiate in good faith an
agreement to cover the Agent's additional fees and expenses in connection
therewith, including reasonable attorneys' fees and expenses.
(b) The fees and compensation specified above shall be payable (to the
extent not already paid) to the Agent in next day clearing house funds on the
earlier of: (i) the consummation of the Public Offering or (ii) a determination
by the Company to terminate or abandon the Community Offering or the Public
Offering. The Company agrees to reimburse the Agent for the costs and expenses
specified in Section 5, to the extent such costs and expenses are incurred by
---------
the Agent and are within the maximum limit specified in Section 5, promptly upon
---------
receiving a reasonable accounting of such costs and expenses from time to time
through the closing of the Community Offering.
Section 2. Delivery of Shares.
------------------
If all conditions precedent to the consummation of the sale of Common Stock
are satisfied, certificates representing the Common Stock sold, in definitive
form, shall be delivered by or on behalf of the Company against payment of the
purchase price therefor. The time and date of such delivery and payment shall
be the closing date of the Public Offering (as determined in accordance with the
Underwriting Agreement) at 10:00 a.m., Eastern time, on the date specified by
the Agent upon three days' notice to the Company, or at such other time and date
as the Agent and the Company may agree upon in writing (in any case, such date
and time of payment and delivery of the certificates representing the Common
Stock is herein called the "Closing Time").
Section 3. Representations and Warranties of the Company.
---------------------------------------------
(a) The Company represents and warrants to the Agent, as of the date
hereof, and as of the Closing Time referred to in Section 2 hereof that:
i. Each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the 1933 Act and no stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the
-3-
<PAGE>
1933 Act and no proceedings for that purpose have been instituted or are pending
or, to the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are purchased,
at the Date of Delivery), the Registration Statement, the Rule 462(b)
Registration Statement and any amendments and supplements thereto complied and
will comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. Neither the Offering
Circular nor any amendments or supplements thereto, at the time the Offering
Circular or any such amendment or supplement was issued and at the Closing Time
(and, if any Option Securities are purchased, at the Date of Delivery), included
or will include an untrue statement of a material fact or omitted or will omit
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading. If
Rule 434 is used, the Company will comply with the requirements of Rule 434 and
the Offering Circular shall not be "materially different", as such term is used
in Rule 434, from the Offering Circular included in the Registration Statement
at the time it became effective. The representations and warranties in this
subsection shall not apply to statements in or omissions from the Registration
Statement or Offering Circular made in reliance upon and in conformity with
information furnished to the Company in writing by the Agent expressly for use
in the Registration Statement or Prospectus.
Each preliminary offering circular and the Offering Circular filed as part
of the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary offering circular and the Offering Circular delivered to the Agent
for use in connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
ii. KPMG Peat Marwick LLP, the accountants who certified the
financial statements and supporting schedules included in the Registration
Statement, are independent public accountants as required by the 1933 Act and
the 1933 Act Regulations.
iii. The consolidated financial statements, audited and unaudited,
included in the Registration Statement and the Offering Circular, together with
the related schedules and notes, present fairly the financial position of the
Company and its consolidated subsidiaries at the dates indicated and the results
of operations, shareholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; and said financial
statements have been prepared in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved. The supporting schedules included in the Registration Statement
present fairly in accordance with GAAP the information required to be stated
therein. The selected consolidated financial data, pro forma and the summary
consolidated financial data included in the Offering Circular present fairly the
information shown therein and have been compiled on a basis
-4-
<PAGE>
consistent with that of the audited consolidated financial statements included
in the Registration Statement.
iv. Since the respective dates as of which information is given in
the Registration Statement and the Offering Circular, except as otherwise stated
therein, (A) there has been no material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the Company or any
of its subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered as one
enterprise, and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
Neither the Company, the Bank nor any other subsidiary has any material
liability of any nature, contingent or otherwise, except as set forth in the
Offering Circular.
v. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland with corporate
power and authority under such laws to own, lease and operate its properties and
conduct its business as described in the Offering Circular. Each of the
subsidiaries of the Company (the "Subsidiaries") is an entity duly organized,
validly existing and in good standing under the laws of its respective
jurisdiction of organization with corporate power and authority under such laws
to own, lease and operate its properties and conduct its business. The Company
and each of its Subsidiaries is duly qualified to transact business as a foreign
corporation and is in good standing in each other jurisdiction in which it owns
or leases property of a nature, or transacts business of a type, that would make
such qualification necessary, except to the extent that the failure to so
qualify or be in good standing would not have a Material Adverse Effect on the
condition (financial or otherwise), earnings, business affairs, assets or
business prospects of the Company and its Subsidiaries, considered as one
enterprise.
vi. The Company is duly registered with the Board of Governors of
the Federal Reserve System as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"); and the deposit accounts of the
Bank are insured by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation (the "FDIC"), up to the maximum allowable limits thereof. The
Company has all such power, authority, authorization, approvals and orders as
may be required to enter into this Agreement, to carry out the provisions and
conditions hereof and to issue and sell the Common Stock.
vii. The Bank is a trust company duly organized, validly existing
and in good standing under the laws of the State of Maryland with corporate
power and authority under such laws to own, lease and operate its properties and
conduct its business; the Bank is duly qualified to transact business as a
foreign corporation and is in good standing in each other jurisdiction in which
it owns or leases property of a nature, or transacts business of a type, that
would make such qualification necessary, except to the extent that the failure
to so qualify or be in good standing would not have a Material Adverse Effect on
the condition (financial or otherwise), earnings, business affairs, assets or
business prospects of the Bank and its subsidiaries, considered as one
enterprise. All of the outstanding shares of capital stock of the Bank and each
of the Company's other subsidiaries have been duly authorized and validly issued
and are fully paid and non-assessable and
-5-
<PAGE>
are owned by the Company directly or indirectly, free and clear of any pledge,
lien, security interest, charge, claim, equity or encumbrance of any kind.
viii. Except for the Bank, the Company does not have any "significant
subsidiaries" as defined in Rule 1-02 of Regulation S-X of the Commission.
ix. The authorized, issued and outstanding capital stock of the
Company is as set forth in the Offering Circular in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to this Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Offering Circular). The shares of issued and
outstanding capital stock have been duly authorized and validly issued and are
fully paid and non-assessable; none of the outstanding shares of capital stock
was issued in violation of the preemptive or other similar rights of any
securityholder of the Company.
x. This Agreement has been duly authorized, executed and delivered
by the Company and, when duly executed by the Agent, will constitute the valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles.
xi. The Common Stock has been duly authorized for issuance and, when
issued and delivered by the Company pursuant to this Agreement against payment
of the consideration set forth herein, will be validly issued and fully paid and
non-assessable; the Common Stock conforms to all statements relating thereto
contained in the Offering Circular and such description conforms to the right
set forth in the instruments defining the same; no holder of the Common Stock
will be subject to personal liability by reason of being such a holder; and the
issuance of the Common Stock is not subject to the preemptive or other similar
rights of any securityholder of the Company.
xii. Neither the Company, the Bank nor any other subsidiary is in
violation of any provision of its articles of incorporation, charter or by-laws
or in default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument to which it is a party
or by which it may be bound or to which any of its properties may be subject,
except for such defaults that in the aggregate would not have a Material Adverse
Effect on the condition (financial or otherwise), earnings, business affairs,
assets or business prospects of the Company and its subsidiaries, considered as
one enterprise and the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated herein and in the Registration
Statement (including the issuance and sale of the Common Stock and the use of
the proceeds from the sale of the Common Stock as described in the Offering
Circular under the caption "Use of Proceeds") and compliance by the Company with
its obligations hereunder have been duly authorized by all necessary corporate
action and do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or a default
or Repayment Event (as defined below) under, give rise to any right of
termination under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any Subsidiary
pursuant to, any of the agreements and instruments (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not
individually or in the aggregate, result in a Material Adverse
-6-
<PAGE>
Effect), nor will such action result in any violation of the provisions of the
charter or by-laws of the Company or any Subsidiary or any applicable law,
statute, rule, regulation, judgment, order, right or decree of any government,
government instrumentality or court, domestic or foreign, having jurisdiction
over the Company or any Subsidiary or any of their assets, properties or
operations. As used herein, a "Repayment Event" means any event or condition
which gives the holder of any note, debenture or other evidence of indebtedness
(or any person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such indebtedness by
the Company or any Subsidiary.
xiii. Except as disclosed in the Offering Circular, there is no
action, suit or proceeding before or by any government, governmental
instrumentality or court, domestic or foreign, now pending or, to the knowledge
of the Company, threatened against the Company, the Bank or any other subsidiary
that is required to be disclosed in the Offering Circular or that could
reasonably be expected to have any Material Adverse Effect on the condition
(financial or otherwise), earnings, business affairs, assets or business
prospects of the Company and its subsidiaries, considered as one enterprise, or
that could reasonably be expected materially and adversely to affect the
properties or assets of the Company and its subsidiaries, considered as one
enterprise, or that could reasonably be expected materially and adversely to
affect the consummation of the transactions contemplated in this Agreement; all
pending legal or governmental proceedings to which the Company, the Bank or any
other subsidiary is a party that are not described in the Offering Circular,
including ordinary routine litigation incidental to its business, if decided in
a manner adverse to the Company, would not have a Material Adverse Effect on the
condition (financial or otherwise), earnings, business affairs or business
prospects of the Company and its subsidiaries, considered as one enterprise.
xiv. There are no material contracts or documents of a character
required to be described in the Registration Statement or the Offering Circular
or to be filed as exhibits to the Registration Statement that are not described
and filed as required.
xv. The Company and its subsidiaries, including the Bank, each has
good and marketable title to all properties and assets described in the Offering
Circular as owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except such as (A) are described in the Offering Circular or (B)
are neither material in amount nor materially significant in relation to the
business of the Company and its subsidiaries, considered as one enterprise; all
of the leases and subleases material to the business of the Company and its
subsidiaries, considered as one enterprise are in full force and effect, and
neither the Company, the Bank nor any other subsidiary has any notice of any
material claim that has been asserted by anyone adverse to the rights of the
Company, the Bank or any other subsidiary under any such lease or sublease or
affecting or questioning the rights of such corporation to the continued
possession of the leased or subleased premises under any such lease or sublease.
xvi. Each of the Company and its subsidiaries, including the Bank,
owns, possesses or has obtained all material governmental licenses, permits,
certificates, consents, orders, approvals and other authorizations necessary to
own or lease, as the case may be, and to operate its properties and to carry on
its business as presently conducted, and neither the Company, the Bank nor any
other subsidiary has received any notice of any restriction upon, or any notice
of proceedings
-7-
<PAGE>
relating to revocation or modification of, any such licenses, permits,
certificates, consents, orders, approvals or authorizations.
xvii. No labor problem with the employees of the Company, the Bank
or any other subsidiary exists or, to the best knowledge of the Company, is
imminent that could have a Material Adverse Effect on the condition (financial
or otherwise), earnings, business affairs or business prospects of the Company
and its subsidiaries, considered as one enterprise, and the Company is not aware
of any existing or imminent labor disturbance by the employees of any of its,
the Bank's or any other subsidiary's principal suppliers, contractors or
customers that could reasonably be expected to Materially Adversely Effect the
condition (financial or otherwise), earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise.
xviii. Except as disclosed in the Offering Circular, there are no
persons with registration or other similar rights to have any securities of the
Company registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
xix. Except as disclosed in the Offering Circular, the Company and
its subsidiaries, including the Bank, own or possess all patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets or other
unpatented and/or unpatentable proprietary or confidential information systems
or procedures), trademarks, service marks and trade names (collectively, "patent
and proprietary rights") currently employed by them in connection with the
business now operated by them except where the failure to own, possess or
acquire such patent and proprietary rights would not have a material adverse
effect on the condition (financial or otherwise), earnings, business affairs,
assets or business prospects of the Company and its subsidiaries, considered as
one enterprise. Neither the Company, the Bank nor any other subsidiary has
received any notice or is otherwise aware of any infringement of or conflict
with asserted rights of others with respect to any patent or proprietary rights,
and which infringement or conflict (if the subject of any unfavorable decision,
rule and refinement, singly or in the aggregate) could reasonably be expected to
result in any material adverse change in the condition (financial or otherwise),
earnings, business affairs, assets or business prospects of the Company and its
subsidiaries, considered as one enterprise.
xx. The Company and each subsidiary of the Company has filed all
federal, state and local income, franchise or other tax returns required to be
filed and have made timely payments of all taxes due and payable in respect of
such returns, and no material deficiency has been asserted with respect thereto
by any taxing authority.
xxi. The Common Stock have been approved for listing on The Nasdaq
Stock Market, Inc.'s (the "Nasdaq Stock Market") National Market.
xxii. Neither the Company, the Bank nor any other subsidiary has
taken or will take, directly or indirectly, any action designed to cause or
result in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation, under the Exchange Act or
otherwise, of the price of the Common Stock.
-8-
<PAGE>
xxiii. Neither the Company, the Bank nor any other subsidiary is or
has been (by virtue of any action, omission to act, contract to which it is a
party or by which it is bound, or any occurrence or state of facts whatsoever)
in violation of any applicable foreign, federal, state, municipal or local
statutes, laws, ordinances, rules, regulations and/or orders issued pursuant to
foreign, federal, state, municipal or local statutes, laws, ordinances, rules,
or regulations (including those relating to any aspect of banking, bank holding
companies, consumer credit, truth-in-lending, usury, currency transaction
reporting, environmental protection, occupational safety and health and equal
employment practices) heretofore or currently in effect, except such violations
that have been fully cured or satisfied without recourse or that in the
aggregate will not have a Material Adverse Effect on the condition (financial or
otherwise), earnings, business affairs, assets or business prospects of the
Company and its subsidiaries, considered as one enterprise.
xxiv. Neither the Company, the Bank nor any other subsidiary has any
agreement or understanding with any person (A) concerning the future acquisition
by the Company or the Bank of a controlling interest in any entity or (B)
concerning the future acquisition by any person of a controlling interest in the
Company, the Bank or any other subsidiary, in either case that is required by
the 1933 Act or the 1933 Act Regulations to be disclosed by the Company that is
not disclosed in the Offering Circular.
xxv. No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency is necessary or required for the performance by the Company
of its obligations hereunder, in connection with the offering, issuance or sale
of the Common Stock hereunder or the consummation of the transactions
contemplated by this Agreement, except such as have been already obtained or as
may be required under the 1933 Act or the 1933 Act Regulations or state
securities laws.
xxvi. Except as disclosed in the Offering Circular, there are no
outstanding options, warrants or other rights calling for the issuance of, and
no commitments, plans or arrangements to issue, any shares of capital stock of
the Company or any of its Subsidiaries or any security convertible into or
exchangeable for capital stock of the Company or any of its Subsidiaries.
xxvii. The Company is not, and upon the issuance and sale of the
Common Stock as herein contemplated and the application of the net proceeds
therefrom as described in the Offering Circular will not be, an "investment
company" or an entity "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
xxviii. Except as described in the Registration Statement and except
as would not, individually or in the aggregate, result in a Material Adverse
Effect, (A) neither the Company nor any of its Subsidiaries is in violation of
any federal, state, local or foreign statute, law, rule, regulation, ordinance,
code, policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order, consent,
decree or judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened release
of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use,
-9-
<PAGE>
treatment, storage, disposal, transport or handling of Hazardous Materials
(collectively, "Environmental Laws"), (B) the Company and its Subsidiaries have
all permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C) there
are no pending or, to the best knowledge of the Company, threatened,
administrative, regulatory or judicial actions, suits, demands, demand letters,
claims, liens, notices of noncompliance or violation, investigation or
proceedings relating to any Environmental Law against the Company or any of its
Subsidiaries and (D) there are no events or circumstances that might reasonably
be expected to form the basis of an order for clean-up or remediation, or an
action, suit or proceeding by any private party or governmental body or agency,
against or affecting the Company or any of its Subsidiaries relating to
Hazardous Materials or any Environmental Laws.
xxix. The Company and its Subsidiaries carry or are entitled to the
benefits of insurance in such amounts and covering such risks as is generally
maintained by companies of established repute engaged in the same or similar
business, and all such insurance is in full force and effect.
xxx. The Company and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (A)
transactions are executed in accordance with management's general and specific
authorizations; (B) transactions are recorded as necessary to permit the
preparation of financial statements in conformity with GAAP and to maintain
accountability for assets; (C) access to assets is permitted only in accordance
with management's general or specific authorizations; and (D) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
xxxi. Other than as contemplated by this Agreement or the
Underwriting Agreement, there is no broker, finder or other party that is
entitled to receive from the Company or any of its Subsidiaries any brokerage or
finder's fee or any other fee, commission or payment as a result of the
transactions contemplated by this Agreement or the Underwriting Agreement.
xxxii. The Company has obtained and delivered to the Agent the
agreements of the persons and entities named in Schedule B hereto to the effect
----------
that each such person and entity will not, for a period of 180 days from the
date hereof and except as otherwise provided therein, without the prior written
consent of the Agent directly or indirectly, (i) offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of the Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock or
file or cause to be filed any registration statement under the 1933 Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise; provided, however, that such
restrictions shall not apply to a bona fide gift of shares of Common Stock by
such person to a person or entity who, prior to such transfer, shall have
executed and delivered to the Agent an agreement, substantially in the form of
the agreement contemplated by this Section 3(a)(xxviii), not to take any action
prohibited by such agreement with respect to such shares of Common Stock.
