As filed with the Securities and Exchange Commission on December 12, 1997
Registration No. 333-37073
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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
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GLEN BURNIE BANCORP
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Maryland 6022 52-1782444
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<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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101 Crain Highway, S.E.
Glen Burnie, Maryland 21061
(410) 766-3300
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(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
F. William Kuethe, Jr., President
Glen Burnie Bancorp
101 Crain Highway, S.E.
Glen Burnie, Maryland 21061
(410) 766-3300
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
James C. Stewart, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
(202) 822-9611
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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. [ ]
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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.
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<PAGE>
PROSPECTUS
GLEN BURNIE BANCORP
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
94,370 Shares of Common Stock, $10.00 Par Value
STOCKHOLDER PURCHASE PLAN
100,000 Shares of Common Stock, $10.00 Par Value
This Prospectus relates to the offering by Glen Burnie Bancorp (the
"Company") to existing stockholders of record of 94,370 shares of its common
stock, $10.00 par value per share (the "Common Stock") pursuant to its Dividend
Reinvestment and Stock Purchase Plan (the "Dividend Reinvestment Plan") and
100,000 shares of its Common Stock pursuant to its Stockholder Purchase Plan
(the "Purchase Plan") (collectively, the "Plans"). The Plans offer stockholders
a convenient way to add to their ownership of the Common Stock without the
payment of brokerage commissions, service charges, fees or other expenses that a
stockholder would customarily be charged if they purchased the Common Stock on
the open market.
Dividend Reinvestment and Stock Purchase Plan. The Dividend
Reinvestment Plan offers record holders of the Common Stock the opportunity to
apply any cash dividends paid on the Common Stock towards the purchase of whole
or fractional shares of Common Stock. Shares will automatically be credited on
each dividend payment date to the accounts of stockholders who elect to
participate in the Dividend Reinvestment Plan. Shares of Common Stock issued
under the Dividend Reinvestment Plan will come from the Company's authorized but
unissued shares. The price per share of Common Stock purchased from the Company
pursuant to the Plan will be based on the Fair Market Value (as such term is
defined in the Dividend Reinvestment Plan) of the Common Stock (less a 5%
discount unless the Board of Directors determines otherwise) provided that no
shares may be issued for less than their par value of $10.00 per share.
Stockholder Purchase Plan. Under the Purchase Plan, stockholders of
record will have the option each quarter of purchasing their pro rata portion of
a new issuance of shares of the Common Stock and may be given the opportunity to
purchase unsubscribed shares as well. The number of shares to be issued in any
quarter will be determined by a Committee of the Board of Directors provided
that the aggregate number of shares that may be issued under the Plan may not
exceed 100,000 shares. The purchase price for all shares to be issued pursuant
to such options will be the fair market value of the Common Stock as determined
by the latest sale consummated by the principal market maker for the Common
Stock, Legg Mason Walker Wood, Inc. ("Legg Mason"), prior to the date of grant.
Although trading information for the Common Stock is available on the
OTC Bulletin Board, there is currently not an active trading market for the
Common Stock. Accordingly, stockholders should only consider an additional
investment in the Common Stock through the Plans if they have a long-term
investment intent.
The Company recommends that you retain this Prospectus for future
reference.
See "Risk Factors" beginning on page 1 for certain information that
should be considered by investors interested in acquiring shares pursuant to the
Plans.
THESE SECURITIES ARE NOT BANK DEPOSITS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER STATE OR FEDERAL GOVERNMENT AGENCY
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is _____________, 1997
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION SHALL 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 IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS 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
PROSPECTUS SUMMARY.................................................... i
RISK FACTORS.......................................................... 1
THE PLANS............................................................. 6
USE OF PROCEEDS....................................................... 9
MARKET FOR THE COMMON STOCK........................................... 9
DIVIDENDS............................................................. 10
SELECTED FINANCIAL DATA............................................... 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................... 12
BUSINESS ............................................................. 21
SUPERVISION AND REGULATION............................................ 30
MANAGEMENT............................................................ 35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........ 39
DESCRIPTION OF CAPITAL STOCK.......................................... 40
PLAN OF DISTRIBUTION.................................................. 42
EXPERTS............................................................... 42
LEGAL MATTERS......................................................... 43
AVAILABLE INFORMATION................................................. 43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................ 44
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed
information regarding the Company, the Bank and the Plans and the Consolidated
Financial Statements of the Company appearing elsewhere in this Prospectus.
The Company
Glen Burnie Bancorp (the "Company") is a bank holding company organized
in 1990 under the laws of the State of Maryland. It presently owns all the
outstanding shares of capital stock of The Bank of Glen Burnie (the "Bank"), a
commercial bank organized in 1949 under the laws of the State of Maryland,
serving Anne Arundel County and surrounding areas from its main office in Glen
Burnie, Maryland and branch offices in Odenton, Riviera Beach, Crownsville and
Severn, Maryland. The Bank is engaged in the commercial and retail banking
business as authorized by the banking statutes of the State of Maryland,
including receiving of demand and time deposits, and the making of loans to
individuals, associations, partnerships and corporations. Real estate financing
consists of residential first and second mortgage loans, home equity lines of
credit and commercial mortgage loans. Commercial lending consists of both
secured and unsecured loans. The Bank's deposits are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC").
The Company's principal executive office is located at 101 Crain
Highway, S.E., Glen Burnie, Maryland 21061. Its telephone number at such office
is (410) 766-3300.
The Dividend Reinvestment and Stock Purchase Plan
Purpose. The Dividend Reinvestment Plan offers stockholders of record a
simple and convenient way to invest their cash dividends in additional shares of
the Common Stock without the payment of brokerage commissions, service charges
and other expenses.
How to Participate. Any stockholder of record is eligible to
participate in the Dividend Reinvestment Plan by signing and returning the
Stockholder Authorization Form which accompanies this Prospectus. Stockholders
holding their shares in "street name" through brokers are not eligible to
participate in the Dividend Reinvestment Plan. Stockholders may enroll at any
time. If a Stockholder Authorization Form is received prior to the record date
for a dividend, that dividend will be reinvested. No fees or transactional costs
are charged for participating in the Dividend Reinvestment Plan.
What Will be the Purchase Price. The purchase price for Common Stock
acquired through the Dividend Reinvestment Plan will be the fair market value of
the Common Stock (defined as the price at which the latest share sale was
consummated by Legg Mason prior to any dividend declaration date) less a 5%
discount unless the Board of Directors determines otherwise. In no event,
however, may shares be purchased at less than their par value of $10.00 per
share.
Administration of the Dividend Reinvestment Plan. The Dividend
Reinvestment Plan is administered by the Company. All correspondence relating to
the Dividend Reinvestment Plan should be addressed to:
President
Glen Burnie Bancorp
107 Crain Highway, S.E.
Glen Burnie, Maryland 21601
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The Stockholder Purchase Plan
Purpose. The Purchase Plan is intended to provide another simple and
convenient way for stockholders to add to their holdings of the Common Stock
without the payment of the brokerage and other charges that normally apply to
open market transactions. In addition, the Purchase Plan allows the Company to
increase its capital for use in its business.
How to Participate. Each quarter, stockholders of record will be
notified that they will have the option of purchasing a pro rata portion of a
new issuance of shares. The option price must be paid in full at the time the
option is exercised. Options must be exercised within the expiration date which
will be no later than three months after the date of grant. No fees or
transactional costs are charged for participating in the Purchase Plan.
How Many Shares May be Purchased. The number of shares to be issued
each quarter will be determined by the Board of Directors. Each stockholder will
have the right to purchase their pro rata portion of such shares based on the
ratio of the number of shares owned of record as of the date of the option grant
compared to the total number of shares of Common Stock outstanding on that date.
In its discretion, the Board may allow stockholders to purchase unsubscribed
shares at the same price per share on such other terms or conditions as the
Board may prescribe. In the event of an oversubscription, such unsubscribed
shares shall be allocated among subscribers on such basis as the Board may
determine.
What Will be the Purchase Price. The purchase price for shares under
the Purchase Plan will be their fair market value, as determined by the latest
sale consummated by Legg Mason prior to the date on which the option is granted.
Shares, however, will not be issued for less than their par value of $10.00 per
share.
Administration of the Purchase Plan. The Purchase Plan will be
administered by a committee of at least three directors including the Chairman
of the Board, the Chief Executive Officer and one other director to be appointed
annually by the Board of Directors.
Risk Factors
See "Risk Factors" beginning on page 1 for a discussion of certain
factors that should be considered by prospective investors, including risk of
continued losses, recent loan loss experience involving significant borrowers,
litigation risk, existence of Memorandum of Understanding, other regulatory
issues, risk of non-compliance with regulatory requirements, dependence on real
estate; localized business, interest rate risk, substantial competition in the
banking industry, restrictions on ability to raise capital, limited market for
the common stock, dividend payment risks, pricing risks in the Plans, potential
dilution and control of the Company.
ii
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RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be carefully considered by investors in deciding whether to
purchase the Common Stock offered hereby.
Risk of Continued Losses
During the years ended December 31, 1996 and 1995, the Company reported
consolidated net losses of $1.020 million ($1.16 per share) and $1.727 million
($2.01 per share), respectively. These results included substantial provisions
for credit losses of $6.596 million made in 1996 and $7.925 million made in 1995
to bolster the Company's consolidated allowance for credit losses which was
being depleted due to substantial loan quality deterioration. Net charge-offs
were $5.233 million during 1996 and $6.991 million during 1995.
The ability of the Company to recover from its consolidated net loss
position is largely dependent on the quality and level of the Bank's earning and
nonperforming assets, the interest rate environment and the adequacy of the
provision for credit losses. The real estate market in Anne Arundel County,
Maryland, the area where the Bank conducts its business, and the overall economy
in such area is likely to continue to have a significant effect on the quality
and level of the Bank's assets in the future. While the consolidated allowance
for credit losses of $5.061 million at the end of 1996 represented less than
3.9% of the Bank's gross loans, it represented 85.0% of its impaired loans.
Although this allowance is intended to cover known and inherent risks in the
loan portfolio, the allowance is an estimate which is inherently uncertain and
depends on the outcome of future events. There can be no assurance that
substantial future provisions for credit losses will not be required, or that
such provisions will not adversely impact the Bank's results of operations in
any given reporting period or over a longer period of time. Moreover, there can
be no assurance that the Bank will not continue to make loan charge-offs in the
future or that the allowance for credit losses will be sufficient to cover
future loan charge-offs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
Recent Loan Loss Experience Involving Significant Borrowers
The Bank had outstanding loans to Mr. Brian Davis and various entities
and persons affiliated with him aggregating approximately $6.0 million. The
major borrowers in the affiliated group have filed bankruptcy proceedings and
significant recovery by the Bank on these loans is unlikely. As a result of the
foregoing, all but $30,000 of these loans have been charged-off.