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<PAGE>
xxxiii. The Company has not distributed and, prior to the later to
occur of (i) the Closing Time and (ii) completion of the distribution of the
Securities, will not distribute any prospectus (as such term is defined in the
1933 Act and the 1933 Act Regulations) in connection with the offering and sale
of the Common Stock other than the Registration Statement, any preliminary
offering circular, the Offering Circular or other materials, if any, permitted
by the 1933 Act or by the 1933 Act Regulations and approved by the Agent.
(b) Any certificate signed by any authorized officer of the Company or
the Bank and delivered to the Agent or to counsel for the Agent pursuant to this
Agreement shall be deemed a representation and warranty by the Company to the
Agent as to the matters covered thereby.
Section 4. Covenants of the Company.
------------------------
The Company covenants and agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective and will notify the Agent immediately, and confirm
the notice in writing, (i) when the Registration Statement, or any post-
effective amendment to the Registration Statement, shall have become effective,
or any supplement to the Offering Circular or any amended Offering Circular
shall have been filed, (ii) of the receipt of any comments from the Commission,
(iii) of any request of the Commission to amend the Registration Statement or
amend or supplement the Offering Circular or for additional information and (iv)
of the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or of any order preventing or suspending the use
of any preliminary offering circular, or of the suspension of the qualification
of the Common Stock for offering or sale in any jurisdiction, or of the
institution or threatening of any proceedings for any of such purposes. The
Company will use every reasonable effort to prevent the issuance of any such
stop order or of any order preventing or suspending such use and, if any such
order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) The Company will not at any time file or make any amendment to the
Registration Statement or, if the Company has elected to rely upon Rule 430A of
the 1933 Act Regulations ("Rule 430A"), any amendment or supplement to the
Offering Circular (including documents incorporated by reference into the
Registration Statement or the Offering Circular) of which the Agent shall not
previously have been advised and furnished a copy, or to which the Agent or
counsel for the Agent shall reasonably object.
(c) The Company has furnished or will furnish to the Agent and counsel to
the Agent, without charge, as many signed and conformed copies of the
Registration Statement as originally filed and of each amendment thereto,
whether filed before or after the Registration Statement becomes effective,
copies of all exhibits and documents filed therewith (including documents
incorporated by reference into the Offering Circular pursuant to the 1933 Act)
and signed copies of all consents and certificates of experts as the Agent may
reasonably request. The copies of the Registration Statement and each amendment
thereto furnished to the Agent will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
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<PAGE>
(d) The Company will deliver or cause to be delivered to the Agent, without
charge, as soon as the Registration Statement shall have become effective and
thereafter from time to time as requested by the Agent during the period when
the Offering Circular is required to be delivered under the 1933 Act, such
number of copies of the Offering Circular (as supplemented or amended) as the
Agent may reasonably request, the Company hereby consents to the use of such
copies for purposes permitted by the 1933 Act. The Offering Circular and any
amendments or supplements thereto furnished to the Agent will be identical to
the electronically transmitted copies thereof filed with the Commission pursuant
to EDGAR, except to the extent permitted by Regulation S-T.
(e) The Company will comply to the best of its ability with the 1933 Act
and the 1933 Act Regulations, and the 1934 Act and the 1934 Act Regulations, so
as to permit the completion of the distribution of the Common Stock as
contemplated in this Agreement and in the Offering Circular. If, at any time
when a prospectus is required by the 1933 Act to be delivered in connection with
sales of the Common Stock, any event shall occur or condition exist as a result
of which it is necessary, in the reasonable opinion of counsel for the Agent or
counsel for the Company, to amend the Registration Statement or amend or
supplement the Offering Circular in order that the Offering Circular will not
include an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading, in the light
of the circumstances existing at the time it is delivered to a purchaser, or if
it shall be necessary, in the reasonable opinion of either such counsel, at any
such time to amend the Registration Statement or amend or supplement the
Offering Circular in order to comply with the requirements of the 1933 Act or
the 1933 Act Regulations, the Company will promptly prepare and file with the
Commission, subject to Section 4(b) hereof, such amendment or supplement as may
------------
be necessary to correct such untrue statement or omission or to make the
Registration Statement or the Offering Circular comply with such requirements,
and the Company will furnish to the Agent such number of copies of such
amendment or supplement as the Agent may reasonably request.
(f) The Company will use its best efforts, in cooperation with the Agent,
to qualify the Common Stock, for offering and sale under the applicable laws of
such states and other jurisdictions as the Agent may designate and to maintain
such qualifications in effect for a period of not less than one year from the
effective date of the Registration Statement; provided, however, that the
-------- -------
Company shall not be obligated to file any general consent to service of process
or to qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to taxation in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required
by the laws of each jurisdiction in which the Common Stock has been qualified as
above provided.
(g) The Company will make generally available (within the meaning of Rule
158 of the 1933 Act Regulations ("Rule 158"), to its stockholders and the Agent
as soon as practicable, but not later than 90 days after the close of the period
covered thereby, an earnings statement of the Company and its subsidiaries (in
form complying with the provisions of Rule 158) covering a period of at least 12
months beginning after the effective date of the Registration Statement but not
later than the first day of the Company's fiscal quarter next following such
effective date.
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<PAGE>
(h) The Company and the Bank shall apply the entire proceeds from the sale
of the Common Stock in the manner specified in the Offering Circular under the
caption "Use of Proceeds."
(i) The Company, during the period when a prospectus is required by the
1933 Act to be delivered in connection with sales of Common Stock, will file
promptly all documents required to be filed with the Commission pursuant to
Section 13 or 14 of the 1934 Act subsequent to the time the Registration
Statement becomes effective.
(j) For a period of three years after the Closing Time, the Company will
furnish to the Agent copies of all annual reports, quarterly reports and current
reports filed by the Company with the Commission and such other documents,
reports, proxy statements and information as shall be furnished by the Company
to its stockholders generally.
(k) The Company will provide to the holders of the Common Stock annual
reports containing financial statements audited by the Company's independent
auditors and, upon written request, the Company's annual reports on Form 10-K.
(l) The Company will file with the Nasdaq Stock Market all documents and
notices required by the Nasdaq Stock Market of companies that have issued
securities that are traded on the Nasdaq Stock Market's National Market, in the
over-the-counter market and quotations for which are reported by the Nasdaq
Stock Market.
(m) The Company shall pay the legal fees and related filing fees of Thacher
Proffitt & Wood to prepare one or more "blue sky" surveys (each, a "Blue Sky
Survey") for use in connection with the offering of the Common Stock as
contemplated by the Offering Circular, and a copy of such Blue Sky Survey or
surveys shall be delivered to each of the Company and the Agent.
(n) If, at the time the Registration Statement becomes effective, any
information shall have been omitted therefrom in reliance upon Rule 430A, then
the Company will prepare, and file or transmit for filing with the Commission in
accordance with Rule 430A and Rule 424(b), copies of an amended Offering
Circular or, if required by Rule 430A, a post-effective amendment to the
Registration Statement (including an amended Offering Circular) containing all
information so omitted.
(o) The Company will, at its expense, subsequent to the issuance of the
Common Stock, prepare and distribute to the Agent and counsel to the Agent, a
bound volume containing copies of the documents used in connection with the
issuance of the Common Stock.
(p) The Company will not, prior to the date that is thirty (30) days after
the date of this Agreement, incur any material liability or obligation, direct
or contingent, or enter into any material transaction, other than in the
ordinary course of business, or any transaction with a related party which is
required to be disclosed in the Offering Circular pursuant to Item 404 of
Regulation S-K of the Commission, except as contemplated by the Offering
Circular.
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<PAGE>
(q) During a period of 180 days from the date of the Offering Circular, the
Company will not, without the prior written consent of the Agent, (i) directly
or indirectly, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or file or cause to be filed any registration statement under
the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or
any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the Common
Stock, whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Common
Stock to be sold hereunder or pursuant to the Underwriting Agreement between the
Company and the Agent in connection with the Public Offering, (B) any shares of
Common Stock issued by the Company upon the exercise of an option or warrant or
the conversion of a security outstanding on the date hereof and referred to in
the Offering Circular, (C) any shares of Common Stock issued or options to
purchase Common Stock granted pursuant to existing employee benefit plans of the
Company referred to in the Offering Circular or (D) any shares of Common Stock
issued pursuant to any non-employee director stock plan.
5. Payment of Expenses.
-------------------
The Company will pay and bear all costs and expenses incident to the
performance of its obligations under this Agreement and otherwise in connection
with the community offering, including (i) the preparation, printing and filing
of the Registration Statement (including financial statements and exhibits), as
originally filed and as amended, all amendments thereto, all preliminary
offering circulars, the Offering Circular and any amendments or supplements
thereto, and the cost of furnishing copies thereof to the Agent; (ii) the
preparation, printing and distribution of this Agreement, the Underwriting
Agreement, the Blue Sky Survey and all other documents applicable to the
Offering; (iii) the preparation, issuance and delivery of certificates for the
Common Stock to the purchasers thereof; (iv) the fees and disbursements of the
Company's counsel and accountants; (v) Nasdaq Stock Market filing fees; (vi) the
fees and disbursements of Thacher Proffitt & Wood in connection with the Blue
Sky Survey; (vii) the qualification of the Common Stock under the applicable
securities laws in accordance with Section 4(f) hereof; (viii) any filing fee
------------
for review of the Offering by the Commission and the NASD; (ix) the fees and
expenses related to the marketing by the Agent of the Common Stock; (x) the fees
and charges of any transfer agent, registrar and other agents; (xi) the legal
fees not to exceed $60,000, plus associated expenses of the Agent's counsel, and
(xii) general out-of-pocket expenses of the Agent which shall not exceed $10,000
without the prior written consent of the Company, which consent shall not be
unreasonably withheld, and (xiii) all other costs incident to the performance of
the Company's obligations hereunder.
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<PAGE>
Section 6. Conditions to the Obligations of Agent.
--------------------------------------
The obligations of the Agent hereunder shall be subject, in the Agent's
discretion, to the following conditions:
(a) The Registration Statement shall have become effective not later than
4:00 p.m., New York City time, on the first business day following the date
hereof, or at such later time or on such later date as the Agent may agree to in
writing; at the Closing Time, no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act and no
proceedings for that purpose shall be pending or, to the Agent's knowledge or
the knowledge of the Company, shall be contemplated by the Commission, and any
request on the part of the Commission for additional information shall have been
complied with to the satisfaction of counsel for the Agent. If the Agent has
elected to rely upon Rule 430A, a prospectus containing the information required
by Rule 430A shall have been filed with the Commission in accordance with Rule
424(b) (or a post-effective amendment providing such information shall have been
filed and declared effective in accordance with the requirements of Rule 430A).
(b) At the Closing Time, the Agent shall have received:
(i) The favorable opinion, dated as of the Closing Time, of Housely
Kantarian & Bronstein, P.C., counsel for the Company, in form and substance
reasonably satisfactory to counsel for the Agent, substantially in the form set
forth in Exhibit B.
---------
(ii) The favorable opinion, dated as of the Closing Time, of Thacher
Proffitt & Wood, counsel for the Agent, in form and substance satisfactory to
the Agent.
In giving such opinions, such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the federal law of the United
States and the laws of Maryland (in the case of Housley Kantarian & Bronstein,
P.C.) upon opinions of other counsel, who shall be counsel satisfactory to
counsel for the Agent, in which case the opinion shall state that such counsel
believes that it, the Agent and the Agent's counsel are entitled to so rely upon
the opinions of such other counsel. Such counsel also may state that, insofar
as such opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and the Bank, and
certificates of public officials.
(c) At the Closing Time, (i) the Registration Statement and the Offering
Circular, as they may then be amended or supplemented, shall contain all
statements that are required to be stated therein under the 1933 Act and the
1933 Act Regulations and shall conform in all material respects to the
requirements of the 1933 Act and the 1933 Act Regulations, the Company shall
have complied in all material respects with Rule 430A (if they shall have
elected to rely thereon), and neither the Registration Statement nor the
Offering Circular, as they may then be amended or supplemented, shall contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
(ii) there shall not have been, since the respective dates as of which
information is given in the Registration Statement, any material adverse change
in the condition (financial or otherwise), earnings, business affairs, assets or
business prospects of the Company and its subsidiaries, considered as one
enterprise, whether or
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<PAGE>
not arising in the ordinary course of business; (iii) no action, suit or
proceeding at law or in equity shall be pending or, to the knowledge of the
Company, threatened against the Company or any subsidiary that would be required
to be set forth in the Offering Circular that is not set forth therein, and no
proceedings shall be pending or, to the knowledge of the Company, threatened
against either of the Company or any subsidiary of the Company before or by any
federal, state or other commission, board or administrative agency wherein an
unfavorable decision, ruling or finding would materially adversely affect the
condition (financial or otherwise), earnings, business affairs, assets or
business prospects of the Company and its subsidiaries, considered as one
enterprise, other than as set forth in the Offering Circular; (iv) the Company
shall have complied, in all material respects, with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to the
Closing Time; (v) the other representations and warranties of the Company set
forth in Section 3(a) hereof shall be accurate in all material respects
------------
as though expressly made at and as of the Closing Time; and (vi) no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose been initiated or, to the knowledge of
the Company, threatened by the Commission. At the Closing Time, the Agent shall
have received a certificate of the President and Chief Executive Officer of the
Company and the Chief Financial Officer of the Company, dated as of the Closing
Time, to such effect.
(d) At the time that this Agreement is executed by the Company, the Agent
shall have received from KPMG Peat Marwick LLP, a letter or letters, dated such
date, in form and substance satisfactory to the Agent and its counsel,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the 1933 Act and the 1933 Act Regulations,
and stating in effect that with respect to the Company:
(i) in their opinion, the consolidated financial statements as of
December 31, 1998 and 1997, and for each of the years in the three year period
ended December 31, 1998 and the related financial statement schedules, if any,
included or incorporated by reference in the Registration Statement and the
Offering Circular and covered by their opinions included therein comply as to
form in all material respects with the applicable accounting requirements of the
1933 Act and the 1933 Act Regulations;
(ii) on the basis of procedures (but not an audit in accordance with
generally accepted accounting standards) specified by the American Institute of
Certified Public Accountants for a review of interim financial information as
described in SAS No. 71, Interim Financial Information, including a reading of
the latest available interim consolidated financial statements of the Company, a
reading of the minutes of all meetings of the Board of Directors of the Company
and the Bank and of the Audit and Executive Committees of the Board of Directors
of the Bank since January 1, 1999, inquiries of certain officials of the Company
and its subsidiaries responsible for financial and accounting matters, and such
other inquiries and procedures as may be specified in such letter, nothing came
to their attention that caused them to believe that:
(1) the unaudited interim consolidated financial information included
or incorporated by reference in the Offering Circular, if any, do not comply as
to form in all material respects with applicable accounting requirements of the
1933 Act, or are not presented in conformity with generally accepted accounting
principles applied on a basis consistent with that of the audited financial
statements included in the Offering Circular;
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<PAGE>
(2) at a specified date not more than three days prior to the date of
this Agreement, there was any increase in long-term debt or Federal Home Loan
Bank advances of the Company and its consolidated subsidiaries or any decrease
in total assets, total deposits or stockholders' equity of the Company and its
consolidated subsidiaries, any increase in the number of outstanding shares of
capital stock of the Company and its consolidated subsidiaries, any increase in
non-performing loans or non-performing assets of the Company and its
consolidated subsidiaries or any increase or decrease in loan loss allowance of
the Company and its consolidated subsidiaries, in each case as compared with
amounts shown in the financial statements at December 31, 1998 included in the
Registration Statement, except in all cases for changes, increases or decreases
that the Registration Statement discloses have occurred or may occur; or
(3) for the period from January 1, 1998 to a specified date not more
than three days prior to the date of this Agreement, there was any decrease in
consolidated net interest income, net income or net income per share, in each
case as compared with a period of comparable length in the preceding year,
except in all cases for increases or decreases that the Registration Statement
discloses have occurred or may occur; and
(iii) in addition to the procedures referred to in clause (ii)
above, they have performed other specified procedures, not constituting an
audit, with respect to certain amounts, percentages, numerical data and
financial information appearing in the Registration Statement (including the
Selected Consolidated Financial Data) (having compared such items with, and have
found such items to be in agreement with, the financial statements of the
Company or general accounting records of the Company, as applicable, which are
subject to the Company's internal accounting controls or other data and
schedules prepared by the Company from such records).
(e) At the Closing Time, the Agent shall have received from KPMG Peat
Marwick LLP a letter, in form and substance satisfactory to the Agent and its
counsel and dated as of the Closing Time, reaffirming the statements made in the
letter(s) furnished pursuant to Section 6(d) hereof, except that the inquiries
------------
specified in Section 6(d) hereof shall be made based upon the latest available
------------
unaudited interim consolidated financial statements and the specified date
referred to shall be a date not more than three (3) days prior to the Closing
Time.
(f) At the Closing Time, counsel for the Agent shall have been furnished
with all such documents, certificates and opinions as they may request for the
purpose of enabling them to pass upon the issuance and sale of the Common Stock
as contemplated in this Agreement and the matters referred to in Section 6(c)
------------
hereof and in order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company, the performance of any
of the covenants of the Company or the fulfillment of any of the conditions
herein contained; and all proceedings taken by the Company at or prior to the
Closing Time in connection with the authorization, issuance and sale of the
Common Stock as contemplated in this Agreement shall be satisfactory in form and
substance to the Agent and its counsel.
(g) The Company shall have paid, or made arrangements satisfactory to the
Agent for the payment of, all such fees and expenses as may be required by
Section 5 hereof.
- ---------
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(h) At Closing Time, the Common Stock shall have been approved for
inclusion in the Nasdaq National Market, subject only to official notice of
issuance.
(i) The NASD shall have confirmed that it has not raised any objection with
respect to the fairness and reasonableness of the underwriting terms and
arrangements.
(j) At the date of this Agreement, the Agent shall have received an
agreement substantially in the form of Exhibit C hereto signed by the persons
---------
listed on Schedule B hereto.
----------
If any of the conditions specified in this Section 6 shall not have
---------
been fulfilled when and as required by this Agreement, this Agreement may be
terminated by the Agent on notice to the Company at any time at or prior to the
Closing Time, and such termination shall be without liability of any party to
any other party, except as provided in Section 5 of this Agreement.
---------
Notwithstanding any such termination, the provisions of Sections 5, 7, 10 and 11
------------------------
of this Agreement shall remain in effect.
Section 7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the Agent, each
officer, director, employee, agent and legal counsel of the Agent, and each
person, if any, who controls the Agent within the meaning of Section 15 of the
1933 Act or Section 20(a) of the 1934 Act, against any loss, liability, claim,
damage and expense whatsoever (which shall include, but not be limited to,
amounts incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim or investigation whatsoever
and any and all amounts paid in settlement of any claim or litigation, provided
such settlement is entered into with the consent of the Company as provided
herein), as and when incurred, arising out of, based upon or in connection with
(i) any untrue statement or alleged untrue statement of a material fact or any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, contained in
(A) any preliminary offering circular, the Registration Statement or the
Offering Circular (as from time to time amended and supplemented), or any
amendment or supplement thereto or in any document incorporated by reference
therein or required to be delivered with any preliminary offering circular or
the Offering Circular or (B) in any application or other document or
communication (collectively called an "application") executed by or on behalf of
the Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the Common Stock under the
"blue sky" or securities laws thereof or filed with the Commission, the NASD or
any securities exchange, unless such statement or omission or alleged statement
or omission was made in reliance upon and in conformity with written information
concerning the Agent, this Agreement or the compensation of the Agent furnished
to the Company by or on behalf of the Agent expressly for inclusion in any
preliminary offering circular, the Registration Statement or the Offering
Circular, or any amendment or supplement thereto, or in any application, as the
case may be, or (ii) any breach of any representation, warranty, covenant or
agreement of the Company contained in this Agreement. For purposes of this
section, the term "expense" shall include, but not be limited to, counsel fees
and costs, court costs, out-of-pocket costs and compensation for the time spent
by any of the Agent's directors, officers, employees and counsel according to
his or her normal hourly billing rates. The indemnification provisions shall
-18-
<PAGE>
also extend to all directors, officers, employees, agents, legal counsel and
controlling persons of each affiliate of the Agent.
(b) The Agent agrees to indemnify and hold harmless the Company, each of
its directors, each officer who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
above, as incurred, but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in any preliminary offering
circular, the Registration Statement or the Offering Circular, or any amendment
or supplement thereto, or any application in reliance upon and in conformity
with written information about the Agent, this Agreement or the compensation of
the Agent, furnished to the Company by the Agent expressly for inclusion in such
preliminary offering circular, the Registration Statement or the Offering
Circular, or any amendment or supplement thereto, or in any application.
(c) An indemnified party shall give prompt notice to each indemnifying
party if any action, suit, proceeding or investigation is commenced in respect
of which indemnity may be sought hereunder, but failure to notify an
indemnifying party shall not relieve the indemnifying party from its obligations
to indemnify hereunder, except to the extent that the indemnifying party has
been prejudiced in any material respect by such failure. If it so elects within
a reasonable time after receipt of such notice, an indemnifying party may assume
the defense of such action, including the employment of counsel satisfactory to
the indemnified parties and the payment of all expenses of the indemnified party
in connection with such action. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless the employment of such counsel shall have been authorized in
writing by the indemnifying party in connection with the defense of such action
or the indemnifying party shall not have promptly employed counsel satisfactory
to such indemnified party or parties or such indemnified party or parties shall
have reasonably concluded that there may be one or more legal defenses available
to it or them or to other indemnified parties that are different from or
additional to those available to one or more of the indemnifying parties, in any
of which events such fees and expenses shall be borne by the indemnifying party
and the indemnifying party shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties. The Company shall be
liable for any settlement of any claim against the Agent (or any of its
directors, officers, employees, agents, legal counsel or controlling persons)
made with the Company's written consent, which consent shall not be unreasonably
withheld. The Company shall not, without the written consent of the Agent,
settle or compromise any claim against the Agent (or any of its directors,
officers, employees, agents, legal counsel or controlling persons) based upon
circumstances giving rise to an indemnification claim against the Company
hereunder unless such settlement or compromise provides that the Agent and the
other indemnified parties shall be unconditionally and irrevocably released from
all liability in respect to such claim.
(d) In order to provide for just and equitable contribution, if a claim for
indemnification pursuant to these indemnification provisions is made but it is
found in a final judgment by a court that such indemnification may not be
enforced in such case, even though the express provisions hereof provide for
indemnification in such case, then the Company, on the one hand, and the Agent,
on the other hand, shall contribute to the amount paid or payable by such
indemnified persons as a
-19-
<PAGE>
result of such loss, liability, claim, damage and expense in such proportion as
is appropriate to reflect the relative benefits received by the Company, on the
one hand, and the Agent, on the other hand, from the underwriting, and also the
relative fault of the Company, on the one hand, and the Agent, on the other
hand, in connection with the statements, acts or omissions which resulted in
such loss, liability, claim, damage and expense, and any other relevant
equitable considerations. No person found liable for a fraudulent
misrepresentation or omission shall be entitled to contribution from any person
who is not also found liable for such fraudulent misrepresentation or omission.
Notwithstanding the foregoing, the Agent shall not be obligated to contribute
any amount hereunder that exceeds the amount of the commission paid to the Agent
under this Agreement.
(e) The indemnity and contribution agreements contained herein are in
addition to any liability which the Company may otherwise have to the Agent.
(f) Neither termination nor completion of the engagement of the Agent nor
any investigation made by or on behalf of the Agent shall affect the
indemnification obligations of the Company or the Agent hereunder, which shall
remain and continue to be operative and in full force and effect.
Section 8. Termination.
-----------
(a) The Agent may terminate this Agreement, by notice to the Company, at
any time at or prior to the Closing Time (i) if there has been, since the
respective dates as of which information is given in the Registration Statement,
any Material Adverse Effect in the condition (financial or otherwise), earnings,
business affairs or business prospects of the Company and its subsidiaries,
considered as one enterprise, whether or not arising in the ordinary course of
business, or (ii) if there has occurred any outbreak or escalation of existing
hostilities or other national or international calamity or crisis, the effect of
which on the financial markets of the United States is such as to make it, in
the Agent's judgment, impracticable to market the Common Stock or enforce
contracts for the sale of the Common Stock, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the NASD, or if trading generally on the New York Stock Exchange
or in the over-the-counter market has been suspended, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices for securities
have been required, by such exchange or by order of the Commission, the NASD or
any other governmental authority with appropriate jurisdiction over such
matters, or (iv) if a banking moratorium has been declared by either federal or
Maryland authorities, or (v) if there shall have been such material and
substantial change in the market for securities in general or in political,
financial or economic conditions as in the Agent's judgment makes it inadvisable
to proceed with the offering, sale and delivery of the Common Stock on the terms
contemplated by the Offering Circular, or (vi) if the Agent reasonably
determines (which determination shall be in good faith) that there has not been
satisfactory disclosure of all relevant financial information relating to the
Company in the Company's disclosure documents and that the sale of the Common
Stock is inadvisable given such disclosures.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party, except
to the extent provided in Section 5 hereof. Notwithstanding any such
---------
termination, the provisions of Sections 5, 7, 10 and 11 hereof shall remain in
------------------------
effect.
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<PAGE>
Section 9. Survival.
--------
The representations, warranties, indemnities, agreements and other
statements of the Company or its officers set forth in or made pursuant to this
Agreement will remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Company or the Agent or any
controlling person and will survive delivery of and payment for the Common
Stock.
Section 10. Arbitration.
-----------
Any claims, controversies, demands, disputes or differences between or
among the parties hereto or any persons bound hereby arising out of, or by
virtue of, or in connection with, or otherwise relating to this Agreement shall
be submitted to and settled by arbitration conducted in Baltimore, Maryland,
before one or three arbitrators, each of whom shall be knowledgeable in the
field of securities law and investment banking. Such arbitration shall be
conducted in accordance with the rules then obtaining of the American
Arbitration Association. The parties hereto agree to share equally the
responsibility for all fees of the arbitrators, abide by any decision rendered
as final and binding and waive the right to appeal the decision or otherwise
submit the dispute to a court of law for a jury or non-jury trial. The parties
hereto specifically agree that neither party may appeal or subject the award or
decision of any such arbitrator to appeal or review in any court of law or in
equity or in any other tribunal, arbitration system or otherwise. Judgment upon
any award granted by such arbitrator may be enforced in any court having
jurisdiction thereof.
Section 11. Notices.
-------
All notices and other communications under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered, mailed or
transmitted by any standard form of telecommunication. Notices shall be
addressed as follows:
If to the Agent:
Ryan, Beck & Co., Inc.
220 South Orange Avenue
Livingston, New Jersey 07039
Attention: David P. Downs, Senior Vice President
with a copy to:
Thacher Proffitt & Wood
1700 Pennsylvania Avenue, N.W., Suite 800
Washington, D.C. 20006
Attention: Richard A. Schaberg, Esq.
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<PAGE>
If to the Company:
Key Capital Corporation
7F Gwynns Mill Court
Owings Mills, Maryland 21117
Attention: Mr. David H. Wells, Jr.
with a copy to:
Housley Kantarian & Bronstein, P.C.
1220 19/th/ Street, N.W., Suite 700
Washington, D.C. 20036
Attention: James C. Stewart, Esq.
Section 12. Parties.
-------
This Agreement is made solely for the benefit of the Agent, and the
officers, directors, employees, agents and legal counsel of the Agent specified
in Section 7 hereof, the Company and, to the extent expressed, any person
---------
controlling the Company or the Agent, and the directors of the Company, their
respective officers who have signed the Registration Statement, and their
respective executors, administrators, successors and assigns, and no other
person shall acquire or have any right under or by virtue of this Agreement. The
term "successors and assigns" shall not include any purchaser of the Common
Stock.
Section 13. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of New Jersey, except as superseded by federal law.
Section 14. Counterparts.
------------
This Agreement may be executed in one or more counterparts, and when a
counterpart has been executed by each party, all such counterparts taken
together shall constitute one and the same agreement.
Section 15. Miscellaneous.
-------------
This Agreement sets forth the entire understanding and agreement of the
parties hereto representing the subject matter hereof and supersedes and cancels
all prior agreements. Any provision in this Agreement which shall be found to
be unenforceable shall not affect the validity of the remaining terms of this
Agreement. Time shall be of the essence for this Agreement.
-22-
<PAGE>
If the foregoing correctly sets forth the arrangement between the Company
and the Agent, please indicate acceptance thereof in the space provided below
for that purpose, whereupon this letter and your acceptance shall constitute a
binding agreement.
Very truly yours,
KEY CAPITAL CORPORATION
By: _________________________________________
David H. Wells, Jr.
President and Chief Executive Officer
Accepted as of the date first above written.
RYAN, BECK & CO., INC.
By: ________________________________
David P. Downs
Senior Vice-President
-23-
<PAGE>
Exhibit 1.1(a)
EXHIBIT A
SERVICES TO BE PROVIDED BY AGENT
Community Offering - This portion of the offering involves direct sales of
------------------
common stock to prospects identified by key. It works best as a team effort
between Key management and Ryan, Beck representatives. Specific steps include:
. design of a detailed marketing strategy for the Stock in order to
facilitate sales to shareholders, customers, potential customers and
employees (the "Prospects") in concert with the management of the
Bank;
. assist the Bank in identifying types of Prospects;
. build a database of Prospects for use in the marketing campaign;
. draft and coordinate the preparation of securities marketing
materials including advertisements, brochures and auiovisual
presentations;
. assist management with respect to handling investor meetings;
including sales and related issues and legal constraints; and
. provide experienced registered representatives who may legally
solicit orders to promote sales among Prospects.