Mr. Davis has pled guilty to committing fraud against the Bank and
various other banks. The Bank's former chief lending officer, Steven G. Boyd,
has pled guilty to accepting bribes from Mr. Davis in return for approving loans
to Mr. Davis and related entities and to straw borrowers. The Federal grand jury
indictment against Mr. Boyd alleged, among other things, that he approved and
recommended loans for Mr. Davis and his affiliates and in addition approved
loans from the Bank of approximately $500,000 to "straw men" the proceeds of
which he knew were for the benefit of Mr. Davis in violation of the Bank's limit
on the amount that could be lent to related borrowers. The United States
Attorney's Office has stated that the investigation which led to Mr. Boyd's
indictment and Mr. Davis's conviction is continuing.
At December 31, 1996, an equipment and automobile leasing entity and
its affiliates had approximately $6,218,000 in outstanding lease loans on which
approximately $700,000 in charge-offs had been taken during 1996. The Bank has
ceased approving new loans for these customers due to concerns about the quality
of certain of the loans and leases. At September 30, 1997, the principal
balances of these loans had been reduced to $3.2 million primarily through
pay-offs.
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<PAGE>
Litigation Risk
The Bank is currently involved in a variety of litigation that may
affect its results of operations. Several of these lawsuits stem from the Bank's
relationship with a former borrower, Brian Davis, who has since pled guilty to
defrauding the Bank, among other financial institutions. In the suit seeking the
greatest amount of damages from the Bank, another former borrower has alleged
that the Bank, acting in concert with Mr. Davis who served as the borrower's
former treasurer and chief financial officer, defrauded the borrower and caused
its bankruptcy. Plaintiff seeks $5,000,000 in compensatory damages and
$50,000,000 in punitive damages in this suit. The Bank is also a defendant in
three separate suits by creditors of a company controlled by Mr. Davis alleging
in each case that the Bank improperly negotiated checks for loan proceeds over
forged endorsements. The aggregate damages sought in these suits total
approximately $2,000,000. A judgment against the Bank has been rendered in favor
of plaintiffs in the amount of $284,000 in one case which the Bank has appealed.
In another case in which plaintiff seeks compensatory damages of $500,000 and
punitive damages of $5,000,000, it is alleged that Bank employees falsely
represented that checks drawn on Mr. Davis's account and payable to plaintiff
had cleared the Bank. See "Business -- Legal Proceedings." Although the Company
does not believe that the outcome of this litigation will have a material
adverse effect on its business, these and other lawsuits have required the Bank
to incur significant legal and professional fees which have reduced the Bank's
profitability. In addition, adverse publicity generated by this litigation may
affect the Bank's competitive position. The Company is unable to predict how
long it will take to resolve the various litigation in which the Bank is
involved nor whether all such litigation will be resolved on terms that are
favorable to the Bank.
Existence of Memorandum of Understanding
The Bank has been operating under Memoranda of Understanding with
federal and state banking regulators for over a year. Effective June 13, 1996,
following a routine examination of the Bank, the Federal Deposit Insurance
Corporation (the "FDIC") and the Maryland State Bank Commissioner (the
"Commissioner") entered into a Memorandum of Understanding (the "M.O.U.") with
the Bank's Board of Directors to address certain concerns raised by the FDIC and
the Commissioner. The M.O.U. required the Bank, among other things, to reduce
classified assets and contingent liabilities, to maintain certain ratios, to
provide the FDIC and the Commissioner with advance notice of dividend
declarations, and to develop plans, strategies and monitoring systems with
respect to loan underwriting and administration, operations and budgets. On July
10, 1997, the Board of Directors executed a revised Memorandum of Understanding
(the "Revised M.O.U.") which supersedes the June 13, 1996 M.O.U. Under the
Revised M.O.U., the Bank may not declare or pay any dividends to the Company
without the prior written consent of the FDIC and the Commissioner if the ratio
of the Bank's Tier 1 capital to assets would be less than 6.0%. Dividends to the
Company may not exceed 50% of net operating income after taxes for the period
declared without the prior written consent of the FDIC and the Commissioner.
Within 360 days of the Effective Date of the Revised M.O.U., the Bank is
required to reduce its classified assets to 25% of Tier 1 Capital plus its
Allowance for Loan and Lease Losses and to reduce its ratio of non-accrual loans
and loans 30 days or more past due to no more than 3.5% of gross loans.
Additionally, the Bank will adopt and implement an internal loan review and
grading system meeting certain criteria and make certain changes in existing
policies and in its strategic plan. See "Business -- Memoranda of
Understanding."
The Bank believes that it is currently in substantial compliance with
the terms of the Revised M.O.U. that are required to be met as of the date of
this Prospectus. There can be no assurance, however, that the Bank will remain
in compliance with the M.O.U. Should it fail to comply with the M.O.U., it may
be subject to future regulatory action. See "Risk Factors -- Risk of
Non-Compliance with Regulatory Requirements."
Other Regulatory Issues
Due to the nature of their business, both the Company and the Bank are
subject to extensive legislation, regulation and supervision. The Federal
Reserve Board and the FDIC have extensive capital requirements applicable to the
Company and the Bank, respectively. The type, location and manner in which they
may conduct business is extensively regulated and examined by the Federal
Reserve Board, the FDIC and the Commissioner. See "Supervision and Regulation."
2
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Risk of Non-Compliance with Regulatory Requirements
While the Company and the Bank believe they are in substantial
compliance with all applicable Federal and state regulations, there can be no
assurance that they will continue to satisfy minimum capital or other Federal or
state banking requirements. Should they fail to comply with such requirements,
enforcement actions may include the issuance of formal and informal agreements,
the issuance of directives to increase capital, the issuance of removal and
prohibition orders against institution-affiliated parties, the imposition of
restrictions and sanctions under the prompt corrective action provisions of the
FDIC Improvement Act, the imposition of civil money penalties, the issuance of a
cease-and-desist order that can be judicially enforced, the termination of
insurance of deposits, and the imposition of a conservator or receiver.
Dependence on Real Estate; Localized Business
The Bank's primary lending focus historically has been real estate
mortgage and commercial lending, and, to a lesser extent, construction lending.
At September 30, 1997, residential and commercial real estate mortgage loans and
construction loans and land development loans comprised approximately 71.6% of
the Bank's loan portfolio. The majority of this portfolio is made up of loans
secured by commercial real estate and construction and land development loans
which comprised 41.2% of the loan portfolio. This real estate dependence may
increase the risk of loss in the Bank's loan portfolio, especially if there
occurs a general decline in real estate values in the areas where properties
securing the Bank's loans are located. Approximately 72% of the Bank's loans
made during 1996, representing 75% in outstanding principal amount, were to
borrowers located in northern Anne Arundel County, Maryland at the time of loan
origination. Northern Anne Arundel County is a mature suburb of Baltimore
characterized by modest population growth and an aging population. See "Business
- -- Market Area." Should the economy in this area suffer any adversity, or
deteriorate for any reason, the quality of the Bank's loans could decline.
Adverse developments in the Bank's market area could particularly affect the
performance of the Bank's portfolio of commercial real estate and construction
and land development loans for which repayment and the value of the collateral
are dependent on the successful operation of the borrower's business. For a more
detailed discussion of the specific characteristics of the Bank's real estate
mortgage loan portfolio, nonperforming loans, and allowance for credit losses,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Interest Rate Risk
The operations of the Bank are significantly influenced by general
economic conditions and by the related monetary and fiscal policies of the
Federal government. Deposit flows and the cost of funds are influenced by
interest rates of competing investments and general market rates of interest.
Lending activities are affected by the demand for loans, which in turn is
affected by the interest rates at which such financing may be offered and by
other factors affecting the availability of funds.
The operations of the Bank are substantially dependent on its net
interest income, which is the difference between the interest income received
from its interest-earning assets and the interest expense incurred in connection
with its interest-bearing liabilities. Increases 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, fluctuations in interest
rates also can result in disintermediation, which is the flow of funds away from
depository institutions into direct investments, such as corporate securities
and other investment vehicles which, because of the absence of Federal deposit
insurance, generally pay higher rates of return than depository institutions.
Changes in interest rates will also affect the value of the Bank's
investment securities portfolio designated as available for sale. Generally, an
increase in interest rates would result in a decline in the value of investment
securities available for sale, which would result in a corresponding adjustment
in stockholders' equity. Therefore, the Bank's and the Company's stockholders'
equity could change based on fluctuations in interest rates and in the value of
investment securities held for sale.
3
<PAGE>
Substantial Competition in the Banking Industry
The Bank faces substantial competition for deposits and loans from
other banking and financial institutions, including many which have
substantially greater resources, name recognition and market presence than the
Bank. Such competition comes not only from locally based institutions but also
from out-of-state financial intermediaries which have opened loan production
offices or which solicit deposits in its market area. Many of the financial
intermediaries operating in the Bank's market area offer certain services which
the Bank does not offer directly. Additionally, banks with larger capitalization
and financial intermediaries not subject to bank regulatory restrictions have
larger lending limits and are thereby able to serve the credit needs of larger
customers. Competitors of the Bank include commercial banks, savings
institutions, credit unions, thrift and loans, insurance companies, mortgage
companies, money market and mutual funds and other institutions which offer
loans and investment products. Historically, the Bank has sought to compete
against larger institutions on the basis of its local ownership and orientation
which the Bank believes has made it more responsive to its customers. The Bank,
however, also encounters significant competition from other locally based
community banks and financial institutions who compete on the same basis,
including a bank which recently has been established near its headquarters by
former directors and officers of the Bank and which may be expected to target
the Bank's customer base. See "Business -- Competition."
Restrictions on Ability to Raise Capital
The Company's stockholders generally have preemptive rights to
subscribe to any and all issuances of the Common Stock, on a proportionate basis
and in an amount equal to the ratio that each individual stockholder's total
number of shares bears to the total number of shares of Common Stock
outstanding. See "Description of Capital Stock." As a result of this provision,
the Company generally may not sell shares of Common Stock without first offering
them to the holders of the Common Stock. Such a provision could limit the
Company's ability to raise capital.
Limited Market for the Common Stock
The Common Stock is not listed on any stock exchange or on the Nasdaq
Stock Market. Although trading information for the Common Stock is available on
the OTC Bulletin Board, there is limited trading activity in the Common Stock.
Accordingly, stockholders who acquire shares of the Common Stock through the
Plans may encounter difficulty in disposing of such shares on the open market.
The absence of an active and liquid trading market for the Common Stock may also
have an impact on the prices which investors are willing to pay for the Common
Stock. Stockholders should only consider an additional investment in the Common
Stock pursuant to the Plans if they have a long-term investment intent.