A-1
<PAGE>
Exhibit 1.1(b)
EXHIBIT B
OPINION OF COUNSEL
The opinion of counsel to the Company to be delivered pursuant to Section
6(b)(i) of this Agreement shall be substantially to the effect that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland, with requisite corporate
power and authority to own, lease and operate its properties and conduct its
business as described in the Registration Statement and is registered as a bank
holding company under the BHC Act. The Bank is a banking corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland, with requisite power and authority to own, lease and operate its
properties and conduct its business as described in the Registration Statement.
To such counsel's knowledge, the Company and the Bank are in compliance with and
conduct their respective businesses in conformity with the BHC Act, the State of
Maryland banking laws, and all other laws and regulations applicable to their
respective businesses. Each of the Company's other subsidiaries is duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation, with requisite corporate power and
authority to own, lease and operate its respective properties and conduct its
business as described in the Registration Statement, except where the failure to
be in good standing would not have a material adverse effect on the condition
(financial or otherwise), earnings, business affairs, assets or business
prospects of the Company and its subsidiaries, considered as one enterprise.
2. The Company and each subsidiary are duly qualified to transact
business as foreign corporations under the corporation laws of each jurisdiction
in which the Company or such subsidiary, as the case may be, owns or leases
property of a nature, has an office or transacts business of a type that would
make such qualification necessary, except where the failure so to qualify would
not have a material adverse effect on the condition (financial or otherwise),
earnings, business affairs, assets or business prospects of the Company and its
subsidiaries, considered as one enterprise.
3. The deposit accounts of the Bank are insured by the Savings
Association Insurance Fund of the FDIC up to the maximum amount allowable by
law, and, to such counsel's knowledge, no proceedings for the termination or
revocation of such membership or insurance are pending or threatened.
4. All of the issued and outstanding shares of capital stock of each of
the Company's direct or indirect subsidiaries have been duly and validly
authorized and issued and are fully paid and nonassessable and, to such
counsel's knowledge, are owned by the Company or one of its wholly owned
subsidiaries, free and clear of any security interests, liens, pledges, claims
or other encumbrances, except where the failure to own such shares free and
clear of any security interests, liens, pledges, claims or other encumbrances
would not have a material adverse effect on the condition (financial or
otherwise), earnings, business affairs, assets or business prospects of the
Company and its subsidiaries, considered as one enterprise.
B-1
<PAGE>
5. The authorized and outstanding capital stock of the Company as of the
date indicated is as set forth in the Offering Circular under the heading
"Capitalization," and all of the outstanding shares of Common Stock of the
Company have been duly authorized and validly issued and are fully paid and non-
assessable.
6. The Common Stock has been duly and validly authorized for issuance,
and, when issued and delivered as contemplated by the Agency Agreement and as
described in the Offering Circular against payment therefor will be duly and
validly issued, fully paid and non-assessable. The Company has all requisite
corporate power and authority to issue and sell the Common Stock in accordance
with and upon the terms and conditions set forth in the Agency Agreement.
7. The shareholders of the Company have no preemptive rights under the
Company's articles of incorporation, as amended, or otherwise under the laws of
the State of Maryland, in respect of the Common Stock.
8. The Company has full corporate power and authority to execute, deliver
and perform the Agency Agreement as contemplated by the Offering Circular; the
Agency Agreement has been duly authorized, executed and delivered by the
Company; and assuming the due authorization, execution and delivery thereof by
the Agent, the Agency Agreement constitutes a legal, valid, and binding
obligation of the Company, enforceable against it in accordance with its terms,
except as enforceability of the Agency Agreement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, and by equitable principles limiting the right to specific
performance or other equitable relief and except as the obligations of the
Company under the indemnification and contribution provisions of Section 7 of
the Agency Agreement may be limited by public policy, as to which no opinion is
expressed.
9. The Company is not an "investment company" or an entity "controlled"
by an investment company," as such terms are defined in the Investment Company
Act.
10. The statements set forth in the Registration Statement under the
captions "Supervision and Regulation," "Description of Capital Stock" and
"Shares Eligible for Future Sale," insofar as they purport to describe the
provisions of the laws referred to therein, fairly summarize the legal matters
described therein.
11. The Registration Statement was declared effective under the 1933 Act
as of the date and time specified in such opinion, any required filing of the
Offering Circular or any supplement thereto pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b) and, to
such counsel's knowledge and information, no stop order suspending the
effectiveness of the Registration Statement has been issued under the 1933 Act
and no proceedings therefor have been initiated or threatened by the Commission.
12. The Registration Statement (including the information required by Rule
430A, if applicable) and the Offering Circular and any amendment or supplement
thereto (except for the financial statements and other financial and statistical
data included therein or omitted therefrom, as to which such counsel need
express no opinion), as of their respective effective or issue dates,
B-2
<PAGE>
complied as to form in all material respects with the applicable requirements of
the 1933 Act and the 1933 Act Regulations.
13. The documents incorporated by reference in the Offering Circular
(except for the financial statements and other financial or statistical data
included therein or omitted therefrom, as to which such counsel expresses no
opinion, and except to the extent that any statement therein is modified or
superseded in the Offering Circular), as of the dates they were filed with the
Commission, complied as to form in all material respects with the applicable
requirements of the 1934 Act and the 1934 Act Regulations.
14. Such counsel knows of no legal or governmental proceedings pending to
which the Company or any subsidiary is a party or of which any property of the
Company or any subsidiary is the subject that are required to be disclosed in
the Registration Statement or that would affect the consummation of the
transactions contemplated in the Agency Agreement; and such counsel knows of no
such proceedings that are threatened or contemplated by governmental authorities
or threatened by others.
15. Such counsel knows of no contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments required to be described in the
Registration Statement or to be filed as exhibits thereto other than those
described therein or filed or incorporated by reference as exhibits thereto, and
such instruments as are summarized in the Registration Statement are fairly
summarized in all material respects.
16. No approval, authorization, consent, registration, qualification or
other order of any public board or body is required in connection with the
execution and delivery of the Agency Agreement or the issuance and sale of the
Common Stock or the consummation by the Company of the other transactions
contemplated by the Agency Agreement, except such as have been obtained under
the 1933 Act and the 1934 Act, or such as may be required under the blue sky or
securities laws of various states in connection with the offering and sale of
the Common Stock.
17. To such counsel's knowledge, each of the Company, the Bank and each
other subsidiary has all material licenses, permits and other governmental
authorizations currently required for the conduct of its business as presently
conducted.
18. The execution and delivery of the Agency Agreement, the issuance and
sale of the Common Stock, the compliance by the Company with the provisions of
the Agency Agreement and the consummation of the transactions therein
contemplated will not conflict with or constitute a breach of, or default under,
the articles of incorporation or by-laws of the Company or any subsidiary or a
breach or default under any contract, indenture, mortgage, loan agreement, note,
lease or other instrument known to such counsel to which either the Company or
any subsidiary is a party or by which any of them or any of their respective
properties may be bound except for such breaches as would not have a material
adverse effect on the condition (financial or otherwise), earnings, business
affairs, assets or business prospects of the Company and its subsidiaries
considered as one enterprise, nor will such action result in a violation on the
part of the Company or any subsidiary of any applicable law or regulation or of
any administrative, regulatory or court decree known to such counsel.
B-3
<PAGE>
19. Such counsel has participated in the preparation of the Registration
Statement and the Offering Circular and has reviewed the documents incorporated
by reference in the Offering Circular, and no facts have come to the attention
of such counsel to lead it to believe (a) that the Registration Statement
(including the information required by Rule 430A, if applicable) or any
amendment thereto (except for the financial statements and other financial or
statistical data included therein or omitted therefrom, as to which such counsel
need not comment), at the time the Registration Statement or any such amendment
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or (b) that the Offering Circular or any
amendment or supplement thereto (except for the financial statements and other
financial or statistical data included therein or omitted therefrom, as to which
such counsel need not comment), at the time the Offering Circular was issued, or
at the Closing Time, included or includes an untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading or (c) that the documents incorporated by reference in the
Offering Circular (except for the financial statements and other financial or
statistical data contained therein or omitted therefrom, as to which such
counsel need not comment, and except to the extent that any statement therein is
modified or superseded in the Offering Circular), as of the dates they were
filed with the Commission, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
B-4
<PAGE>
EXHIBIT 1.2
KEY CAPITAL CORPORATION
(A Maryland Corporation)
_________ shares of Common Stock
Par Value $1.00 Per Share
UNDERWRITING AGREEMENT
----------------------
_______, 1999
Ryan, Beck & Co., Inc.
220 South Orange Avenue
Livingston, New Jersey 07039
Ladies and Gentlemen:
Key Capital Corporation, a Maryland corporation ("Key" or "Company"), the
holding company for Key Bank and Trust, a Maryland chartered trust company
("Bank"), proposes to issue and sell to Ryan, Beck & Co., Inc. (the
"Underwriter"), ____________ authorized but unissued shares of its common stock,
$1.00 par value per share (the "Common Stock"). The Company also grants to
Ryan, Beck the option described in Section 2 to purchase all or any part of
______ additional shares of Common Stock to cover over-allotments. The
aforesaid ___________ shares of Common Stock ("Initial Shares"), together with
all or any part of the _____ additional shares of Common Stock subject to the
option described in Section 2 ("Additional Shares"), are collectively herein
called the "Shares." The Shares are more fully described in the Prospectus
referred to below. The Underwriter proposes to resell the shares to the general
public in a public offering ("Public Offering").
Prior to the date hereof, up to ____ shares of Common Stock were offered to
the general public in a community offering ("Community Offering") pursuant to an
agency agreement between the Company and the Underwriter dated ___, 1999 (the
"Agency Agreement"). The Shares proposed to be sold to the Underwriter hereby
represent Shares not sold in the Community Offering. The Community Offering and
the Public Offering are collectively referred to herein as the "Offering."
The initial public offering price for the Shares, the purchase price to be
paid by the Underwriter for the Shares and the commission per Common Stock to be
paid by the Company to the Underwriter shall be agreed upon by the Company and
the Underwriter, and such agreement
<PAGE>
shall be set forth in a separate written instrument substantially in the form of
Exhibit A hereto (the "Price Determination Agreement"). The Price Determination
- ---------
Agreement may take the form of an exchange of any standard form of written
telecommunication between the Company and the Underwriter and shall specify such
applicable information as is indicated in Exhibit A hereto. The offering of the
---------
Shares will be governed by this Agreement, as supplemented by the Price
Determination Agreement. From and after the date of the execution and delivery
of the Price Determination Agreement, this Agreement shall be deemed to
incorporate, and all references herein to "this Agreement" shall be deemed to
include, the Price Determination Agreement.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (No. 333-
62667) covering the registration of the Securities under the Securities Act of
1933, as amended (the "1933 Act"), including the related offering circular and
preliminary prospectus or prospectuses. Such registration statement, as amended,
has been declared effective by the Commission. The amended prospectus on file
with the Commission at the time such registration statement became effective is
hereinafter referred to as the "Offering Circular," except that, if the
prospectus used in connection with the Community Offering differs from the
prospectus on file with the Commission at the time the registration statement
became effective, the term "Offering Circular" shall refer to such revised
prospectus from and after the time it is first used in the Community Offering.
Promptly after execution and delivery of this Agreement, the Company will
either (i) prepare and file a post-effective amendment to the Registration
Statement and an amended prospectus relating to the sale of Shares in the Public
Offering in accordance with the provisions of Rule 430A ("Rule 430A") of the
rules and regulations of the Commission under the 1933 Act (the "1933 Act
Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act
Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule
434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term
Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such post-effective registration statement, as
amended, if applicable, but that is deemed to be part of such post-effective
registration statement (a) pursuant to paragraph (b) of Rule 430A is referred to
as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus relating to the sale of
Shares in the Public Offering, and any prospectus relating to the sale of Shares
in the Public Offering that omitted, as applicable, the Rule 430A Information or
the Rule 434 Information, that was used prior to the execution and delivery of
this Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriter for use in connection with the Public Offering of the Shares is
herein called the "Prospectus." If Rule 434 is relied on, the term "Prospectus"
shall refer to the
2
<PAGE>
preliminary prospectus dated ______, 1999 together with the Term Sheet and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the Prospectus or any Term
Sheet or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
Section 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
---------------------------------------------
represents and warrants to the Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(b) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(a) hereof, and agrees with the Underwriter, as
follows:
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement and any Rule 462(b) Registration Statement has become
effective under the 1933 Act and no stop order suspending the effectiveness of
the Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of the Company, are contemplated
by the Commission, and any request on the part of the Commission for additional
information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are purchased,
at the Date of Delivery), the Registration Statement, the Rule 462(b)
Registration Statement and any amendments and supplements thereto complied and
will comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto, at the time the Prospectus
or any such amendment or supplement was issued and at the Closing Time (and, if
any Option Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. If Rule 434 is
used, the Company will comply with the requirements of Rule 434 and the
Prospectus shall not be "materially different", as such term is used in Rule
434, from the prospectus included in the Registration Statement at the time it
became effective. The representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information furnished to
the Company in writing by the Underwriter expressly for use in the Registration
Statement or Prospectus.
3
<PAGE>
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all
material respects with the 1933 Act Regulations and each preliminary prospectus
and the Prospectus delivered to the Underwriter for use in connection with this
offering was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) Independent Accountants. KPMG Peat Marwick LLP, the
-----------------------
accountants who certified the financial statements and supporting schedules
included in the Registration Statement, are independent public accountants as
required by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The consolidated financial
--------------------
statements, audited and unaudited, included in the Registration Statement and
the Prospectus, together with the related schedules and notes, present fairly
the financial position of the Company and its consolidated subsidiaries at the
dates indicated and the results of operations, shareholders' equity and cash
flows of the Company and its consolidated subsidiaries for the periods
specified; and said financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the information
required to be stated therein. The selected consolidated financial data, pro
forma and the summary consolidated financial data included in the Prospectus
present fairly the information shown therein and have been compiled on a basis
consistent with that of the audited consolidated financial statements included
in the Registration Statement.
(iv) No Material Adverse Effect on Business. Since the
--------------------------------------
respective dates as of which information is given in the Registration Statement
and the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have been
no transactions entered into by the Company or any of its subsidiaries, other
than those in the ordinary course of business, which are material with respect
to the Company and its subsidiaries considered as one enterprise, and (C) there
has been no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock. Neither the Company, the Bank nor
any other subsidiary has any material liability of any nature, contingent or
otherwise, except as set forth in the Prospectus.
(v) Good Standing of the Company. The Company is a corporation duly
----------------------------
organized, validly existing and in good standing under the laws of the State of
Maryland with corporate power and authority under such laws to own, lease and
operate its properties and conduct its business as described in the Prospectus.
Each subsidiary of the Company is an entity duly organized, validly existing and
in good standing under the laws of its respective jurisdiction of organization
with corporate power and authority under such laws to own, lease and operate its
4
<PAGE>
properties and conduct its business. The Company and each of its subsidiaries is
duly qualified to transact business as a foreign corporation and is in good
standing in each other jurisdiction in which it owns or leases property of a
nature, or transacts business of a type, that would make such qualification
necessary, except to the extent that the failure to so qualify or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, business affairs, assets or business prospects of the
Company and its subsidiaries, considered as one enterprise.
(vi) Corporate Power and Authority. The Company is duly
-----------------------------
registered with the Board of Governors of the Federal Reserve System as a bank
holding company under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"); each subsidiary of the Company that conducts business as a bank is duly
authorized to conduct such business in each jurisdiction in which such business
is currently conducted; and the deposit accounts of the Bank are insured by the
Bank Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC"),
up to the maximum allowable limits thereof. The Company has all such power,
authority, authorization, approvals and orders as may be required to enter into
this Agreement, to carry out the provisions and conditions hereof and to issue
and sell the Common Stock.
(vii) Good Standing of the Bank. The Bank is a trust company
-------------------------
duly organized, validly existing and in good standing under the laws of the
State of Maryland with corporate power and authority under such laws to own,
lease and operate its properties and conduct its business; the Bank is duly
qualified to transact business as a foreign corporation and is in good standing
in each other jurisdiction in which it owns or leases property of a nature, or
transacts business of a type, that would make such qualification necessary,
except to the extent that the failure to so qualify or be in good standing would
not have a material adverse effect on the condition (financial or otherwise),
earnings, business affairs, assets or business prospects of the Bank and its
subsidiaries, considered as one enterprise. All of the outstanding shares of
capital stock of the Bank and each of the Company's other subsidiaries have been
duly authorized and validly issued and are fully paid and non-assessable and are
owned by the Company directly or indirectly, free and clear of any pledge, lien,
security interest, charge, claim, equity or encumbrance of any kind.
(viii) Absence of Significant Subsidiaries. Except for the Bank,
-----------------------------------
the Company does not have any "significant subsidiaries" as defined in Rule 1-02
of Regulation S-X of the Commission.
(ix) Capitalization. The authorized, issued and outstanding
--------------
capital stock of the Company is as set forth in the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectus). The shares
of issued and outstanding capital stock have been duly authorized and validly
issued and are fully paid and non-assessable; none of the outstanding shares of
capital stock was issued in violation of the preemptive or other similar rights
of any securityholder of the Company.
5
<PAGE>
(x) Authorization of Agreement. This Agreement has been duly
--------------------------
authorized, executed and delivered by the Company and, when duly executed by the
Underwriter, will constitute the valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(xi) Authorization and Description of Securities. The Shares to
-------------------------------------------
be purchased by the Underwriter from the Company have been duly authorized for
issuance and sale to the Underwriter pursuant to this Agreement and, when issued
and delivered by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid and non-
assessable; the Common Stock conforms to all statements relating thereto
contained in the Prospectus and such description conforms to the right set forth
in the instruments defining the same; no holder of the Shares will be subject to
personal liability by reason of being such a holder; and the issuance of the
Shares is not subject to the preemptive or other similar rights of any
securityholder of the Company.
(xii) Absence of Defaults and Conflicts. Neither the Company, the
---------------------------------
Bank nor any other subsidiary is in violation of any provision of its articles
of incorporation, charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other agreement or
instrument to which it is a party or by which it may be bound or to which any of
its properties may be subject, except for such defaults that in the aggregate
would not have a material adverse effect on the condition (financial or
otherwise), earnings, business affairs, assets or business prospects of the
Company and its subsidiaries, considered as one enterprise and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement (including
the issuance and sale of the Shares and the use of the proceeds from the sale of
the Shares as described in the Prospectus under the caption "Use of Proceeds")
and compliance by the Company with its obligations hereunder have been duly
authorized by all necessary corporate action and do not and will not, whether
with or without the giving of notice or passage of time or both, conflict with
or constitute a breach of, or a default or Repayment Event (as defined below)
under, give rise to any right of termination under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any Subsidiary pursuant to, any of the Agreements and Instruments
(except for such conflicts, breaches or defaults or linens, charges or
encumbrances that would not individually or in the aggregate, result in a
Material Adverse Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or any Subsidiary or any
applicable law, statute, rule, regulation, judgment, order, right or decree of
any government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any Subsidiary or any of their assets,
properties or operations. As used herein, a "Repayment Event" means any event
or condition which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right to
6
<PAGE>
require the repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any Subsidiary.
(xiii) Absence of Legal Proceedings. Except as disclosed in the
----------------------------
Prospectus, there is no action, suit or proceeding before or by any government,
governmental instrumentality or court, domestic or foreign, now pending or, to
the knowledge of the Company, threatened against the Company, the Bank or any
other subsidiary that is required to be disclosed in the Prospectus or that
could reasonably be expected to result in any material adverse change in the
condition (financial or otherwise), earnings, business affairs, assets or
business prospects of the Company and its subsidiaries, considered as one
enterprise, or that could reasonably be expected materially and adversely to
affect the properties or assets of the Company and its subsidiaries, considered
as one enterprise, or that could reasonably be expected materially and adversely
to affect the consummation of the transactions contemplated in this Agreement;
all pending legal or governmental proceedings to which the Company, the Bank or
any other subsidiary is a party that are not described in the Prospectus,
including ordinary routine litigation incidental to its business, if decided in
a manner adverse to the Company, would not have a Material Adverse Effect on the
condition (financial or otherwise), earnings, business affairs or business
prospects of the Company and its subsidiaries, considered as one enterprise.
(xiv) Accuracy of Exhibits. There are no material contracts or
--------------------
documents of a character required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not described and filed as required.
(xv) Title to Property. The Company and its subsidiaries,
-----------------
including the Bank, each has good and marketable title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as (A) are described in the
Prospectus or (B) are neither material in amount nor materially significant in
relation to the business of the Company and its subsidiaries, considered as one
enterprise; all of the leases and subleases material to the business of the
Company and its subsidiaries, considered as one enterprise are in full force and
effect, and neither the Company, the Bank nor any other subsidiary has any
notice of any material claim that has been asserted by anyone adverse to the
rights of the Company, the Bank or any other subsidiary under any such lease or
sublease or affecting or questioning the rights of such corporation to the
continued possession of the leased or subleased premises under any such lease or
sublease.
(xvi) Possession of Licenses and Permits. Each of the Company
----------------------------------
and its subsidiaries, including the Bank, owns, possesses or has obtained all
material governmental licenses, permits, certificates, consents, orders,
approvals and other authorizations necessary to own or lease, as the case may
be, and to operate its properties and to carry on its business as presently
conducted, and neither the Company, the Bank nor any other subsidiary has
received any notice of any restriction upon, or any notice of proceedings
relating to revocation or modification of, any such licenses, permits,
certificates, consents, orders, approvals or authorizations.
7
<PAGE>
(xvii) Absence of Labor Dispute. No labor problem with the
------------------------
employees of the Company, the Bank or any other subsidiary exists or, to the
best knowledge of the Company, is imminent that could materially adversely
affect the condition (financial or otherwise), earnings, business affairs or
business prospects of the Company and its subsidiaries, considered as one
enterprise, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its, the Bank's or any other subsidiary's
principal suppliers, contractors or customers that could reasonably be expected
to materially adversely affect the condition (financial or otherwise), earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise.
(xviii) Registration Rights. Except as disclosed in the Prospectus,
-------------------
there are no persons with registration or other similar rights to have any
securities of the Company registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
(xix) Possession of Intellectual Property. Except as disclosed in
-----------------------------------
the Prospectus, the Company and its subsidiaries, including the Bank, own or
possess all patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets or other unpatented and/or unpatentable proprietary or
confidential information systems or procedures), trademarks, service marks and
trade names (collectively, "patent and proprietary rights") currently employed
by them in connection with the business now operated by them except where the
failure to own, possess or acquire such patent and proprietary rights would not
have a material adverse effect on the condition (financial or otherwise),
earnings, business affairs, assets or business prospects of the Company and its
subsidiaries, considered as one enterprise. Neither the Company, the Bank nor
any other subsidiary has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to any
patent or proprietary rights, and which infringement or conflict (if the subject
of any unfavorable decision, rule and refinement, singly or in the aggregate)
could reasonably be expected to result in any material adverse change in the
condition (financial or otherwise), earnings, business affairs, assets or
business prospects of the Company and its subsidiaries, considered as one
enterprise.
(xx) Tax Matters. The Company and each subsidiary of the Company
-----------
has filed all federal, state and local income, franchise or other tax returns
required to be filed and have made timely payments of all taxes due and payable
in respect of such returns, and no material deficiency has been asserted with
respect thereto by any taxing authority.
(xxi) Nasdaq Listing. The Common Stock have been approved for
--------------
listing on The Nasdaq Stock Market, Inc.'s (the "Nasdaq Stock Market") National
Market.
(xxii) Compliance with Certain Provisions of the Exchange Act.
------------------------------------------------------
Neither the Company, the Bank nor any other subsidiary has taken or will take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be
8
<PAGE>
expected to constitute, the stabilization or manipulation, under the Exchange
Act or otherwise, of the price of the Common Stock.
(xxiii) Compliance with Applicable Laws. Neither the Company, the
-------------------------------
Bank nor any other subsidiary is or has been (by virtue of any action, omission
to act, contract to which it is a party or by which it is bound, or any
occurrence or state of facts whatsoever) in violation of any applicable foreign,
federal, state, municipal or local statutes, laws, ordinances, rules,
regulations and/or orders issued pursuant to foreign, federal, state, municipal
or local statutes, laws, ordinances, rules, or regulations (including those
relating to any aspect of banking, bank holding companies, consumer credit,
truth-in-lending, usury, currency transaction reporting, environmental
protection, occupational safety and health and equal employment practices)
heretofore or currently in effect, except such violations that have been fully
cured or satisfied without recourse or that in the aggregate will not have a
Material Adverse Effect on the condition (financial or otherwise), earnings,
business affairs, assets or business prospects of the Company and its
subsidiaries, considered as one enterprise.
(xxiv) Absence of Certain Agreements. Neither the Company, the
-----------------------------
Bank nor any other subsidiary has any agreement or understanding with any person
(A) concerning the future acquisition by the Company or the Bank of a
controlling interest in any entity or (B) concerning the future acquisition by
any person of a controlling interest in the Company, the Bank or any other
subsidiary, in either case that is required by the 1933 Act or the 1933 Act
Regulations to be disclosed by the Company that is not disclosed in the
Prospectus.
(xxv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration, qualification or
decree of, any court or governmental authority or agency is necessary or
required for the performance by the Company of its obligations hereunder, in
connection with the offering, issuance or sale of the Securities hereunder or
the consummation of the transactions contemplated by this Agreement, except such
as have been already obtained or as may be required under the 1933 Act or the
1933 Act Regulations or state securities laws.
(xxvi) Warrants, Options and Other Rights. Except as disclosed in
----------------------------------
the Prospectus, there are no outstanding options, warrants or other rights
calling for the issuance of, and no commitments, plans or arrangements to issue,
any shares of capital stock of the Company or any of its Subsidiaries or any
security convertible into or exchangeable for capital stock of the Company or
any of its Subsidiaries.
(xxvii) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the application
of the net proceeds therefrom as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").
9
<PAGE>
(xxviii) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, individually or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its Subsidiaries is
in violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent, decree or judgment, relating to pollution or protection of human
health, the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its Subsidiaries have all permits,
authorizations and approvals required under any applicable Environmental Laws
and are each in compliance with their requirements, (C) there are no pending or,
to the best knowledge of the Company, threatened, administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its Subsidiaries and (D) there
are no events or circumstances that might reasonably be expected to form the
basis of an order for clean-up or remediation, or an action, suit or proceeding
by any private party or governmental body or agency, against or affecting the
Company or any of its Subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xxix) Insurance. The Company and its Subsidiaries carry or are
---------
entitled to the benefits of insurance in such amounts and covering such risks as
is generally maintained by companies of established repute engaged in the same
or similar business, and all such insurance is in full force and effect.
(xxx) Accounting Controls. The Company and its Subsidiaries
-------------------
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general and specific authorizations; (ii) transactions are recorded
as necessary to permit the preparation of financial statements in conformity
with GAAP and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorizations; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxxi) Fees. Other than as contemplated by this Agreement or the
----
Agency Agreement, there is no broker, finder or other party that is entitled to
receive from the Company or any of its Subsidiaries any brokerage or finder's
fee or any other fee, commission or payment as a result of the transactions
contemplated by this Agreement or the Agency Agreement.
10
<PAGE>
(xxxii) Lock-up Agreements. The Company has obtained and delivered
------------------
to the Underwriter the agreements of the persons and entities named in Schedule
--------
B hereto to the effect that each such person and entity will not, for a period
- -
of 180 days from the date hereof and except as otherwise provided therein,
without the prior written consent of the Underwriter directly or indirectly, (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Common Stock
or any securities convertible into or exchangeable or exercisable for Common
Stock or file or cause to be filed any registration statement under the 1933 Act
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise; provided, however, that such
restrictions shall not apply to a bona fide gift of shares of Common Stock by
such person to a person or entity who, prior to such transfer, shall have
executed and delivered to the Underwriter an agreement, substantially in the
form of the agreement contemplated by this Section 1(a)(xxviii), not to take any
action prohibited by such agreement with respect to such shares of Common Stock.
(xxxiii) Use of Prospectus. The Company has not distributed and,
-----------------
prior to the later to occur of (i) the Closing Time and (ii) completion of the
distribution of the Shares, will not distribute any prospectus (as such term is
defined in the 1933 Act and the 1933 Act Regulations) in connection with the
offering and sale of the Shares other than the Registration Statement, any
preliminary prospectus, the Prospectus or other materials, if any, permitted by
the 1933 Act or by the 1933 Act Regulations and approved by the Representative.
(b) Any certificate signed by any authorized officer of the Company or
the Bank and delivered to the Underwriter or to counsel for the Underwriter
pursuant to this Agreement shall be deemed a representation and warranty by the
Company to the Underwriter as to the matters covered thereby.
Section 2. Sale and Delivery to the Underwriter; Closing.
---------------------------------------------
(a) Initial Securities and Option Securities. On the basis of the
----------------------------------------
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company agrees to sell to the Underwriter, and
the Underwriter agrees to purchase from the Company, _________ shares of Common
Stock at the purchase price and terms set forth herein and in the Price
Determination Agreement.
In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the Underwriter to purchase up to an additional
_________ shares of Common Stock in accordance with the terms set forth herein
and in the Price Determination Agreement. The option hereby granted will expire
at 5:00 p.m. New York City time on the 30th day after the commencement of
11
<PAGE>
the Public Offering (or at 5:00 p.m. New York City time on the next business day
following the 30th day if such 30th day is not a business day) and may be
exercised, on one occasion only, solely for the purpose of covering over-
allotments which may be made in connection with the offering and distribution of
the Initial Securities upon notice by the Underwriter to the Company setting
forth the number of Option Securities as to which the Underwriter is exercising
the option and the time, date and place of payment and delivery for the Option
Securities. Such time and date of delivery (the "Date of Delivery") shall be
determined by the Underwriter but shall not be later than five full business
days after the exercise of said option, nor in any event prior to Closing Time,
as hereinafter defined, nor earlier than the second business day after the date
on which the notice of the exercise of the option shall have been given.
(b) Payment. Payment of the purchase price for, and delivery of
-------
certificates for, the Initial Securities shall be made at the offices of Thacher
Proffitt & Wood, 1700 Pennsylvania Avenue, N.W., Suite 800, Washington, DC
20006, or at such other place as shall be agreed upon by the Company and the
Underwriter, at 10:00 a.m. Washington time on the third full business day after
commencement of the Public Offering, or at such other time not earlier than
three nor more than ten full business days thereafter as the Underwriter and the
Company shall determine (such date and time of payment and delivery being herein
called the "Closing Time"). In addition, in the event that any or all of the
Option Securities are purchased by the Underwriter, payment of the purchase
price for, and delivery of certificates for, such Option Securities shall be
made at the above-mentioned office of Thacher Proffitt & Wood, or at such other
place as shall be agreed upon by the Company and the Underwriter, on the Option
Closing Date as specified in the notice from the Underwriter to the Company.
Payment for the Initial Securities and the Option Securities, if any, shall be
made to the Company by wire transfer of immediately available funds, against
delivery to the Underwriter for the account of the Underwriter of Common Stock
to be purchased by it.
(c) Denominations; Registration. Certificates for the Initial
---------------------------
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Underwriter may request in writing at least one
full business day before the Closing Time or the relevant Date of Delivery, as
the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Underwriter in The City of New York not later than 10:00 A.M. (Eastern time) on
the business day prior to the Closing Time or the relevant Date of Delivery, as
the case may be.