Dividend Payment Risks
The Company has announced that it intends to pay dividends equal to
forty percent (40%) of its profits for each quarter. The Company's ability to
pay dividends to stockholders is dependent on its ability to receive dividends
from the Bank. Payment of dividends by the Bank to the Company and by the
Company to its stockholders, however, is subject to their respective financial
conditions and to regulation. Federal and state banking regulations prohibit
dividend payments unless the Company and the Bank have sufficient net retained
earnings and capital as determined by the regulators. See "Supervision and
Regulation -- Regulation of the Company -- Dividends and Distributions" and " --
Regulation of the Bank -- Dividend Limitations." The Bank's payment of dividends
is further restricted by the M.O.U. which requires prior approval of the FDIC
and the Commissioner for the payment of dividends by the Bank in excess of 50%
of its net operating income or if the Bank's Tier 1 capital ratio would be
reduced below 6.0%. The Company does not believe that these restrictions will
materially limit its ability to pay dividends. There is no assurance that either
the Bank or the Company will be legally or financially able to pay any specified
amount of dividends in the future. The second quarter 1997 dividend was paid
partly in cash and partly in stock.
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Pricing Risks in the Plans
Dividend Reinvestment Plan. There can be no assurance that the market
price of the Common Stock will stay at the level at which it is trading at the
time the dividend reinvestment price is calculated pursuant to the Dividend
Reinvestment Plan. Under the Dividend Reinvestment Plan, the value of the shares
to be issued in lieu of cash dividends is determined based on the higher of (a)
ninety-five percent (95%) of the market price at the time a dividend is declared
or (b) the stock's par value ($10.00 per share). By the time the dividend is
actually paid, the market price at which the Company's stock is selling may have
declined from the dividend reinvestment price. Thus, the number of shares to be
issued may be less than the number that would have been issuable had such number
been based on the sales price of the shares at the time the dividend is paid and
the market value of the shares actually issued may be less than the amount of
cash that would have been received had the dividend been paid in cash. See "The
Plans -- Dividend Reinvestment and Stock Purchase Plan."
Purchase Plan. There can be no assurance that shares purchased pursuant
to options issued under the Purchase Plan will continue to trade at their
purchase price. Further there can be no assurance that the market price of the
Common Stock will not decline in the period between the date an option is
exercised and the date shares are issued to a stockholder. Accordingly, there
can be no assurance that price paid by stock holding to acquire shares through
the Purchase Plan will be less than the price at which shares could have been
acquired on the open market.
Potential Dilution
Stockholders who do not elect to participate in the Plans may suffer
substantial dilution in their voting rights and their proportional interest in
any future net earnings of the Company.
Control of the Company
Pursuant to the Company's Articles of Incorporation, the affirmative
vote of 80% of the outstanding shares is required for the approval of any
merger, consolidation or share exchange involving the Company. In addition,
amendments to Company's Articles of Incorporation and Bylaws require an 80%
vote. As a result, the holders of 20% 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. In addition, such holders could prevent any amendment to the
Articles of Incorporation that might lower this voting requirement. The Board of
Directors currently controls over 20% of the outstanding stock. Accordingly, the
Board of Directors voting together as a group would be in a position to prevent
most acquisitions of the Company. In addition, the Maryland General Corporation
Law includes certain restrictions on 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 such voting rights have been
approved by a vote of the stockholders. See "Description of Capital Stock --
Certain Voting Requirements." These provisions may have the effect of
discouraging or preventing a future takeover attempt in which stockholders might
otherwise receive a premium for their shares over then current market prices.
5
<PAGE>
THE PLANS
The following discussion presents a general summary of the Plans.
Periodic reports are generally not furnished under the Plans although the
Company makes annual reports available to its stockholders which reports may
contain some information about the Plans. See "Available Information." Copies of
the Plans will be sent to stockholders upon written request to the Treasurer of
Glen Burnie Bancorp, 101 Crain Highway, S.E., Glen Burnie, Maryland 21061.
Dividend Reinvestment and Stock Purchase Plan
Under the Dividend Reinvestment Plan, the Company is offering its
stockholders of record the opportunity to receive additional shares of the
Common Stock in lieu of cash dividends, if and when dividends are declared by
the Board of Directors. Any record stockholder who elects to participate in the
Dividend Reinvestment Plan will receive, if and when any dividend is declared,
shares of Common Stock rather than cash on the dividend payment date. The number
of shares he will receive will equal the number obtained by dividing the amount
that he would have been paid in cash by a deemed per share "Purchase Price"
which is equal to the per share price paid in the latest sale consummated by
Legg Mason prior to the dividend declaration date less a 5% discount unless the
Board of Directors determines otherwise. In no event, however, will the Purchase
Price be less than the par value per share of $10.00.
Once an election to participate is made, all dividends thereafter
payable to the electing stockholder will be paid in Common Stock until such time
as (i) the stockholder advises the Company in writing that he no longer wishes
to participate in the Dividend Reinvestment Plan, (ii) the Company receives
written notice of the stockholder's death or adjudicated incapacity, or (iii)
the stockholder transfers record ownership of the shares dividends with respect
to which are subject to payment in stock under the Plan.
The Company will maintain an account reflecting stock dividends issued
under the Dividend Reinvestment Plan. Shares held in a participant's account
are voted directly by the participant. Certificates for stock dividends issued
under the Dividend Reinvestment Plan will only be provided upon (i) request by a
participating stockholder, (ii) withdrawal by a participating stockholder from
the Dividend Reinvestment Plan, or (iii) termination of the Dividend
Reinvestment Plan by the Company. Should participation in the Dividend
Reinvestment Plan be withdrawn or terminated, cash will be issued in lieu of
fractional shares. Certificates are generally issued within a week.
Stockholders holding Common Stock in "street name" through a broker are
not eligible to participate in the Dividend Reinvestment Plan with respect to
those shares. Any such holder who desires to participate in the Dividend
Reinvestment Plan should contact their broker and arrange to have such shares
registered in their name as a record holder.
Stockholders who reside in jurisdictions in which it is unlawful for
the Company to permit their participation are not eligible to participate in the
Dividend Reinvestment Plan. The Company also reserves the right to exclude a
stockholder who resides in a foreign country or in a jurisdiction which requires
registration or qualification of the Common Stock or of the Company's directors,
officers or other employees as agents in connection with sales pursuant to the
Dividend Reinvestment Plan.
The Board of Directors may amend, modify or suspend the Dividend
Reinvestment Plan at any time and from time to time but the Dividend
Reinvestment Plan may not be permanently terminated unless the Company's
stockholders elect to terminate it. The Company's stockholders have approved the
Dividend Reinvestment Plan.
During 1995 and 1996, 10,795 and 10,820 shares of Common Stock,
respectively, were issued under the Dividend Reinvestment Plan. 94,370 shares
are reserved for issuance under the Dividend Reinvestment Plan. The Dividend
Reinvestment Plan was suspended in 1996 pending registration of additional
shares to be issued under the Dividend Reinvestment Plan.
6
<PAGE>
Tax Consequences. The following discussion summarizes certain material
U.S. Federal income tax consequences for U.S. taxpayers participating in the
Dividend Reinvestment Plan. The discussion is based upon provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative history,
judicial authority, current administrative rulings and practice, and existing
and proposed Treasury Regulations, all as in effect and existing on the date
hereof, and all of which are subject to change, perhaps with retroactive effect.
This discussion does not purport to deal with all aspects of U.S. Federal income
taxation that might be relevant to particular participants in light of their
personal circumstances or status, nor does it discuss state, local or foreign
income tax consequences. THEREFORE, EACH STOCKHOLDER IS STRONGLY URGED TO
CONSULT WITH HIS OWN TAX ADVISORS WITH RESPECT TO THOSE MATTERS.
A participant who chooses to receive a distribution of additional
shares of Common Stock in lieu of cash under the provisions of the Dividend
Reinvestment Plan will be treated for U.S. Federal income tax purposes as having
received a taxable dividend to the extent such distribution is treated as made
from the Company's current and accumulated earnings and profits, in an amount
equal to the "Purchase Price" (as determined under the Dividend Reinvestment
Plan) of all full and fractional shares credited to the participant's account,
and otherwise as a non-taxable return of capital to the extent of such
participant's tax basis in his shares of Common Stock (with a corresponding
reduction in his tax basis in such Common Stock) and thereafter as capital gain.
The participant's tax basis in the shares credited under the Dividend
Reinvestment Plan will be an amount equal to the "Purchase Price" of such shares
(as determined under the Dividend Reinvestment Plan). The holding period for
shares acquired through the Dividend Reinvestment Plan will begin on the day
after the dividend payment date.
Following termination of participation in the Dividend Reinvestment
Plan and receipt by the participant of shares of Common Stock previously held by
the Dividend Reinvestment Plan administrator, a participant will realize gain or
loss upon receipt of a cash payment for any fractional share interests credited
to the participant's account. The amount of any such gain or loss will be the
difference between the cash payment and the participant's tax basis in such
fractional share interests.
The tax discussion as set forth above is for general information
purposes only. Each stockholder considering participation in the Dividend
Reinvestment Plan is urged to consult his own tax and financial advisors as to
any U.S. Federal, state and other tax consequences of participating in the
Dividend Reinvestment Plan based upon his particular facts and circumstances.
Stockholder Purchase Plan
Pursuant to the Purchase Plan, stockholders of record will be granted
an option (an "Option") each quarter to purchase newly issued shares of the
Common Stock. The number of shares that may be purchased pursuant to Options
shall be determined by the Board. Each Option will entitle the stockholder to
purchase one share. Options will be granted in proportion to stockholders'
record share holdings as of the date of grant at a per share price (the
"Purchase Price") equal to the latest per share price reported for a sale of the
Common Stock by Legg Mason prior to the date of grant. Options may be exercised
in full or partially at the election of the stockholder. Options may only be
exercised by returning the option exercise form and paying the Purchase Price in
full prior to the expiration date for the Option which may not be latter than
three months after the date of grant. Once an Option has been exercised, the
exercise is irrevocable. Shares will be issued to persons exercising Options as
soon as practicable after receipt of a properly completed option exercise form
and payment of the Purchase Price in full. Shares may be issued in either
certificated or uncertificated form at the election of the stockholder.
Stockholders will be notified on a quarterly basis in writing that they
have the option to purchase Common Stock. Stockholders holding shares for the
account of others, such as banks, brokers, trustees and depositaries, should
contact the beneficial owners of those securities to ascertain the intentions of
those beneficial owners with respect to the Options. Persons beneficially owning
Common Stock held in brokerage accounts or which is otherwise held on their
behalf by a nominee should contact their broker or nominee to exercise
subscription rights on their behalf.