Section 3. Certain Covenants of the Company. The Company covenants
--------------------------------
with the Underwriter as follows:
(a) Compliance with Securities Regulations. The Company will use its
--------------------------------------
best efforts to cause the Registration Statement to become effective and will
notify the Underwriter immediately, and confirm the notice in writing, (i) when
the Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt
12
<PAGE>
of any comments from the Commission, (iii) of any request of the Commission to
amend the Registration Statement or amend or supplement the Prospectus or for
additional information and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Common Stock for offering or sale in any
jurisdiction, or of the institution or threatening of any proceedings for any of
such purposes. The Company will promptly effect the filings necessary pursuant
to Rule 424(b) and will take such steps as shall be necessary to ascertain
promptly whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will use every reasonable effort
to prevent the issuance of any such stop order or of any order preventing or
suspending such use and, if any such order is issued, to obtain the lifting
thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will not at any time file or
--------------------
make any amendment to the Registration Statement or, if the Company has elected
to rely upon Rule 430A of the 1933 Act Regulations ("Rule 430A"), any amendment
or supplement to the Prospectus (including documents incorporated by reference
into the Registration Statement or the Prospectus) of which the Underwriter
shall not previously have been advised and furnished a copy, or to which the
Underwriter or counsel for the Underwriter shall reasonably object.
(c) Delivery of Registration Statements. The Company has delivered or
-----------------------------------
will deliver to the Underwriter and counsel for the Underwriter, without charge,
as many signed and conformed copies of the Registration Statement as originally
filed and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts as the Underwriter may reasonably request. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriter will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company will deliver or cause to be
------------------------
delivered to the Underwriter or counsel to the Underwriter, without charge, from
time to time until the effective date of the Registration Statement, as many
copies of each preliminary prospectus as the Underwriter may reasonably request,
and the Company hereby consents to the use of such copies for purposes permitted
by the 1933 Act. The Company will deliver or cause to be delivered to the
Underwriter, without charge, as soon as the Registration Statement shall have
become effective (or, if the Company has elected to rely upon Rule 430A, as soon
as practicable after the Price Determination Agreement has been executed and
delivered) and thereafter from time to time as requested by the Underwriter
during the period when the Prospectus is required to be delivered under the 1933
Act, such number of copies of the Prospectus (as supplemented or amended) as the
Underwriter may reasonably request. The Prospectus and any amendments or
supplements thereto furnished to the Underwriter will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
13
<PAGE>
(e) Continued Compliance with Securities Laws. The Company will
-----------------------------------------
comply to the best of its ability with the 1933 Act and the 1933 Act
Regulations, and the 1934 Act and the 1934 Act Regulations, so as to permit the
completion of the distribution of the Common Stock as contemplated in this
Agreement and in the Prospectus. If, at any time when a prospectus is required
by the 1933 Act to be delivered in connection with sales of the Common Stock,
any event shall occur or condition exist as a result of which it is necessary,
in the reasonable opinion of counsel for the Underwriter or counsel for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein not misleading, in the light of the circumstances existing at
the time it is delivered to a purchaser, or if it shall be necessary, in the
reasonable opinion of either such counsel, at any such time to amend the
Registration Statement or amend or supplement the Prospectus in order to comply
with the requirements of the 1933 Act or the 1933 Act Regulations, the Company
will promptly prepare and file with the Commission, subject to Section 3(b)
hereof, such amendment or supplement as may be necessary to correct such untrue
statement or omission or to make the Registration Statement or the Prospectus
comply with such requirements, and the Company will furnish to the Underwriter
such number of copies of such amendment or supplement as the Underwriter may
reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts,
-----------------------
in cooperation with the Underwriter, to qualify the Common Stock, for offering
and sale under the applicable securities laws of such states and other
jurisdictions as the Underwriter may designate and to maintain such
qualifications in effect for a period of not less than one year from the
effective date of the Registration Statement; provided, however, that the
-------- -------
Company shall not be obligated to file any general consent to service of process
or to qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to taxation in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Common Stock have been qualified as
above provided.
(g) Rule 158. The Company will make generally available (within the
--------
meaning of Rule 158 of the 1933 Act Regulations ("Rule 158") to its
securityholders and the Underwriter as soon as practicable, but not later than
90 days after the close of the period covered thereby, an earnings statement of
the Company and its subsidiaries (in form complying with the provisions of Rule
158) covering a period of at least 12 months beginning after the effective date
of the Registration Statement but not later than the first day of the Company's
fiscal quarter next following such effective date.
(h) Use of Proceeds. The Company will use the net proceeds received
---------------
by it from the sale of the Shares in the manner specified in the Prospectus
under "Use of Proceeds."
14
<PAGE>
(i) Compliance with Exchange Act. The Company, during the period when
----------------------------
a prospectus is required by the 1933 Act to be delivered in connection with
sales of Common Stock, will file promptly all documents required to be filed
with the Commission pursuant to Section 13 or 14 of the 1934 Act subsequent to
the time the Registration Statement becomes effective.
(j) Delivery of Reports to Underwriter. For a period of three years
----------------------------------
after the Closing Time, the Company will furnish to the Underwriter copies of
all annual reports, quarterly reports and current reports filed by the Company
with the Commission and such other documents, reports, proxy statements and
information as shall be furnished by the Company to its stockholders generally.
(k) Delivery of Reports to Shareholders. The Company will provide to
-----------------------------------
the holders of the Common Stock annual reports containing financial statements
audited by the Company's independent auditors and, upon written request, the
Company's annual reports on Form 10-K.
(l) Delivery of Reports to Nasdaq. The Company will file with the
-----------------------------
Nasdaq Stock Market all documents and notices required by the Nasdaq Stock
Market of companies that have issued securities that are traded on the Nasdaq
Stock Market's National Market, in the over-the-counter market and quotations
for which are reported by the Nasdaq Stock Market.
(m) Payment of Blue Sky Fees. The Company shall pay the legal fees
------------------------
and related filing fees of Thacher Proffitt & Wood to prepare one or more "blue
sky" surveys (each, a "Blue Sky Survey") for use in connection with the offering
of the Common Stock as contemplated by the Prospectus and a copy of such Blue
Sky Survey or surveys shall be delivered to each of the Company and the
Underwriter.
(n) Updating the Prospectus. If, at the time the Registration
-----------------------
Statement becomes effective, any information shall have been omitted therefrom
in reliance upon Rule 430A, then the Company will prepare, and file or transmit
for filing with the Commission in accordance with Rule 430A and Rule 424(b),
copies of an amended Prospectus or, if required by Rule 430A, a post-effective
amendment to the Registration Statement (including an amended Prospectus)
containing all information so omitted.
(o) Delivery of Bound Volumes. The Company will, at its expense,
-------------------------
subsequent to the issuance of the Common Stock, prepare and distribute to the
Underwriter and counsel to the Underwriter, a bound volume containing copies of
the documents used in connection with the issuance of the Common Stock.
(p) Restriction on Material Transactions. The Company will not, prior
------------------------------------
to the Option Closing Date or thirty (30) days after the date of this Agreement,
whichever occurs first, incur any material liability or obligation, direct or
contingent, or enter into any material transaction, other than in the ordinary
course of business, or any transaction with a related party
15
<PAGE>
which is required to be disclosed in the Prospectus pursuant to Item 404 of
Regulation S-K of the Commission, except as contemplated by the Prospectus.
(q) Restriction on Sale of Securities. During a period of 180 days
---------------------------------
from the date of the Prospectus, the Company will not, without the prior written
consent of the Underwriter, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or file or cause to be
filed any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder, (B) any
shares of Common Stock issued by the Company upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof and
referred to in the Prospectus, (C) any shares of Common Stock issued or options
to purchase Common Stock granted pursuant to existing employee benefit plans of
the Company referred to in the Prospectus or (D) any shares of Common Stock
issued pursuant to any non-employee director stock plan.
Section 4. Payment of Expenses.
-------------------
(a) Payment. The Company will pay and bear all costs and expenses
-------
incident to the performance of its obligations under this Agreement, including
(i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits), as originally filed and as
amended, all amendments thereto, all preliminary prospectuses, the Prospectus
and any amendments or supplements thereto, and the cost of furnishing copies
thereof to the Underwriter; (ii) the preparation, printing and distribution of
this Agreement, the Agency Agreement, the Blue Sky Survey and all other
documents applicable to the Offering; (iii) the preparation, issuance and
delivery of certificates for the Common Stock to the purchasers thereof; (iv)
the fees and disbursements of the Company's counsel and accountants; (v) Nasdaq
Stock Market filing fees; (vi) the fees and disbursements of Thacher Proffitt &
Wood in connection with the Blue Sky Survey; (vii) the qualification of the
Common Stock under the applicable securities laws in accordance with Section
3(f) hereof; (viii) any filing fee for review of the Offering by the Commission
and the NASD; (ix) the fees and expenses related to the marketing by the
Underwriter of the Common Stock; (x) the fees and charges of any transfer agent,
registrar and other agents; (xi) the legal fees not to exceed $60,000, plus
associated expenses of the Underwriter's counsel, and (xii) general out-of-
pocket expenses of the Underwriter which shall not exceed $10,000 without the
prior written consent of the Company, which consent shall not be unreasonably
withheld, and (xiii) all other costs incident to the performance of the
Company's obligations hereunder.
16
<PAGE>
If (i) the Closing Time does not occur on or before , 1999, (ii) the
Company abandons or terminates the Offering, or (iii) this Agreement is
terminated by the Underwriter in accordance with the provisions of Section 5 or
8(a), the Company shall reimburse the Underwriter for its reasonable out-of-
pocket expenses, as set forth in this Section 4, including the reasonable fees
and disbursements of counsel for the Underwriter.
(b) Allocation of Expenses. The provisions of this Section shall not
----------------------
affect and, as between the Underwriter, on the one hand, and the Company on the
other hand, shall not be affected by, any agreement that the Company may make
for the sharing of such costs and expenses.
Section 5. Conditions of Underwriter's Obligations. The obligations
---------------------------------------
of the Underwriter to purchase and pay for the Common Stock that it has agreed
to purchase pursuant to this Agreement are subject, in the Underwriter's
discretion, to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
---------------------------------------
Statement shall have become effective not later than 4:00 p.m., New York City
time, on the first business day following the date hereof, or at such later time
or on such later date as the Underwriter may agree to in writing; at the Closing
Time, no stop order suspending the effectiveness of the Registration Statement
shall have been issued under the 1933 Act and no proceedings for that purpose
shall be pending or, to the Underwriter's knowledge or the knowledge of the
Company, shall be contemplated by the Commission, and any request on the part of
the Commission for additional information shall have been complied with to the
satisfaction of counsel for the Underwriter. If the Company has elected to rely
upon Rule 430A, a prospectus containing the information required by Rule 430A
shall have been filed with the Commission in accordance with Rule 424(b) (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A).
(b) Opinions of Counsel. At the Closing Time, the Underwriter shall
-------------------
have received:
(i) The favorable opinion, dated as of the Closing Time, of Housley,
Kantarian & Bronstein, P.C., counsel for the Company, in form and substance
reasonably satisfactory to counsel for the Underwriter, substantially in the
form set forth in Exhibit B.
---------
(ii) The favorable opinion, dated as of the Closing Time, of
Thacher Proffitt & Wood, counsel for the Underwriter, in form and substance
satisfactory to the Underwriter.
In giving such opinions, such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the federal law of the United
States and the laws of Maryland upon opinions of other counsel, who shall be
counsel satisfactory to counsel for the Underwriter, in which case the opinion
shall state that such counsel believes that it, the Underwriter and the
Underwriter's counsel are entitled to so rely upon the opinions of such other
counsel. Such
17
<PAGE>
counsel may also state that, insofar as such opinion involves factual matters,
they have relied, to the extent they deem proper, upon certificates of officers
or directors of the Company and the Bank and certificates of public officials.
(c) Officer's Certificate. At the Closing Time and again at the
---------------------
Option Closing Date, (i) the Registration Statement and the Prospectus, as they
may then be amended or supplemented, shall contain all statements that are
required to be stated therein under the 1933 Act and the 1933 Act Regulations
and shall conform in all material respects to the requirements of the 1933 Act
and the 1933 Act Regulations, the Company shall have complied in all material
respects with Rule 430A (if they shall have elected to rely thereon), and
neither the Registration Statement nor the Prospectus, as they may then be
amended or supplemented, shall contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading; (ii) there shall not have been, since the
respective dates as of which information is given in the Registration Statement,
any material adverse change in the condition (financial or otherwise), earnings,
business affairs, assets or business prospects of the Company and its
subsidiaries, considered as one enterprise, whether or not arising in the
ordinary course of business; (iii) no action, suit or proceeding at law or in
equity shall be pending or, to the knowledge of the Company, threatened against
the Company or any subsidiary that would be required to be set forth in the
Prospectus that is not set forth therein, and no proceedings shall be pending
or, to the knowledge of the Company, threatened against the Company or any
subsidiary of the Company before or by any federal, state or other commission,
board or administrative agency wherein an unfavorable decision, ruling or
finding would materially adversely affect the condition (financial or
otherwise), earnings, business affairs, assets or business prospects of the
Company and its subsidiaries, considered as one enterprise, other than as set
forth in the Prospectus; (iv) the Company shall have complied, in all material
respects, with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the Closing Time or Option Closing Date,
as applicable; (v) the other representations and warranties of the Company set
forth in Section l(a) hereof shall be accurate in all material respects as
though expressly made at and as of the Closing Time or Option Closing Date, as
applicable; and (vi) no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that purpose
been initiated or, to the knowledge of the Company, threatened by the
Commission. At the Closing Time, the Underwriter shall have received a
certificate of the President and Chief Executive Officer and the Chief Financial
Officer of the Company, dated as of the Closing Time, to such effect.
18
<PAGE>
(d) Accountant's Comfort Letter. At the time that this Agreement is
---------------------------
executed by the Company, the Underwriter shall have received from KPMG Peat
Marwick, LLP, a letter or letters, dated such date, in form and substance
satisfactory to the Underwriter, confirming that they are independent certified
public accountants with respect to the Company within the meaning of the 1933
Act and the 1933 Act Regulations, and stating in effect that with respect to the
Company:
(i) in their opinion, the consolidated financial statements as of
December 31, 1998 and 1997, and for each of the years in the three year period
ended December 31, 1998 and the related financial statement schedules, if any,
included or incorporated by reference in the Registration Statement and the
Prospectus and covered by their opinions included therein comply as to form in
all material respects with the applicable accounting requirements of the 1933
Act and the 1933 Act Regulations;
(ii) on the basis of procedures (but not an audit in accordance
with generally accepted accounting standards) specified by the American
Institute of Certified Public Accountants for a review of interim financial
information as described in SAS No. 71, Interim Financial Information, including
a reading of the latest available interim consolidated financial statements of
the Company, a reading of the minutes of all meetings of the Board of Directors
of the Company and the Bank and of the Audit and Executive Committees of the
Board of Directors of the Bank since January 1, 1999, inquiries of certain
officials of the Company and its subsidiaries responsible for financial and
accounting matters, and such other inquiries and procedures as may be specified
in such letter, nothing came to their attention that caused them to believe
that:
(A) the unaudited interim consolidated financial information included
or incorporated by reference in the Prospectus, if any, do not comply
as to form in all material respects with applicable accounting
requirements of the 1933 Act, or are not presented in conformity with
generally accepted accounting principles applied on a basis consistent
with that of the audited financial statements included in the
Prospectus,
(B) at a specified date not more than three days prior to the date of
this Agreement, there was any increase in long-term debt or Federal
Home Loan Bank advances of the Company and its consolidated
subsidiaries or any decrease in total assets, total deposits or
stockholders' equity of the Company and its consolidated subsidiaries,
any increase in the number of outstanding shares of capital stock of
the Company and its consolidated subsidiaries, any increase in non-
performing loans or non-performing assets of the Company and its
consolidated subsidiaries or any increase or decrease in loan loss
allowance of the Company and its consolidated subsidiaries, in each
case as compared with amounts shown in the financial statements at
December 31, 1998 included in the Registration Statement,
19
<PAGE>
except in all cases for changes, increases or decreases that the
Registration Statement discloses have occurred or may occur; or
(C) for the period from January 1, 1998 to a specified date not more
than three days prior to the date of this Agreement, there was any
decrease in consolidated net interest income, net income or net income
per share, in each case as compared with a period of comparable length
in the preceding year, except in all cases for increases or decreases
that the Registration Statement discloses have occurred or may occur;
and
(iii) in addition to the procedures referred to in clause (ii)
above, they have performed other specified procedures, not constituting an
audit, with respect to certain amounts, percentages, numerical data and
financial information appearing in the Registration Statement (including the
Selected Consolidated Financial Data) (having compared such items with, and have
found such items to be in agreement with, the financial statements of the
Company or general accounting records of the Company, as applicable, which are
subject to the Company's internal accounting controls or other data and
schedules prepared by the Company from such records).
(e) At the Closing Time, the Underwriter shall have received from KPMG
Peat Marwick, LLP a letter, in form and substance satisfactory to the
Underwriter and dated as of the Closing Time, reaffirming the statements made in
the letter(s) finished pursuant to Section 5(d) hereof, except that the
inquiries specified in Section 5(d) hereof shall be made based upon the latest
available unaudited interim consolidated financial statements and the specified
date referred to shall be a date not more than three days prior to the Closing
Time.
(f) At the Closing Time, counsel for the Underwriter shall have been
furnished with all such documents, certificates and opinions as they may request
for the purpose of enabling them to pass upon the issuance and sale of the
Common Stock as contemplated in this Agreement and the matters referred to in
Section 5(c) hereof and in order to evidence the accuracy and completeness of
any of the representations, warranties or statements of the Company, the
performance of any of the covenants of the Company or the fulfillment of any of
the conditions herein contained; and all proceedings taken by the Company at or
prior to the Closing Time in connection with the authorization, issuance and
sale of the Common Stock as contemplated in this Agreement shall be satisfactory
in form and substance to the Underwriter and its counsel.
(g) Payment of Expenses. The Company shall have paid, or made
-------------------
arrangements satisfactory to the Underwriter for the payment of, all such
expenses as may be required by Section 4 hereof.
20
<PAGE>
(h) Conditions for Purchase of Option Securities. In the event the
--------------------------------------------
Underwriter exercises its option provided in Section 2 hereof to purchase all or
any portion of the Option Securities, the obligations of the Underwriter to
purchase the Option Securities that it has agreed to purchase shall be subject
to the receipt by the Underwriter on the Option Closing Date of:
(1) A certificate, dated the Option Closing Date, of the
President and the Chief Financial Officer of the Company confirming
that the certificate delivered at the Closing Time pursuant to Section
5(c) hereof remains true as of the Option Closing Date;
(2) The favorable opinion of Housley, Kantarian & Bronstein,
P.C., counsel for the Company, addressed to the Underwriter and dated
the Option Closing Date, in form satisfactory to counsel to the
Underwriter, relating to the Option Securities and otherwise to the
same effect as the opinion required by Section 5(b)(i) hereof;
(3) The favorable opinion of Thacher Proffitt & Wood, counsel to
the Underwriter, dated the Option Closing Date, relating to the Option
Securities and otherwise to the same effect as the opinion required by
Section 5(b)(iv) hereof; and
(4) A letter from KPMG Peat Marwick, L.L.P. addressed to the
Underwriter and dated the Option Closing Date, in form and substance
satisfactory to the Underwriter and substantially the same in form and
substance as the letter finished to the Underwriter pursuant to
Section 5(e) hereof.
(i) Approval of Listing. At Closing Time, the Shares shall have been
-------------------
approved for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(j) No Objection. The NASD shall have confirmed that it has not
------------
raised any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the
------------------
Underwriter shall have received an agreement substantially in the form of
Exhibit C hereto signed by the persons listed on Schedule B hereto.
- --------- ----------
If any of the conditions specified in this Section 5 shall not have been
fulfilled when and as required by this Agreement, this Agreement may be
terminated by the Underwriter on notice to the Company at any time at or prior
to the Closing Time, and such termination shall be without liability of any
party to any other party, except as provided in Section 4 of this Agreement.
Notwithstanding any such termination, the provisions of Sections 4, 6, 10 and 12
of this Agreement shall remain in effect.
21
<PAGE>
Section 6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the Underwriter,
each officer, director, employees, agent and legal counsel of the Underwriter,
and each person, if any, who controls the Underwriter within the meaning of
Section 15 of the 1933 Act or Section 20(a) of the 1934 Act, against any loss,
liability, claim, damage and expense whatsoever (which shall include, but not be
limited to, amounts incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim or investigation
whatsoever and any and all amounts paid in settlement of any claim or
litigation, provided such settlement is entered into with the consent of the
Company as provided herein), as and when incurred, arising out of, based upon or
in connection with (i) any untrue statement or alleged untrue statement of a
material fact or any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, contained in (A) any preliminary prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented), or
any amendment or supplement thereto or in any document incorporated by reference
therein or required to be delivered with any preliminary prospectus or the
Prospectus or (B) in any application or other document or communication
(collectively called an "application") executed by or on behalf of the Company
or based upon written information furnished by or on behalf of the Company filed
in any jurisdiction in order to qualify the Common Stock under the "blue sky" or
securities laws thereof or filed with the Commission, the NASD or any securities
exchange, unless such statement or omission or alleged statement or omission was
made in reliance upon and in conformity with written information concerning the
Underwriter, the Underwriting Agreement or the compensation of the Underwriter
furnished to the Company by or on behalf of the Underwriter expressly for
inclusion in any preliminary prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or in any application, as
the case may be, or (ii) any breach of any representation, warranty, covenant or
agreement of the Company contained in the Underwriting Agreement. For purposes
of this section, the term "expense" shall include, but not be limited to,
counsel fees and costs, court costs, out-of-pocket costs and compensation for
the time spent by any of the Underwriter's directors, officers, employees and
counsel according to his or her normal hourly billing rates. The indemnification
provisions shall also extend to all directors, officers, employees, agents,
legal counsel and controlling persons of each affiliate of the Underwriter.
(b) The Underwriter agrees to indemnify and hold harmless each of the
Company, each of their directors or trustees, each officer who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act,
against any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) above, as incurred, but only with respect
to untrue statements or omissions, or alleged untrue statements or omissions,
made in any preliminary prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or any application in
reliance upon and in conformity with written information about the Underwriter,
the Underwriting Agreement or the compensation of the Underwriter, furnished to
the Company by the Underwriter expressly for inclusion in such
22
<PAGE>
preliminary prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or in any application.
(c) An indemnified party shall give prompt notice to each indemnifying
party if any action, suit, proceeding or investigation is commenced in respect
of which indemnity may be sought hereunder, but failure to notify an
indemnifying party shall not relieve the indemnifying party from its obligations
to indemnify hereunder, except to the extent that the indemnifying party has
been prejudiced in any material respect by such failure. If it so elects within
a reasonable time after receipt of such notice, an indemnifying party may assume
the defense of such action, including the employment of counsel satisfactory to
the indemnified parties and the payment of all expenses of the indemnified party
in connection with such action. Such indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless the employment of such counsel shall have been authorized in
writing by the indemnifying party in connection with the defense of such action
or the indemnifying party shall not have promptly employed counsel satisfactory
to such indemnified party or parties or such indemnified party or parties shall
have reasonably concluded that there may be one or more legal defenses available
to it or them or to other indemnified parties that are different from or
additional to those available to one or more of the indemnifying parties, in any
of which events such fees and expenses shall be borne by the indemnifying party
and the indemnifying party shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties. The Company shall be
liable for any settlement of any claim against the Underwriter (or any of its
directors, officers, employees, agents, legal counsel or controlling persons)
made with the Company's written consent, which consent shall not be unreasonably
withheld. The Company shall not, without the written consent of the Underwriter,
settle or compromise any claim against the Underwriter (or any of its directors,
officers, employees, agents, legal counsel or controlling persons) based upon
circumstances giving rise to an indemnification claim against the Company
hereunder unless such settlement or compromise provides that the Underwriter and
the other indemnified parties shall be unconditionally and irrevocably released
from all liability in respect to such claim.
(d) In order to provide for just and equitable contribution, if a
claim for indemnification pursuant to these indemnification provisions is made
but it is found in a final judgment by a court that such indemnification may not
be enforced in such case, even though the express provisions hereof provide for
indemnification in such case, then the Company, on the one hand, and the
Underwriter, on the other hand, shall contribute to the amount paid or payable
by such indemnified persons as a result of such loss, liability, claim, damage
and expense in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriter, on the
other hand, from the underwriting, and also the relative fault of the Company,
on the one hand, and the Underwriter, on the other hand, in connection with the
statements, acts or omissions which resulted in such loss, liability, claim,
damage and expense, and any other relevant equitable considerations. No person
found liable for a fraudulent misrepresentation or omission shall be entitled to
contribution from any person who is not also found liable for such fraudulent
misrepresentation or omission. Notwithstanding the foregoing,
23
<PAGE>
the Underwriter shall not be obligated to contribute any amount hereunder that
exceeds the amount of the underwriting commission paid to the Underwriter with
respect to the Shares purchased by the Underwriter.
(e) The indemnity and contribution agreements contained herein are in
addition to any liability which the Company may otherwise have to the
Underwriter.
(f) Neither termination nor completion of the engagement of the
Underwriter nor any investigation made by or on behalf of the Underwriter shall
affect the indemnification obligations of the Company or the Underwriter
hereunder, which shall remain and continue to be operative and in full force and
effect.
Section 7. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. The representations, warranties, indemnities, agreements and other
- ---------
statements of the Company or their officers or directors set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
regardless of any investigation made by or on behalf of the Company or the
Underwriter or any controlling person and will survive delivery of and payment
for the Common Stock.
Section 8. Termination of Agreement.
------------------------
(a) The Underwriter may terminate this Agreement, by notice to the
Company, at any time at or prior to the Closing Time (i) if there has been,
since the respective dates as of which information is given in the Registration
Statement, any material adverse change in the condition (financial or
otherwise), earnings, business affairs or business prospects of the Company and
its subsidiaries, considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any outbreak or
escalation of existing hostilities or other national or international calamity
or crisis, the effect of which on the financial markets of the United States is
such as to make it, in the Underwriter's judgment, impracticable to market the
Common Stock or enforce contracts for the sale of the Common Stock, or (iii) if
trading in any securities of the Company has been suspended or materially
limited by the Commission or the NASD, or if trading generally on the New York
Stock Exchange or in the over-the-counter market has been suspended, or minimum
or maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by such exchange or by order of the Commission,
the NASD or any other governmental authority with appropriate jurisdiction over
such matters, or (iv) if a banking moratorium has been declared by either
federal or Maryland authorities, or (v) if there shall have been such material
and substantial change in the market for securities in general or in political,
financial or economic conditions as in the Underwriter's judgment makes it
inadvisable to proceed with the offering, sale and delivery of the Common Stock
on the terms contemplated by the Prospectus, or (vi) if the Underwriter
reasonably determines (which determination shall be in good faith) that there
has not been satisfactory disclosure of all relevant financial information
relating to the Company in the Company's
24
<PAGE>
disclosure documents and that the sale of the Common Stock is inadvisable given
such disclosures.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party, except
to the extent provided in Section 4 hereof. Notwithstanding any such
termination, the provisions of Sections 4, 6, 9 and 11 hereof shall remain in
effect.
Section 9. Notices. All notices and other communications under
-------
this Agreement shall be in writing and shall be deemed to have been duly given
if delivered, mailed or transmitted by any standard form of telecommunication.
Notices shall be addressed as follows:
If to the Underwriter:
Ryan, Beck & Co., Inc.
220 South Orange Avenue
Livingston, New Jersey 07039
Attention: David P. Downs, Senior Vice-President
with a copy to:
Thacher Proffitt & Wood
1700 Pennsylvania Avenue, N.W.
Suite 800
Washington, D.C. 20006
Attention: Richard A. Schaberg, Esq.
If to the Company or the Bank:
Key Capital Corporation
7F Gwynns Mill Court
Owings Mills, MD 21117
Attention: David H. Wells, Jr., President
with a copy to:
Housley Kantarian & Bronstein, P.C.
1220 19/th/ Street, N.W.,
Suite 700
Washington, DC 20036
Attention: James C. Stewart, Esq.
25
<PAGE>
Section 10. Parties. This Agreement is made solely for the benefit
-------
of the Underwriter, and the officers, directors, employees, agents and legal
counsel of the Underwriter specified in Section 6 hereof, the Company and, to
the extent expressed, any person controlling the Company or the Underwriter, and
the directors of the Company, its respective officers who have signed the
Registration Statement, and their respective executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" shall
not include any purchaser, as such purchaser, from the Underwriter of the Common
Stock.
Section 11. Arbitration. Any claims, controversies, demands,
------------
disputes or differences between or among the parties hereto or any persons bound
hereby arising out of, or by virtue of, or in connection with, or otherwise
relating to this Agreement shall be submitted to and settled by arbitration
conducted in Baltimore, Maryland, before one or three arbitrators, each of whom
shall be knowledgeable in the field of securities law and investment banking.
Such arbitration shall be conducted in accordance with the rules then obtaining
of the American Arbitration Association. The parties hereto agree to share
equally the responsibility for all fees of the arbitrators, abide by any
decision rendered as final and binding and waive the right to appeal the
decision or otherwise submit the dispute to a court of law for a jury or non-
jury trial. The parties hereto specifically agree that neither party may appeal
or subject the award or decision of any such arbitrator to appeal or review in
any court of law or in equity or in any other tribunal, arbitration system or
otherwise. Judgment upon any award granted by such arbitrator may be enforced in
any court having jurisdiction thereof.
Section 12. Governing Law. This Agreement shall be governed by the
-------------
laws of the State of New Jersey.
Section 13. Counterparts. This Agreement may be executed in one or
------------
more counterparts, and when a counterpart has been executed by each party, all
such counterparts taken together shall constitute one and the same agreement.
Section 14. Miscellaneous. This Agreement sets forth the entire
-------------
understanding and agreement of the parties hereto representing the subject
matter hereof and supersedes and cancels all prior agreements. Any provision in
this Agreement which shall be found to be unenforceable shall not affect the
validity of the remaining terms of this Agreement. Time shall be of the essence
for this Agreement.
26
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement between the Company and the
Underwriter in accordance with its terms.
Very truly yours,
KEY CAPITAL CORPORATION
By: _______________________________
Name: David H. Wells, Jr.
Title: President
KEY BANK & TRUST
By: _______________________________
Name: David H. Wells, Jr.
Title: President
Confirmed and accepted as of
the date first above written:
RYAN BECK & CO., INC.
By: ____________________________________
Name: David P. Downs
Title: Senior Vice-President
27
<PAGE>
EXHIBIT A
---------
KEY CAPITAL CORPORATION
(a Maryland corporation)
Shares of Common Stock
PRICE DETERMINATION AGREEMENT
-----------------------------
___________________________, 1999
Ryan, Beck & Co., Inc.