7
<PAGE>
The aggregate number of shares that may be issued under the Purchase
Plan shall not exceed 100,000 shares subject to adjustment for stock splits and
stock dividends subsequent to the date the Purchase Plan is adopted. Shares
optioned and not exercised shall continue to be available for inclusion in
subsequent Option grants provided that, in its discretion, the Board of
Directors may give stockholders the opportunity to purchase unsubscribed
optioned shares at the Purchase Price on such other terms and conditions as the
Board of Directors may determine. Purchase orders for unsubscribed shares will
not be filled until the expiration date for the Options. In the event of an
oversubscription, such unsubscribed shares shall be allocated among subscribers
on such basis as the Board of Directors may determine. The Board of Directors
reserves the right to allocate unsubscribed shares on any basis it deems
appropriate including, but not limited to, the order in which orders were
received, the relative size of orders, the number of shares held by subscribers
or on any other basis in its sole discretion.
Options are not transferable except upon death. Holders of Options do
not receive any rights or benefits of stockholders with respect to the
underlying Common Stock until the Options are fully exercised and certificates
evidencing the Common Stock are issued.
Options are only exercisable during a stockholder's lifetime by the
stockholder. In the event a stockholder dies without having fully exercised
their Options, the stockholder's executors or administrators shall have the
right to exercise such Options during their remaining term to the same extent
that the stockholder was entitled to exercise the Option.
The Company will make reasonable efforts to comply with the securities
laws of all states in which stockholders reside. The Board of Directors reserves
the right not to issue Options to stockholders residing in a foreign country or
in a jurisdiction in which the granting of Options or the offer or sale of the
Common Stock would be unlawful or in which the Company or its directors,
officers or employees would be required to register as a broker, dealer or
selling agent.
The Purchase Plan will be administered by a Committee made up of the
Company's Chairman of the Board, Chief Executive Officer and another director,
who is appointed by the Company's Board of Directors annually. All questions
concerning the timeliness and validity of Option exercises and the eligibility
of stockholders for Options will be determined by the Committee whose
determinations will be final and binding on all parties.
Tax Consequences. The following discussion summarizes certain material
U.S. Federal income tax consequences for U.S. taxpayers upon the receipt,
disposition, exercise or lapse of Options. The discussion is based upon
provisions of the Code, its legislative history, judicial authority, current
administrative rulings and practice, and existing and proposed Treasury
regulations, all as in effect and existing on the date hereof, and all of which
are subject to change, perhaps with retroactive effect. This discussion assumes
that such Options, and the Common Stock acquired upon exercise of the Options,
will be held as capital assets (as defined in Section 1221 of the Code) by the
holders thereof. This discussion does not purport to deal with all aspects of
U.S. Federal income taxation that might be relevant to particular holders in
light of their personal circumstances or status, nor does it discuss state,
local or foreign income tax consequences. THEREFORE, EACH STOCKHOLDER IS
STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISORS WITH RESPECT TO THESE
MATTERS.
Under Section 305 of the Code, a stockholder's receipt of Options
pursuant to the Purchase Plan will not be subject to U.S. Federal income tax. A
stockholder's basis in the Options will be treated as zero so long as either (1)
both (a) the value of the Options at the time of receipt is less than 15% of the
value of the Common Stock in respect of which the Options were distributed
(which the Company expects to be the case) and (b) such stockholder does not
otherwise elect to allocate his basis in such Common Stock among such Common
Stock and the Options in accordance with Section 307(a) of the Code, or (2) such
Options are allowed to lapse.
No gain or loss will be recognized for U.S. Federal income tax purposes
by holders of the Options upon the exercise of the Option and acquisition of the
Common Stock of the Company. A holder's tax basis in the Common Stock received
on exercise of the Options will equal the sum of his tax basis, if any, in the
Options plus the exercise price paid. The holding period of the Common Stock
received on the exercise of the Options will commence on the date of exercise
and will not include the holding period of the Options.
8
<PAGE>
If Options acquired pursuant to the Purchase Plan are not exercised and
are allowed to expire, no gain or loss will be recognized by the holder of such
Options.
Certain Resale Restrictions
Shares acquired by affiliates of the Company pursuant to the Plans
will, be subject to certain resale restrictions. Rule 144 imposes a volume limit
on the amount of securities which each affiliate of an issuer, as well as each
holder of "restricted" securities, may sell during any three-month period and
limits on the manner in which such sales may be made. "Restricted" shares are
shares which have not been registered under the Securities Act of 1933 in
reliance upon an exemption which restricts their resale. "Restricted" securities
may only be sold if they are subsequently registered for resale or if resale is
authorized under an applicable rule such as Rule 144. The Company does not
believe that it currently has any "restricted" securities outstanding.
USE OF PROCEEDS
To the extent stockholders participate in the Dividend Reinvestment
Plan and receive dividends in stock rather than cash, the cash savings to the
Company will increase its working capital. The proceeds from the sale of Common
Stock under the Purchase Plan will also increase the Company's working capital.
The Company believes that it will benefit from investment by stockholders on a
continuing basis. Such investment should assist it and the Bank to maintain and
expand their operations and business activities.
MARKET FOR THE COMMON STOCK
The Company's stock is traded in the over-the-counter market and quoted
on the OTC Bulletin Board under the symbol "GLBZ." There is not currently an
active trading market for the Common Stock. The following table sets forth the
high and low sales prices for the Common Stock for each full quarterly period
during 1995 and 1996 and during 1997 to date, based on trades reported on the
OTC Bulletin Board or by Legg Mason. Prices have been adjusted to give
retroactive effect to a six-for-five stock split effected through a stock
dividend paid on January 3, 1996.
1997 1996 1995
-------------- -------------- ---------------
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
March 31, $28.000 $21.500 $37.500 $34.000 $32.917 $28.750
June 30, 25.000 22.000 36.250 33.000 32.917 31.042
September 30, 24.750 23.500 33.500 33.000 32.917 32.083
December 31, NA NA 34.000 25.000 34.375 28.854
As of November 14, 1997, the latest date for which the Company was
able to obtain information on a reported sale of the Common Stock, the last
reported sales price for the Common Stock on the OTC Bulletin Board was $24-3/8
per share.
As of September 30, 1997, the number of record holders of the Common
Stock was 477.
9
<PAGE>
DIVIDENDS
Since its inception, the Company has paid quarterly cash dividends on
its Common Stock. Per share cash dividends declared for each full quarter during
last two fiscal years and the current year to date, giving retroactive effect to
a six-for-five stock split effected through a stock dividend paid on January 3,
1996, were as follows:
Quarter Ended 1997 1996 1995
------------- ---- ---- ----
March 31, $0.160 $0.300 $0.208
June 30, 0.060 0.300 0.250
September 30, 0.060 0.300 0.250
December 31, NA 0.050 0.250
In addition to the foregoing cash dividends, the Company declared one
percent stock dividends during the second and third quarters of 1997. Because
the effect of these stock dividends was not material, earnings and dividends per
share have not been restated for these stock dividends.
The Company intends to pay dividends equal to forty percent (40%) of
its profits for each quarter. However, dividends remain subject to declaration
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
impose general restrictions on 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, dividend payments are prohibited unless a bank or bank
holding company 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."
10
<PAGE>
SELECTED FINANCIAL DATA
The following table presents consolidated selected financial data for
the Company and its subsidiaries for each of the periods indicated. Dividends
and earnings per share have been adjusted to give retroactive effect to stock
splits and stock dividends accounted for as stock splits. Certain ratio data for
the nine months ended September 30, 1997 and 1996 has been annualized. Results
of operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results of operations that can be expected for the entire
fiscal year.
<TABLE>
<CAPTION>
At or for the
Nine Months Ended
September 30, At or for the Year Ended December 31,
---------------------------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ -------- -------- -------- -------- ------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Data:
Net Interest Income.......... $ 8,059 $ 8,241 $ 10,884 $ 11,339 $ 11,868 $ 10,736 $ 8,788
Provision for Credit Losses.. 270 2,825 6,596 7,925 1,120 1,080 1,000
Other Income................. 1,320 1,238 2,230 1,904 1,515 1,408 1,360
Other Expense................ 8,859 6,556 9,019 8,740 7,139 6,716 5,954
Net Income (Loss)............ 579 415 (1,020) (1,727) 3,517 3,047 2,284
Share Data:
Net Income (Loss) Per Share.. $ 0.64 $ 0.46 $ ( 1.16) $ (2.01) $ 4.22 $ 3.69 $ 2.79
Cash Dividends Declared
Per Common Share.......... 0.28 0.90 0.95 0.96 0.80 0.75 0.72
Weighted Average Common
Shares Outstanding....... 901,624 898,021 881,211 861,116 833,849 826,244 817,324
Financial Condition Data:
Total Assets................. $ 226,242 $ 249,214 $254,325 $ 246,165 $ 232,935 $ 223,422 $ 203,573
Loans Receivable, net........ 109,961 136,654 124,672 150,472 153,814 141,866 128,199
Total Deposits............... 205,003 226,669 232,746 221,121 208,566 202,911 186,358
Total Stockholders' Equity... 18,857 19,525 18,507 20,537 21,677 18,617 15,716
Performance Ratios:
Return on Average Assets..... 0.24% 0.17% (0.41)% (0.73)% 1.53% 1.40% 1.23%
Return on Average Equity..... 4.15 2.83 (5.29) (7.42) 17.24 17.70 15.23
Net Interest Margin(1)....... 5.13 5.11 5.04 5.42 5.88 5.67 5.46
Dividend Payout Ratio........ 31.07 137.74 * * 19.24 20.38 25.89
Capital Ratios:
Average Equity to Average
Assets..................... 7.75% 7.92% 7.82% 9.89% 8.86% 7.92% 8.05%
Leverage Ratio(2)............ 7.42 7.62 7.00 8.20 9.40 8.60 8.40
Total Risk-Based Capital
Ratio(2).................. 15.75 14.88 12.50 13.62 15.35 14.30 13.30
Asset Quality Ratios:
Allowance for Credit Losses
to Gross Loans............. 3.74% 1.47% 3.90% 2.40% 1.77% 1.77% 1.35%
Non-performing Loans to
Total Loans................ 3.89 4.46 3.72 4.17 2.32 2.23 2.11
Allowance for Credit Losses
to Non-performing Loans.... 100.00 45.40 109.24 58.89 77.34 80.79 64.78
Net Loan Charge-offs to
Average Loans.............. 1.16 2.95 3.56 4.48 0.60 0.20 0.19
</TABLE>
- ---------------
* Not meaningful
(1) Presented on a tax-equivalent basis.