220 South Orange Avenue
Livingston, New Jersey 07039
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated the date hereof (the
"Underwriting Agreement"), among Key Capital Corporation, a Maryland corporation
(the "Company") and Ryan, Beck & Co., Inc. (the "Underwriter"). The
Underwriting Agreement provides for the purchase by the Underwriter from the
Company subject to the terms and conditions set forth therein, of _____ shares
of Common Stock of the Company (the "Common Stock"), subject to the
Underwriter's option to purchase up to an additional ______ shares of Common
Stock (to cover over-allotments, if any). This Agreement is the Price
Determination Agreement referred to in the Underwriting Agreement.
Pursuant to Section 2 of the Underwriting Agreement, the Company agrees
with the Underwriter as follows:
1. The public offering price per share of Common Stock shall be
$__________.
2. The purchase price per share of Common Stock to be paid by the
Underwriter shall be $____.
3. The commission per share of Common Stock to be paid by the Company to
the Underwriter for its commitment hereunder shall be $_____.
1
<PAGE>
The Company represents and warrants to the Underwriter that the
representations and warranties of the Company set forth in Section l(a) of the
Underwriting Agreement are accurate as though expressly made at and as of the
date hereof.
This Agreement shall be governed by the laws of the State of New Jersey.
If the foregoing is in accordance with the understanding of the Underwriter
of the agreement between the Underwriter and the Company, please sign and return
to the Company a counterpart hereof, whereupon this instrument, along with all
counterparts and together with the Underwriting Agreement, shall be a binding
agreement between the Underwriter and the Company in accordance with its terms
and the terms of the Underwriting Agreement.
Very truly yours,
KEY CAPITAL CORPORATION
By: ___________________________
Name: David H. Wells, Jr.
Title: President
KEY BANK & TRUST
By: ____________________________
Name: David H. Wells, Jr.
Title: President
Confirmed and accepted as of
the date first above written:
RYAN, BECK & CO., INC.
By: _________________________________
Name: David P. Downs
Title: Senior Vice-President
2
<PAGE>
March 1, 1999
Board of Directors
Key Capital Corporation
7F Gwynns Mill Court
Owings Mills, Maryland 21117
RE: Registration Statement on Form S-1
Gentlemen:
We have acted as special counsel to Key Capital Corporation (the
"Company"), in connection with the Registration Statement on Form S-1 to be
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Registration Statement"). The Registration Statement
relates to shares of common stock of the Company (the "Common Stock") to be
issued in connection with the Community Offering (defined and described in the
Prospectus, which is part of the Registration Statement) and Public Offering
(defined and described in the Prospectus) of the Company.
In rendering this opinion, we have assumed that the Common Stock will be
offered and sold in the manner described in the Prospectus. We have examined
such records and documents and made such examination as we have deemed relevant
in connection with this opinion.
Based upon the foregoing, it is our opinion that the shares of Common Stock
will, when issued and sold as contemplated by the Registration Statement, be
legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Prospectus under the
heading "Legal Matters."
HOUSLEY KANTARIAN & BRONSTEIN, P.C.
By: /s/James C. Stewart
---------------------
James C. Stewart
<PAGE>
EXHIBIT 10.3
KEY BANK AND TRUST
1999 CASH INCENTIVE BONUS PLAN
A Cash Incentive Bonus is to be paid to certain designated Officers based on the
profitability of the Bank. While inclusion in the Cash Incentive bonus plan is
discretionary with both the Committee and the Board, generally this bonus is
performance based and is generally limited to those individuals who have been
General Corporate Officers and/or Division Managers for at least one year.
The Cash Incentive Bonus shall be calculated on results of operations of Key
Bank and Trust and subsidiaries for calendar year 1999.
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, 1999.
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, 1999 - $290 million, Net pre-tax profits
$4,900,000 - Calculate 1% of $290 million = $2,900,000 - then deduct $2,900,000
from $4,900,000 = $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 1999. 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 1999 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 1999 shall be paid between 15
and 30 days after completion of the year end audit and issuance of financial
reports for 2000 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 2000. 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%
Sean Hough, VP .4%
</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, 1999, 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
1999 SPECIAL BONUS PLAN FOR DIVISION MANAGERS
Irrespective of the overall profitability of the Bank, certain individual
officers in charge of revenue producing divisions 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 auditors). 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, 1999 - $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 is 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 1999 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 1999 shall be paid between 15
and 30 days after completion of the year end audit and issuance of financial
reports for 2000 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, 1999, 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 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 LLP
KPMG LLP
Baltimore, Maryland
March 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements and notes thereto of Key Capital Corporation at and for the
year ended December 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,633
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,498
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 220,957
<ALLOWANCE> 8,457
<TOTAL-ASSETS> 292,026
<DEPOSITS> 257,024
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 5,266
<LONG-TERM> 0
0
0
<COMMON> 4,533
<OTHER-SE> 22,203
<TOTAL-LIABILITIES-AND-EQUITY> 292,026
<INTEREST-LOAN> 27,832
<INTEREST-INVEST> 1,884
<INTEREST-OTHER> 992
<INTEREST-TOTAL> 30,708
<INTEREST-DEPOSIT> 11,591
<INTEREST-EXPENSE> 11,769
<INTEREST-INCOME-NET> 18,939
<LOAN-LOSSES> 5,179
<SECURITIES-GAINS> (18)
<EXPENSE-OTHER> 19,689
<INCOME-PRETAX> 5,666
<INCOME-PRE-EXTRAORDINARY> 5,666
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,768
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 7.12
<LOANS-NON> 4,736
<LOANS-PAST> 1,878
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,200
<ALLOWANCE-OPEN> 8,024
<CHARGE-OFFS> 10,716
<RECOVERIES> 5,970
<ALLOWANCE-CLOSE> 8,457
<ALLOWANCE-DOMESTIC> 8,457
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
Exhibit 99
STOCK ORDER FORM Key Capital Corporation
Note: In order to subscribe in the Community Offering, you must submit a
properly completed original stock order form. Copies will not be accepted.
Please read the Stock Order Form Guide and Instructions on the back of this form
before completion.
================================================================================
Deadline: The Offering ends at __:__ _.m. Maryland Time, ___________, 1999.
Your Stock Order Form properly executed and with the correct payment, must be
received at the address on the bottom of this form by this deadline, or it will
be considered void.
================================================================================
Number of Shares Maximum
(1) Number of Shares Price Per Share (2) Total Payment Due
--------------- $12.00 ---------------
x = $
--------------- ---------------
The minimum number of shares that may be subscribed for is 100. The maximum
subscription order is 5,000 shares. In the event that the final purchase price
is less than $12.00 per share, the difference will be refunded.
================================================================================
Method of Payment
================================================================================
(3) [ ] Enclosed is a check, bank draft or money order payable to
_____________, as Escrow Agent for Key Capital Corporation of
$_________.
(4) [ ] I wish to pay by wire transfer. Please contact the Stock Information
Center for wire instructions.
(5) [ ] I authorize Key Bank and Trust to make withdrawals from my Key Bank and
Trust certificate or savings account(s) shown
below, and understand that the amounts will not otherwise be available for
withdrawal:
Account Number(s) Amounts(s)
- ------------------------------------------ --------------------
- ------------------------------------------ --------------------
- ------------------------------------------ --------------------
- ------------------------------------------ --------------------
Total Withdrawal
--------------------
There is no penalty for early withdrawals used for this payment.
================================================================================
Stock Registration
================================================================================
<TABLE>
(6) Form of stock ownership
<S> <C> <C>
[ ] Individual [ ] Uniform Transfers to Minors [ ] Partnership
[ ] Joint Tenants [ ] Uniform Gifts to Minors [ ] Individual Retirement Account
[ ] Tenants in Common [ ] Corporation [ ] Fiduciary/Trust (Under Agreement Dated ________)
- -------------------------------------------------------------------- ---------------------------------------------------
Name Social Security # or Tax I.D.
- -------------------------------------------------------------------- ---------------------------------------------------
Name Social Security # or Tax I.D.
- -------------------------------------------------------------------- ---------------------------------------------------
Street Address Daytime Telephone
- -------------------------------------------------------------------- ---------------------------------------------------
City State Zip Code Evening Telephone
- -------------------------------------------------------------------- ---------------------------------------------------
</TABLE>
Directors, Executive Officers and Employees of Key Bank and Trust
[ ] Check here if you are a director, officer or employee of Key Bank and
Trust or a member of such person's immediate family.
NASD Affiliation (This section only applies to those individuals who meet the
criteria below)
[ ] Check if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply with
the conditions under which an exemption from the NASD's Interpretation With
Respect to Free-Riding and Withholding is available, you agree, if you have
checked the NASD affiliation box: (1) not to sell, transfer or hypothecate the
shares subscribed for herein for a period of three months following the issuance
and (2) to report this subscription in writing to the applicable NASD member
within one day of the payment therefor.
================================================================================
Acknowledgment By signing below, I acknowledge receipt of the Prospectus dated
____________, 1999 and that I have reviewed all provisions therein including the
following risks described in the section entitled "Risk Factors:" (i) credit
risks related to lending specialties; (ii) industry risks related to
construction and development lending; (iii) risks related to the proposed new
banking subsidiaries and branch expansion; (iv) Key Operations' dependence on
significant customer; (v) no prior market for the Common Stock and no
assurance of an active and liquid trading market; (vi) substantial competition
in the financial services industry; (vii) recent stock market volatility;
(viii) dependence on key personnel; (ix) control of the Company;
(x) geographic concentration; (xi) technology risks and Year 2000 problem; (xii)
ability to make dividend payments; (xiii) government regulations; and (xiv)
interest rate risk. I understand that I may not change or revoke my order once
it is received by Key Capital Corporation. Under penalties of perjury, I further
certify that: (1) the social security number or taxpayer identification number
given above is correct; and (2) I am not subject to backup withholding. You must
cross out this item, (2) above, if you have been notified by the Internal
Revenue Service that you are subject to backup withholding because of under-
reporting interest or dividends on your tax return.
================================================================================
Signature THIS FORM MUST BE SIGNED AND DATED THIS ORDER IS NOT VALID IF THE
STOCK ORDER FORM IS NOT SIGNED. YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE
PROVISIONS OF THE PROSPECTUS. When purchasing as a custodian, corporate officer,
etc., include your full title. An additional signature is required only if
payment is by withdrawal from an account that requires more than one signature
to withdraw funds. If you need help completing this Form, call the Stock
Information Center at (410) 363-7050.
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------- -------------------------------------------------------------
Signature Title (if applicable) Date Signature Title (if applicable) Date
- --------------------------------------------------------------- -------------------------------------------------------------
</TABLE>
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT DEPOSIT ACCOUNTS ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
================================================================================
- ------------------------------------------------------------------------------
Date Rec'd __/__/__ Order # ________ Batch # ________
OFFICE USE Check # _________ Category _______
Amount $________ Initials _________
- ------------------------------------------------------------------------------
Stock Information Center
7F Gwynns Mill Court
Owings Mills, Maryland 21117
(410) 363-7050
<PAGE>
Stock Ownership Guide
- ---------------------
Instructions: See your legal advisor if you are unsure about the correct
registration of your stock.
Individual - The share are to be registered in an individual's name only. You
may not list beneficiaries for this ownership.
Joint Tenants - Joint tenants with right of survivorship identifies two or more
owns. When shares are held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the death
of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common - Tenants in common may also identify two or more owners. When
shares are held by tenants in common stock, upon the death of one co-tenant
ownership of the shares will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or sale
of shares held by tenants in common. You may not list beneficiaries for this
ownership.
Individual Retirement Account - Individual Retirement Account ("IRA") holders
may make share purchases from their deposits through a pre-arranged "trustee-to-
trustee" transfer. Shares may only be held in a self-directed IRA. Key Bank and
Trust does not offer a self-directed IRA. Please contact the Stock Information
Center if you have any questions about your IRA account. There will be no early
withdrawal or IRS penalties incurred in these transactions.
Uniform Gifts to Minors - For residents of may states, shares may be held in the
name of a custodian for the benefit of a minor under the Uniform Transfers to
Minors Act. For residents in other states, shares may be held in a similar type
of ownership under the Uniform Gifts to Minors Act of the individual states. For
either type of ownership, the minor is the actual owner of the shares with the
adult custodian being responsible for the investment until the child reaches
legal age. On the first line, print the first name, middle initial and last name
of the custodian, with the abbreviation "CUST" and "Unif Tran Min Act" or "Unif
Gift Min Act" after the name. Print the first name, middle initial and last name
of the minor on the second "NAME" line. Standard U.S. Postal Services state
abbreviations should be used to describe the appropriate state. For example,
shares held by John Doe as custodian for Susan Doe under the Maryland Transfers
to Minor Act will be abbreviated John Doe, CUST Susan Doe Unif Tran Min Act MD.
Use the minor's Social Security Number. Only one custodian and one minor may be
designated.
Corporate/Partnership - Corporation/Partnerships may purchase shares. Please
provide the Corporation/Partnership's legal name and Tax I.D.
Fiduciary/Trust - Generally, fiduciary relationships (such as trusts, estates,
guardianships, etc.) are established under a form of trust agreement or pursuant
to a court order. Without a legal document establishing a fiduciary
relationship, your shares may not be registered in a fiduciary capacity.
Instructions: On the first "NAME" line, print the first name, middle initial and
last name of the fiduciary if the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the first "NAME" line. Following
the name, print the fiduciary "title" such as trustee, executor, personal
representative, etc. On the second "NAME" line, print either the name of the
maker, donor or testator OR the name of the beneficiary. Following the name,
indicate the type of legal document establishing the fiduciary relationship
(agreement, court order, etc.) In the blank after "Under Agreement Dated," fill
in the date of the document governing the relationship. The date of the document
need not be provided for a trust created by a will. An example of fiduciary
ownership of stock in the case of a trust is: John D. Smith, Trustee for Thomas
A. Smith Trust Under Agreement Dated 06/09/87.
Item Instruction
- ----------------
Items 1 and 2- Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying the number of
shares by the maximum subscription price of $12.00 per share. The minimum
purchase is 100 shares. The maximum amount any person may purchase is
$_________. The Company reserves the right to waive these limits without notice
to any subscriber and to reject the subscription of any order received in the
Community Offering, if any, in whole or in part.
Item 3- Payment for shares may be made by check, bank draft or money order made
payable to "__________________________, as Escrow Agent for Key Capital
Corporation." DO NOT MAIL CASH. If the Community Offering is not completed by
___________, 1998 (unless extended by the Company) or the Offering is otherwise
terminated by the Company, all subscription funds will be refunded in full
without interest.
Item 4- To pay withdrawal from a savings account or certificate of deposit at
Key Bank and Trust, insert the account number(s) and the amount(s) you wish to
withdraw from each account. If more than one signature is required to withdraw,
each must sign in the Signature box on the front of this form. To withdraw from
an account with checking privileges, please write a check. No early withdrawal
penalty will be charged on funds used to purchase shares in the Community
Offering. A hold will be placed on the account(s) for the amount(s) you show.
Payments will remain in certificate account(s) until the Offering closes and
will continue to earn interest at the account rate until then. If a partial
withdrawal reduces the balance of a certificate account to less than the
applicable minimum, the remaining balance with thereafter earn interest at Key
Bank and Trust passbook rate.
Item 5- If you wish to pay by wire transfer, please check this box and contact
the Stock Information Center.
Item 6- The stock transfer industry has developed a uniform system of
shareholder registration that we will use in the issuance of Key Capital
Corporation common stock. Print the name(s) in which you want the shares
registered and the mailing address of the registration. Include the first name,
middle initial and last name of the shareholder. Avoid the use of two initials.
Please omit words that do not affect ownership rights, such as "Mrs.", "Mr.",
"Dr.", special account", etc.
Enter the Social Security or Tax I.D. number of one registered owner. This
registered owner must be listed on the first "NAME" line. Be sure to include
your telephone number because we will need to contact you if we cannot execute
your order as given. Review the Stock Ownership Guide and refer to the
instructions for Uniform Gifts to Minors/Uniform Transfers to Minors and
Fiduciaries.