(2) Bank only.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company recorded $579,000 in net income for the nine months ended
September 30, 1997 after incurring losses in each of the last two full fiscal
years. The Company's recent results of operations have been significantly
affected by approximately $4.5 million in charge-offs related to loans
outstanding to Mr. Brian Davis and affiliated entities. During the 1995 fiscal
year, the Bank's aggregate outstanding loans to these entities totaled as much
as $5.8 million and these entities represented the Bank's largest single group
of borrowers. Included in total outstandings were loans made to various
borrowers who allegedly funneled the proceeds to Mr. Davis. Mr. Davis has since
pled guilty to defrauding the Bank and other financial institutions and the
Bank's former Chief Lending Officer has pled guilty to accepting bribes from Mr.
Davis in connection with these loans. See "Risk Factors -- Recent Loan Losses
Involving Significant Borrowers." The Board of Directors of the Bank has entered
into Memoranda of Understanding with the FDIC and the Maryland Commissioner of
Banking to address certain factors relating to its recent losses. See "Business
- -- Memoranda of Understanding."
The Bank continues to be involved in litigation related to Mr. Davis'
activities including suits by entities affiliated with Mr. Davis. See "Business
- -- Legal Proceedings." Although the Company does not believe that outcome of
this litigation will have a material adverse effect on the Bank, these lawsuits
have required the Company to incur considerable legal and professional fees
which have significantly increased the Company's other expense. Adverse
publicity related to these lawsuits is also believed to have also hurt the
Bank's competitive position in its market place.
In 1995, the Company also underwent a change in management as a slate
of nominees proposed by F. William Kuethe, Jr. and John E. Demyan, members of
two of the Bank's founding families, defeated management's nominees in a proxy
contest at the 1995 annual meeting of stockholders. Expenses related to this
contest resulted in a $687,841 restructuring charge during 1995. The Bank's
current management has been focused on addressing the Bank's asset quality and
other operating problems and resolving the litigation in which the Bank is
involved while maintaining the Bank as the locally owned and oriented community
bank which it has historically been.
Forward-Looking Statements
When used in this discussion and elsewhere in the Prospectus, the words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national economic conditions, unfavorable judicial decisions, substantial
changes in levels of market interest rates, credit and other risks of lending
and investment activities and competitive and regulatory factors could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
Comparison of Results of Operations For the Nine Months Ended September 30, 1997
and 1996 and Years Ended December 31, 1996, 1995 and 1994
General. For the nine months ended September 30, 1997, the Company
reported consolidated net income of $579,000 ($0.64 per share) compared to
consolidated net income of $415,000 ($0.46 per share) for the nine months ended
12
<PAGE>
September 30, 1996. The increase in net income during the 1997 period was
principally attributable to a lower provision for credit losses. For fiscal year
1996, the Company had a consolidated net loss of $1,020,177 ($1.16 per share)
compared to a 1995 consolidated net loss of $1,726,748 ($2.01 per share) and a
1994 consolidated net income of $3,516,593 ($4.22 per share). The losses during
1996 and 1995 were primarily due to a significant increase in the provision for
credit losses to $6,596,000 for 1996 and $7,925,000 for 1995 compared to
$1,120,000 for 1994. The increase resulted from provisions being made to
charge-off delinquent and non-performing loans. The collectibility of certain
loans, significant in aggregate amount, became doubtful during 1996 and the Bank
charged-off a significant amount of such loans. See "Risk Factors -- Recent Loan
Loss Experience Involving Significant Borrowers." Charge-offs in 1996 amounted
to $5,468,293 following the $7,060,650 charged off in 1995.
Net Interest Income. The primary component of the Company's net income
is its net interest income which is the difference between income earned on
assets and interest expense paid on 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, represents the
Company's net interest margin.
Consolidated net interest income for the nine months ended September
30, 1997 was $8,059,000 compared to $8,241,000 for the nine months ended
September 30, 1996. The decrease in net interest income for the nine-month
period was primarily attributable to lower interest income. Interest income fell
$498,000 (10.4%) for the nine months ended September 30, 1997. The decline in
interest income was attributable to continued run-off of the loan portfolio.
Interest expense declined $549,000, or 9.4%, for the nine months ended September
30, 1997. The Company's earnings performance continues to be impacted by a
decline in earning assets and a shift in the asset mix from loans to lower
yielding investment securities. Net interest margin for the nine months ended
September 30, 1997 was 5.13% compared to 5.11% for the nine months ended
September 30, 1996. The increase in the net interest margin for the first nine
months of 1997 was primarily due to the loss of accrued interest on loans
charged off during the corresponding period in 1996.
Consolidated net interest income prior to provision for credit losses
decreased by $454,884 (4.0%) from $11,339,137 in 1995 to $10,884,253 in 1996.
Net interest income had decreased by $528,822 (4.5%) in 1995 from $11,867,959 in
1994. The 1996 decrease was primarily due to an increase in interest expense on
deposits and a decrease in total interest revenues from lending activities for
such period. The 1995 decrease is primarily due to an increase in interest
expense on deposits which exceeded a slight increase in total interest revenues
from lending activities for such period. The movement of deposits from lower
yielding savings and money market accounts to higher yielding certificates of
deposit resulted in an increase in the Bank's cost of deposits during 1996 and
1995. In addition, loans on which accrual of interest has been discontinued
amounted to $4,545,581 at December 31, 1996. Interest that would have accrued
under the terms of these loans was $457,035. Interest income on loans fell
$1,394,512 (9.6%) from $14,475,876 at the end of 1995 to $13,081,364 at the end
of 1996, after increasing $390,234 (2.8%) during 1995 from $14,085,642 at the
end of 1994. In addition to increased loan charge offs, the Bank made fewer
loans during 1996 than 1995.
During 1996 and 1995, the Bank shifted investments from U.S. Treasury
securities to U.S. government agency and state and municipal securities because
they have offered higher yields. Interest from Federal funds sold almost doubled
during 1996, increasing from $138,678 in 1995 to $261,423 in 1996 as Federal
funds sold increased significantly. Significant gains in investment securities
($506,695) occurred in 1995 as a result of a restructuring of the Bank's
investment securities portfolio. The gains were much smaller in 1996 after the
restructuring was complete.
13
<PAGE>
The following table allocates changes in income and expense
attributable to the Bank's interest-earning assets and interest-bearing
liabilities for the periods indicated between changes due to changes in rate and
changes in volume. Changes due to rate/volume are allocated to changes due to
volume.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------------------- ---------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
----------------------------- ---------------------------- --------------------------
Change Due to Change Due to Change Due to
Increase/ ----------------- Increase/ ----------------- Increase/ ---------------
Decrease Rate Volume Decrease Rate Volume Decrease Rate Volume
-------- ---- ------ -------- ---- ------ -------- ---- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Federal funds sold........................ $ (18) $ 15 $ (33) $ 122 $ (37) $ 159 $ 38 $ 52 $ (14)
--------- -------- --------- -------- -------- --------- ------- ------ ------
Interest-bearing deposits................. 5 4 1 (31) (17) (14) 62 0 62
--------- -------- --------- -------- -------- --------- ------- ------ ------
Investment securities:
U.S. Treasury securities and obligations
of U.S. government agencies........... 1,452 18 1,434 1,082 234 848 99 (20) 119
Obligations of states and
political subdivisions (1)............ (449) (16) (433) 472 (74) 546 52 (57) 109
All other investment securities......... 6 0 6 2 (1) 3 23 6 17
--------- -------- --------- -------- -------- --------- ------- ----- ------
Total investment securities......... 1,009 2 1,007 1,556 159 1,397 174 (71) 245
Loans, net of unearned income............. --------- -------- --------- -------- -------- --------- ------- ----- ------
Demand, time and lease ................. (527) 93 (620) (613) (56) (557) 88 145 (57)
Mortgage and construction............... (1,051) (32) (1,019) (269) (604) 335 301 (41) 342
Installment and credit card............. (305) 38 (343) (517) 31 (548) 4 (122) 126
--------- -------- --------- -------- -------- --------- ------- ------ ------
Total gross loans (2)................. (1,883) 99 (1,982) (1,399) (629) (770) 393 (18) 411
--------- -------- --------- -------- -------- --------- ------- ------ ------
Allowance for credit losses...........
--------- -------- --------- -------- -------- --------- ------- ------ ------
Total net loans....................... (1,883) 99 (1,982) (1,399) (629) (770) 393 (18) 411
--------- -------- --------- -------- -------- --------- ------- ------ ------
Total interest-earning assets............. $ (887) $ 101 $ (988) $ 248 $ (524) $ 772 $ 667 $ (37) $ 704
========= ======== ========= ======== ======== ========= ======= ====== ======
Liabilities
Interest-bearing deposits:
Savings and NOW......................... $ (267) $ (301) $ 34 $ (112) $ (191) $ 79 $ (302) $ (12) $ (290)
Money market............................ (146) (53) (93) (111) (42) (69) (147) 43 (190)
Other time deposits..................... (155) (191) 36 762 7 755 1,613 902 711
--------- ------- -------- -------- ------- -------- ------- ------ ------
Total interest-bearing deposits....... (568) (545) (23) 539 (226) 765 1,164 933 231
Non-interest-bearing deposits............. -- -- -- -- -- -- -- -- --
--------- ------- -------- -------- ------- -------- ------- ------ ------
Borrowed funds............................ 28 24 4 (39) (9) (30) 21 22 (1)
--------- ------- -------- -------- ------- -------- ------- ------ ------
Total interest-bearing liabilities........ $ (540) $ (552) $ (18) $ 500 $ (235) $ 735 $ 1,185 $ 955 $ 230
========= ======= ======== ======== ======= ======== ======= ====== ======
</TABLE>
- ----------------
(1) Tax equivalent basis.
(2) Non-accrual loans included in average balances.
14
<PAGE>
The following table provides information for the designated periods
with respect to the average balances, income and expense and annualized yields
and costs associated with various categories of interest-earning assets and
interest-bearing liabilities.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------------------------------
1997 1996
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Federal funds sold.............................. $ 3,562 $ 150 5.61% $ 4,305 $ 168 5.20%
---------- --------- ---- --------- --------- ----
Interest bearing deposits....................... 1,376 53 5.14 1,324 48 4.83
---------- --------- ---- --------- --------- ----
Investment securities:
U.S. Treasury securities and obligations
of U.S. government agencies............... 77,551 3,987 6.85 49,479 2,535 6.83
Obligations of States and political
subdivisions(1) .......................... 21,240 1,308 8.21 28,272 1,757 8.29
All other investment securities............. 848 46 7.23 734 40 7.27
---------- --------- ---- --------- --------- ----
Total investment securities................ 99,639 5,341 7.14 78,485 4,332 7.36
Loans, net of unearned income
Demand, time and lease........................ 14,346 989 9.19 23,661 1,516 8.54
Mortgage and construction..................... 84,682 5,817 9.16 99,570 6,868 9.20
Installment and credit card................... 22,330 1,451 8.66 27,569 1,756 8.49
---------- --------- ---- --------- --------- ----
Total gross loans(2)...................... 121,358 8,257 9.08 150,800 10,140 8.97
Allowance for credit losses............... 4,521 3,910
---------- ---------
Total net loans........................... 116,837 8,257 9.42 146,890 10,140 9.20
---------- --------- ---- --------- --------- ----
Total interest-earning assets............. 221,414 13,811 8.32 231,004 14,688 8.48
--------- ---------
Cash and due from banks......................... 7,241 7,902
Other assets.................................... 11,190 7,761
---------- ---------
Total assets.............................. $ 239,845 $ 246,667
========== =========
Liabilities and Stockholders' Equity
Interest-bearing deposits:
Savings and NOW............................... $ 69,626 $ 1,300 2.49% $ 71,502 $ 1,567 2.92%
Money market.................................. 22,682 479 2.82 27,319 625 3.05
Other time deposits........................... 82,503 3,449 5.57 82,772 3,604 5.81
---------- --------- ---- --------- ------- ----
Total interest-bearing deposits............. 174,811 5,228 3.99 181,593 5,796 4.26
Borrowed funds.................................. 1,492 60 5.36 1,131 32 3.77
---------- --------- ---- --------- ------- ----
Total interest-bearing liabilities.......... 176,303 5,288 4.00 182,724 5,828 4.25
--------- -------
Non-interest-bearing deposits................... 43,953 44,022
Other liabilities............................... 1,004 386
Stockholders' equity............................ 18,585 19,535
---------- ---------
Total liabilities and stockholders' equity...... $ 239,845 $ 246,667
========== =========
Net interest income............................. $ 8,513 $ 8,860
========= =======
Net interest spread............................. 4.31% 4.23%
==== ====
Net interest margin............................. 5.13% 5.11%
==== ====
</TABLE>
- -----------------
(1) Presented on a tax-equivalent basis. The incremental tax rate applied is
37.04%.
(2) Non-accrual loans included in average balance.
15
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Federal funds sold............................... $ 5,185 $ 261 5.03% $ 2,416 $ 139 5.75%
--------- -------- ---- -------- -------- ----
Interest-bearing deposits........................ 1,267 54 4.26 1,526 85 5.57
--------- -------- ---- -------- -------- ----
Investment securities:
U.S. Treasury securities and obligations
of U.S. government agencies................ 53,454 3,669 6.86 40,263 2,587 6.43
Obligations of States and
political subdivisions (1)................. 27,875 2,307 8.28 21,479 1,835 8.54
All other investment securities.............. 737 54 7.33 696 52 7.47
--------- -------- ---- -------- -------- ----
Total investment securities............. 82,066 6,030 7.35 62,438 4,474 7.12
Loans, net of unearned income
Demand, time and lease......................... 22,343 1,944 8.70 28,559 2,557 8.95
Mortgage and construction...................... 97,777 8,886 9.07 94,322 9,135 9.68
Installment and credit card.................... 26,802 2,278 8.50 33,338 2,795 8.38
--------- -------- ---- --------- -------- ----
Total gross loans (2)....................... 146,922 13,088 8.91 156,219 14,487 9.27
Allowance for credit losses................. 3,835 2,766
--------- ---------
Total net loans.............................. 143,087 13,088 9.15 153,453 14,487 9.44
--------- -------- ---- --------- -------- ----
Total interest-earning assets................ 231,605 19,433 8.39 219,833 19,185 8.73
-------- ---- -------- ----
Cash and due from banks.......................... 7,936 7,152
Other assets..................................... 7,318 8,471
--------- ---------
Total assets............................ $ 246,859 $ 235,456
========= =========
Liabilities and Stockholders' Equity:
Interest-bearing deposits:
Savings and NOW................................ $ 71,455 $ 2,075 2.90% $ 68,957 $ 2,187 3.17%
Money market................................... 26,911 818 3.04 29,081 929 3.19
Other time deposits............................ 83,486 4,819 5.77 70,382 4,057 5.76
--------- -------- ---- --------- -------- ----
Total interest-bearing deposits.............. 181,852 7,712 4.24 168,420 7,173 4.26
Borrowed funds................................... 1,029 50 4.86 1,549 89 5.75
--------- -------- ---- --------- -------- ----
Total interest-bearing liabilities........... 182,881 7,762 4.24 169,969 7,262 4.27
-------- --------
Non-interest-bearing deposits.................... 44,570 41,500
Other liabilities................................ 110 699
Stockholders' equity............................. 19,298 23,288
--------- ---------
Total liabilities and equity..................... $ 246,859 $ 235,456
========= =========
Net interest income.............................. $ 11,671 $ 11,923
======== ========
Net interest spread.............................. 4.15% 4.46%
==== ====
Net interest margin.............................. 5.04% 5.42%
==== ====
</TABLE>
<PAGE>
Year Ended December 31,
------------------------------
1994
------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
Assets:
Interest-earning assets:
Federal funds sold............................... $ 2,799 $ 101 3.61%
-------- -------- ----
Interest-bearing deposits........................ 415 23 5.54
-------- -------- ----
Investment securities:
U.S. Treasury securities and obligations
of U.S. government agencies................ 38,430 2,488 6.47
Obligations of States and
political subdivisions (1)................. 20,240 1,783 8.81
All other investment securities.............. 443 29 6.55
-------- -------- ----
Total investments securities............ 59,113 4,300 7.28
Loans, net of unearned income
Demand, time and lease......................... 29,232 2,469 8.45
Mortgage and construction...................... 90,804 8,834 9.73
Installment and credit card.................... 31,897 2,791 8.75
-------- -------- ----
Total gross loans (2)....................... 151,933 14,094 9.45
Allowance for credit losses................. 2,762
--------
Total net loans.............................. 149,171 14,094 9.45
-------- -------- ----
Total interest-earning assets................ 211,498 18,518 8.76
-------- ----
Cash and due from banks.......................... 9,769
Other assets..................................... 8,817
--------
Total assets............................ $230,084
========
Liabilities and Stockholders' Equity:
Interest-bearing deposits:
Savings and NOW................................ $ 78,067 $ 2,489 3.19%
Money market................................... 35,301 1,076 3.05
Other time deposits............................ 54,524 2,444 4.48
-------- -------- ----
Total interest-bearing deposits.............. 167,892 6,009 3.58
Borrowed funds................................... 1,573 68 4.32
-------- -------- ----
Total interest-bearing liabilities........... 169,465 6,077 3.59
--------
Non-interest-bearing deposits.................... 39,585
Other liabilities................................ 639
Stockholders' equity............................. 20,395
--------
Total liabilities and equity..................... $230,084
========
Net interest income.............................. $ 12,441
========
Net interest spread.............................. 5.17%
====
Net interest margin.............................. 5.88%
====
- ---------------
(1) Tax equivalent basis. The incremental tax rate applied was 37.04% for 1996
and 38.62% for 1995 and 1994.
(2) Non-accrual loans included in average balance.
16
<PAGE>
Provision for Credit Losses. During the nine months ended September 30,
1997, the Company provided $270,000 for credit losses compared to $2,825,000 in
provisions during the nine months ended September 30, 1996. The decrease in the
provision reflects a decline in charge-off activity and a reduction in
classified loans. During the nine months ended September 30, 1997, the Company
recorded net charge-offs of $1,055,000 compared to $3,274,000 in net charge-offs
during the nine months ended September 30, 1996. During fiscal year 1996, the
Company provided $6,596,000 for credit losses compared to $7,925,000 in such
provisions during 1995 and $1,120,000 in provisions during 1994. The higher
provisions during fiscal years 1996 and 1995 reflect the amount determined by
the Company to be necessary to maintain the allowance for credit losses to an
adequate level after significant increases in loan charge-offs during these
years. See "Risk Factors -- Recent Loan Loss Experience Involving Significant
Borrowers."
Other Income. Other income increased $82,000 (6.6%) during the nine
months ended September 30, 1997 compared to the prior year period. The increase
in other income reflects higher gains on the sale of investment securities
during the third quarter of 1997. In order to improve its interest rate
sensitivity, the Bank sold $16.0 million in long-term, fixed-rate state, county
and municipal securities which had been classified as available-for-sale and
invested the proceeds in adjustable-rate, mortgage-backed securities issued by
the Government National Mortgage Association ("GNMA"). Other income for fiscal
year 1996 was $2,230,457, an increase of $326,174, or 17.1%, over fiscal year
1995 and an increase of $715,626, or 47.2%, over fiscal year 1994. The
improvement in other income reflects increased service charges on deposit
accounts attributable to growth in deposits and $560,000 in proceeds from an
insurance settlement with the Bank's fidelity bond company relating to the
reimbursement of legal fees expended by the Bank in defending certain actions.
These improvements in other income offset a decline in gains on sales of
securities following a restructuring of the Bank's securities portfolio.
Other Expenses. Other expense increased by $2,303,000, or 35.1%, for
the nine months ended September 30, 1997 primarily due to a $284,000 accrual for
a judgment rendered against the Bank in the third quarter of 1997 and a $700,000
expense incurred in connection with the settlement of certain litigation during
the second quarter. In addition, the Company experienced increases in other
expenses due to professional fees incurred in connection with other litigation
in which the Company is involved. Salary and employee benefit expenses increased
$497,732 (12.0%) during the year ended December 31, 1996 rising from $4,137,232
in 1995 to $4,634,964 in 1996. They rose only $149,014 (3.7%) during 1995 from
$3,988,218 in 1994. During 1996 the Bank staff was increased in the credit
analysis and loan collection areas to deal with the Bank's troubled loans.
Increased other expenses of the Company and its subsidiaries in 1996 primarily
resulted from increased legal fees and other continuing costs of litigation. See
"Legal Proceedings." The Bank has obtained insurance reimbursement for
approximately $560,000 of its 1995 restructuring and litigation charges which is
included in other income..
Income Taxes. During the nine months ended September 30, 1997, the
Company recorded an income tax benefit of $329,000 compared to a tax benefit of
$317,000 during the nine months ended September 30, 1996. For the years ended
December 31, 1996 and 1995, the Company recognized $1,480,192 and $1,694,444 in
tax benefits compared to an income tax expense of $1,606,761 during the 1994
fiscal year. Due primarily to its holdings of tax-exempt state, county and
municipal securities, the Company recorded tax losses during the nine months
ended September 30, 1997 and 1996 and the two prior fiscal years. These net
operating losses have been applied to prior years' earnings resulting in tax
benefits in each of the periods. The Company has recently reduced its holdings
of tax-exempt state, county and municipal securities and reinvested the proceeds
in U.S. Government agency securities the income on which is not exempt from
federal taxation. Accordingly, the Company anticipates an increase in taxable
income which may reduce the availability of future tax benefits.
Comparison of Financial Condition at September 30, 1997 and December 31, 1996
and 1995.
The Company's total assets declined to $226,242,000 at September 30,
1997 after increasing to $254,324,701 at December 31, 1996 from $246,164,736 at
December 31, 1995 and from $232,934,732 at December 31, 1994. The reduction in
assets during the most recent nine-month period reflects a decline in the loan
portfolio to $109,961,000 at September 30, 1997, net of allowances, from
$124,672,000 at December 31, 1996. Although the loan portfolio had declined to
$124,672,414 at December 31, 1996 from $150,471,768 at December 31, 1995 and
$153,814,422 at December 31, 1994, total assets grew due to an expansion of the
investment securities portfolio.
17
<PAGE>
The decline in the loan portfolio during the most recent nine months
was largely due to a decrease in commercial and industrial loans during the
period. Commercial mortgage loans increased during the period while residential
mortgages decreased slightly and lease financing and installment loans also
decreased. The declines in the loan portfolio during fiscal years 1996 and 1995
were principally due to a decrease in construction and land development loans
which had substantially increased during the preceding year but declined during
the most recent fiscal years due to decreased origination activity and loan
charge-offs. Commercial mortgage loans increased during 1995 and again slightly
in 1996. Residential mortgages increased in 1995 but fell in 1996, as did demand
and time loans. The decline in demand and time loans reflects decreased lending
activity and increased charge-offs. Lease financing and installment loans
decreased in both 1995 and 1996. The Bank has decided to decrease its equipment
and automobile lease based lending because of the difficulties in monitoring the
financial condition of the clients of lease company borrowers.
The Company's total investment securities portfolio (including both
investment securities available for sale and investment securities held to
maturity) totaled $94,279,000 at September 30, 1997, a $2,295,000 or 3.4%,
decrease from $96,574,000 at December 31, 1996. During fiscal year 1996, the
total investment securities portfolio grew by $21,975,153, or 29.46%, after
growing by $14,197,134, or 23.50% during fiscal year 1995 to $74,598,847. The
increases in the investment securities portfolio during fiscal years 1996 and
1995 reflects increases in deposits coupled with a decline in new lending
activity and increased loan amortization primarily in the shorter term
construction and land development, lease financing and installment portfolios.
The Bank has allowed some run-off in the investment securities portfolio as
deposits have declined during the current fiscal year.
Deposits as of September 30, 1997 totaled $205,003,000, a decrease of
$27,743,000 (11.9%) for the year to date. Demand deposits as of September 30,
1997 totaled $42,671,000, a $6,742,000 (13.6%) decrease from $49,413,000 at
December 31, 1996. NOW accounts as of September 30, 1997 totaled $20,594,000, a
decrease of $2,198,000 (9.6%) for the year to date. Money market accounts
declined by $6,007,000 (22.9%) for the year to date to total $20,204,000 on
September 30, 1997. Savings deposits decreased by $4,434,000, or 9.2%, year to
date. Meanwhile, certificates of deposit over $100,000 totaled $10,487,000 on
September 30, 1997, an increase of $1,867,000 (21.7%) from year end. Other time
deposits (made up of certificates of deposit less than $100,000 and individual
retirement accounts) totaled $67,288,000 on September 30, 1997, a $10,229,000
(13.2%) decrease from December 31, 1996.
Total deposits increased from $221,120,763 at the end of 1995 to
$232,745,975 at the end of 1996, an increase of $11,625,212 (5.3%). Total
deposits increased by $12,555,110 (6.0%) during 1995 from $208,565,653 at the
end of 1994. While deposits increased during the past two fiscal years, the Bank
believes that a general downward trend in interest rates paid on deposit
accounts has resulted in a trend away from lower yielding deposit products
toward higher yielding long term deposits. NOW accounts totaled $22,792,376 at
year end 1996, an increase of $502,527 (2.3%) from the 1995 year end total of
$22,289,849, which was a $17,141 (0.1%) increase over the 1994 year end total of
$22,272,708. Money market accounts declined $1,391,386 (5.0%) during 1996
falling from $27,602,041 at the end of 1995 to $26,210,655 at the end of 1996.
They had declined $5,278,782 (16.1%) during 1995 from $32,880,823 at the end of
1994. Over the same period, savings deposits, after decreasing from $52,830,352
in 1994 to $46,752,665 in 1995, a decrease of $6,077,687 (11.5%), increased by
$1,440,302 (3.1%) to end 1996 at $48,192,967. Meanwhile, certificates of deposit
over $100,000 decreased from $9,844,841 at the end of 1995 to $8,620,096 at the
end of 1996, a decline of $1,224,745 (12.4%). The foregoing does not include IRA
accounts in excess of $100,000. During 1995 these balances had increased by
$2,040,197 (26.1%) from the 1994 year end balance of $7,804,644. Other time
deposits (made up of certificates of deposit less than $100,000 and individual
retirement accounts) increased by $8,032,607 (11.6%) in 1996 and by $17,788,337
(34.4%) in 1995, rising from $51,696,007 at the end of 1994 to year end totals
of $69,484,344 for 1995 and $77,516,951 for 1996.
18
<PAGE>
The Company experienced a $270,000, or 1.5%, increase in total
stockholders' equity during the nine months ended September 30, 1997 as the
increase in retained earnings resulting from net income during the period offset
a decline in net unrealized appreciation on securities available for sale
resulting from the disposition of certain available-for-sale securities.
Operating losses during 1995 and 1996 significantly affected retained earnings
which fell $4,007,822 (43.8%) during 1995 from $9,154,546 at year end 1994 to
$5,146,724 at year end 1995, and another $1,856,647 (36.1%) during 1996 to end
1996 at $3,290,077. Surplus steadily increased, however, rising $466,191 (8.6%)
during 1995 from $5,450,852 at the end of 1994 to $5,917,043 at the end of 1995,
and $275,857 (4.7%) during 1995 to end 1996 at $6,192,900. The increase in the
surplus account was primarily a result of the reinvestment of dividends pursuant
to the Dividend Reinvestment Plan and the payment of a one percent stock
dividend in lieu of a cash dividend during the nine months listed September 30,
1997.
Asset/Liability Management
Net interest income, the primary component of the Company's net income,
arises from the difference between the yield on interest-earning assets and the
cost of interest-bearing liabilities and the relative amounts of such assets and
liabilities. The Company manages its assets and liabilities by coordinating the
levels of and gap between interest-rate sensitive assets and liabilities to
minimize changes in net interest income and in the economic value of its equity
despite changes in market interest rates. The Bank's Asset/Liability and Risk
Management Committee meets on a monthly basis to monitor compliance with the
Board's objectives. Among other tools used by the Asset/Liability and Risk
Management Committee to monitor interest rate risk is a "gap" report which
measures the dollar difference between the amount of interest-earning assets and
interest-bearing liabilities subject to repricing within a given time period.
Generally, during a period of rising interest rates, a negative gap position
would adversely affect net interest income, while a positive gap would result in
an increase in net interest income, while, conversely, during a period of
falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
The following table sets forth the Bank's interest-rate sensitivity at
September 30, 1997.
<TABLE>
<CAPTION>
Over 1
Over 3 to through Over
0-3 Months 12 Months 5 Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks........... $ -- $ -- $ -- $ -- $ 6,661,211
Federal funds and overnight
deposits....................... 6,239,554 -- -- -- 6,239,554
Securities........................ 20,612,806 25,734,333 25,552,295 20,158,497 92,057,931
Loans............................. 17,603,346 9,760,236 32,538,830 55,305,969 115,208,381
Fixed assets...................... -- -- -- -- 4,459,384
Other assets...................... -- -- -- -- (1,366,540)
--------------- --------------- -------------- -------------- --------------
Total assets................... $ 44,455,706 $ 35,494,569 $ 58,091,125 $ 75,464,466 $ 223,259,921
=============== =============== ============== ============== ==============
Liabilities:
Demand deposit accounts........... $ -- $ -- $ -- $ -- $ 43,342,348
NOW accounts...................... 20,453,914 -- -- -- 20,453,914
Money market deposit accounts..... 20,136,383 -- -- -- 20,136,383
Savings accounts.................. 44,106,709 -- -- -- 44,106,709
IRA accounts...................... 3,181,502 4,772,976 13,333,877 645,025 21,933,380
Certificates of deposit........... 13,957,877 23,673,712 16,795,253 819,659 55,246,501
Other liabilities................. -- -- -- -- (536,413)
Stockholders' equity........... -- -- -- -- 18,577,099
--------------- --------------- -------------- -------------- --------------
Total liabilities and
stockholders' equity...... $ 101,836,385 $ 28,446,688 $ 30,129,130 $ 1,464,684 $223,259,921
=============== =============== ============== ============== ============
GAP.................................. $ (57,380,679) $ 7,047,881 $ 27,961,995 $ 73,999,782
Cumulative GAP....................... (57,380,679) (50,332,798) (22,370,803) 51,628,979
Cumulative GAP as a % of
total assets (25.70)% (22.54)% (10.02)% 23.13%
</TABLE>
19
<PAGE>
The foregoing analysis assumes that the Bank's assets and liabilities
move with rates at their earliest repricing opportunities based on final
maturity. Mortgage-backed securities are assumed to mature during the period in
which they are estimated to prepay and it is assumed that loans and other
securities are not called prior to maturity. Certificates of deposit and IRA
accounts are presumed to reprice at maturity. NOW savings accounts are assumed
to reprice within three months although it is the Company's experience that such
accounts may be less sensitive to changes in market rates.
Liquidity and Capital Resources
The Company currently has no business other than that of the Bank and
does not currently have any material funding commitments. 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.
The Bank's most liquid assets are cash and cash equivalents, which are
cash on hand, amounts due from financial institutions, federal funds sold and
money market mutual funds. 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 (cash due from banks,
interest-bearing deposits in other financial institutions, and federal funds
sold), as of September 30, 1997, totaled $10,571,000, a decrease of $12,107,000
(53.4%) from the December 31, 1996 total of $22,678,000. Cash and cash
equivalents (cash due from banks, interest-bearing deposits in other financial
institutions, and Federal funds sold) as of December 31, 1996 were $22,677,661,
an increase of $13,227,640 (140.0%) from the December 31, 1995 total of
$9,450,021. Most of this increase was in Federal funds sold which were at a $-0-
balance at the end of 1995 and totaled $10,175,000 at the end of 1996. The large
balance in Federal funds sold at the end of 1996 was a result of recent
increases in non-personal money market demand accounts and business checking
accounts immediately before year end combined with a higher average balance
maintained during the year. The 1995 year end total was a slight $156,295 (1.6%)
decrease from the $9,606,316 1994 year end total. Short-term borrowings
decreased as cash and cash equivalents rose. Short-term borrowings fell $468,846
(21.0%) during 1995 from $2,226,568 at the end of 1994 to $1,757,722 at the end
of 1995 and by another $1,209,785 (68.8%) during 1995 to end 1996 at $547,937.
The Bank may draw on a $26,000,000 line of credit from the Federal Home
Loan Bank of Atlanta. Borrowings under the line are secured by a lien on the
Bank's residential mortgage loans. As of September 30, 1997, however, no amounts
were outstanding under this line. In addition the Bank has a secured line of
credit in the amount of $2.0 million from another commercial bank.
Recently Adopted Accounting Standards
In February 1997, the FASB issued Statement No. 128, "Earnings Per
Share." This Statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. This Statement simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings Per Share,"
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of
20
<PAGE>
the diluted EPS computation. This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This Statement requires
restatement of all prior-period EPS data presented. Management believes that
adoption of this pronouncement will not impact any previously reported earnings
per share information.
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 is a bank holding company organized in 1990 under the laws
of the State of Maryland and located in Anne Arundel County, Maryland. It
presently owns all of the outstanding shares of capital stock of the Bank, a
commercial bank organized in 1949 under the laws of the State of Maryland,
serving Anne Arundel County and surrounding areas. The Bank is engaged in the
commercial and retail banking business as authorized by the banking statutes of
the State of Maryland, including the receiving of demand and time deposits, and
the making of loans to individuals, associations, partnerships and corporations.
Real estate financing consists of residential first and second mortgage loans,
home equity lines of credit and commercial mortgage loans. Commercial lending
consists of both secured and unsecured loans. The Bank's deposits are insured up
to applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
Market Area
The Bank considers its principal market area for lending and deposit
products to consist of Northern Anne Arundel County, Maryland. Northern Anne
Arundel County is a mature suburb of the City of Baltimore which in recent years
has experienced modest population growth and is characterized by an aging
population. Management believes that the majority of the working population in
its market area either commutes to Baltimore or is employed at the nearby
Baltimore Washington International airport. Anne Arundel County is generally
considered to have more affordable housing than other suburban Baltimore areas
and has begun to attract younger persons and minorities on this basis. This
inflow, however, has not been sufficient to affect current population trends.
Memoranda of Understanding
Effective June 13, 1996, the Board of Directors, the FDIC and the
Maryland State Bank Commissioner (the "Commissioner") entered into a Memorandum
of Understanding ("M.O.U.") which required the Bank to establish written
programs to reduce classified assets and contingent liabilities and to report to
the FDIC and the Commissioner quarterly on the status of such assets and
liabilities, to collect or charge-off certain classified loans, to maintain
ratios relating to capital and to delinquent and non-accrual loans, to provide
the FDIC and the Commissioner with thirty days notice prior to dividend
declaration, to develop an internal loan review and grading system, policies for
loan underwriting and administration, a strategic plan for improving operations
and budgets, and policies and monitoring systems for liquidity and interest rate
risk, to evaluate the allowance for loan and lease losses quarterly, to engage a
chief lending officer, to cease any violations of law or regulations cited by
the FDIC or the Commissioner, and to establish a committee of three directors to
monitor compliance with the M.O.U.
21
<PAGE>
Effective July 10, 1997, the Board of Directors entered into a revised
Memorandum of Understanding (the "Revised M.O.U.") with the FDIC and the
Commissioner which supersedes the June 13, 1996 M.O.U. Under the Revised M.O.U.,
the Bank may not declare or pay any dividends to the Company without the prior
written consent of the FDIC and the Commissioner if the ratio of the Bank's Tier
1 capital to assets would be less than 6.0%. Dividends to the Company may not
exceed 50% of net operating income after taxes for the period declared without
the prior written consent of the FDIC and the Commissioner. Within 360 days of
the Effective Date of the Revised M.O.U., the Bank is required to reduce its
classified assets to 25% of Tier 1 Capital plus its Allowance for Loan and Lease
Losses and to reduce its ratio of non-accrual loans and loans 30 days or more
past due to no more than 3.5% of gross loans. Additionally, the Bank will adopt
and implement an internal loan review and grading system meeting certain
criteria and make certain changes in existing policies and in its strategic
plan.
Should the Bank fail to comply with the provisions of the M.O.U., the
FDIC or the Commissioner could seek to impose greater sanctions on the Bank.
Enforcement actions may include the issuance of formal and informal
agreements, the imposition of civil money penalties and the issuance of a
cease-and-desist order that can be judicially enforced. Neither the FDIC nor the
Commissioner has sought to initiate any such measures.
Lending Activities
The Bank offers a full range of consumer and commercial loans. The
Bank's lending activities include residential and commercial real estate loans,
construction loans, land acquisition and development loans, equipment and
automobile lease financing, commercial loans and consumer installment lending.
Substantially all of the Bank's loan customers are residents of Anne Arundel
County and surrounding areas of Central Maryland. The Bank solicits loan
applications for commercial loans from small to medium sized businesses located
in its market area. The Bank believes that this is a market in which a
relatively small community bank, like the Bank, has a competitive advantage in
personal service and flexibility. The Bank's lease financing portfolio consists
of loans purchased from third party originators.
During the last fiscal year, the Bank's loan portfolio significantly
decreased in size primarily due to declines in the size of construction and land
development portfolio and in its lease financing and demand and time loan
portfolio. The declines in the construction and land development portfolio
reflect the significant increase in such lending in fiscal year 1994 which was
not sustained in subsequent years. The Bank has decided to decrease its
equipment and automobile lease-based lending because of the difficulties
encountered in monitoring the financial condition of borrowers on purchased
leases. The declines in the demand and time loan portfolio reflect in part the
substantial charge-offs which the Bank has taken during the past two fiscal
years. See "Risk Factors -- Recent Loan Loss Experience Involving Significant
Borrowers."
22
<PAGE>
The following table provides information on the composition of the loan
portfolio at the indicated dates.
<TABLE>
<CAPTION>
At December 31,
At September 30, ---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- --------------- ----------------
$ % $ % $ % $ % $ % $ %
- - - - - - - - - - - -
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate................. 81,818 71.62% 88,923 68.54% 98,422 63.84% 94,715 60.49% 85,313 59.07% 77,855 59.92%
Installment................. 19,445 17.02 22,281 17.17 27,898 18.10 32,352 20.66 27,537 19.07 21,706 16.70
Credit card................. 1,093 0.96 1,434 1.11 1,484 0.96 1,233 0.79 953 0.66 264 0.20
Commercial.................. 11,881 10.40 17,095 13.18 26,366 17.10 28,278 18.06 30,615 21.20 30,130 23.18
-------- -------- -------- -------- -------- --------
114,237 100.00% 129,733 100.00% 154,170 100.00 156,578 100.00% 144,418 100.00% 129,955 100.00%
Allowance for credit
losses................... 4,276 5,061 3,698 2,764 2,552 1,756
-------- -------- -------- -------- -------- --------
Loans, net ................ $109,961 $124,672 $150,472 $153,814 $141,866 $128,199
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the maturities for various categories of
the loan portfolio at September 30, 1997. Demand loans and loans which have no
stated maturity are treated as due in one year or less. At September 30, 1997,
the Company had $12,472,039 in loans due after one year with variable rates and
$92,755,553 in such loans with fixed rates. The Bank's long-term real estate
loans allow the Bank to call the loan after three years in order to adjust the
interest rate if necessary. The Bank has generally not exercised its call option
and the following table assumes no exercise of the Bank's call option.
Due Over
Due Within One to Five Due Over
One Year Years Five Years Total
-------- ----- ---------- -----
(In thousands)
Real Estate........... $4,834 $ 9,897 $67,087 $81,818
Installment........... 1,073 16,049 2,323 19,445
Credit Card........... 1,093 -- -- 1,093
Commercial............ 2,009 9,478 394 11,881
------ ------- ------- --------
$9,009 $35,424 $69,804 $114,237
====== ======= ======= ========
23
<PAGE>
Real Estate Lending. The Bank offers long-term mortgage financing for
residential and commercial real estate as well as shorter term construction and
land development loans. At September 30, 1997, the Bank had $34.7 million in
residential mortgages, $42.8 million in commercial mortgages and $4.3 million in
construction and land development loans. Residential mortgage and residential
construction loans are originated with fixed rates while commercial mortgages
may be originated on either a fixed or variable rate basis. Commercial
construction loans are generally originated on a variable rate basis. The Bank's
long-term, fixed-rate mortgages include a provision allowing the Bank to call
the loan after three years in order to adjust the interest rate. The Bank,
however, has never exercised this right. Substantially all of the Bank's real
estate loans are secured by properties in Anne Arundel County, Maryland. Under
the Bank's loan policies, the maximum permissible loan-to-value ratio for
owner-occupied residential mortgages is 80% of the lesser of the purchase price
or appraised value. For residential investment properties, the maximum
loan-to-value ratio is 75%. The maximum permissible loan-to-value ratio for
residential and commercial construction loans is 80%. The maximum loan-to-value
ratio for permanent commercial mortgages is 75%. The maximum loan-to-value ratio
for land development loans is 70% and for unimproved land is 65%. The Bank also
offers home equity loans secured by the borrower's primary residence provided
that the aggregate indebtedness on the property does not exceed 80% of its
value.
Commercial Lending. The Bank's commercial loan portfolio consists
principally of demand and time loans for commercial purposes and purchased lease
financings. The Bank's business demand and time lending includes various working
capital loans, lines of credit and letters of credit for commercial customers.
Demand loans require the payment of interest until called while time loans
require a single payment of principal and interest at maturity. Such loans may
be made on a secured or an unsecured basis. All such loans are underwritten on
the basis of the borrower's creditworthiness rather than the value of the
collateral. The Bank's lease financing portfolio includes leases on various
types of commercial equipment that have been purchased from various vendors. The
Bank has determined to de-emphasize lease financing because of the difficulties
encountered in monitoring the financial condition of borrowers on purchased
leases.
Installment Lending. The Bank makes consumer and commercial installment
loans for the purchase of automobiles, boats, other consumer durable goods,
capital goods and equipment. Such loans provide for repayment in regular
installments and are secured by the goods financed. Also included in installment
loans are overdraft loans and other credit repayable in installments. As of
September 30, 1997, approximately $11,105,260, or 56.11%, of the installment
loans in the Bank's portfolio had been originated for commercial purposes and
$8,686,572, or 43.89%, had been originated for consumer purposes.
Credit Card and Related Loans. Credit card and related loans consist of
outstanding balances on credit cards and overdraft lines of credit. The Bank
offers no annual fee VISA(R) and MasterCard(R) credit cards to qualified
customers. Credit card billing and payment processing is done for the Bank by an
unaffiliated third party which receives a fee for such services. The Bank's
overdraft protection line of credit is offered as a convenience to qualified
customers.
Although the risk of non-payment for any reason exists with respect to
all loans, certain other specific risks are associated with each type of loan.
The primary risks associated with commercial loans, including commercial real
estate loans, are 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. Primary risks associated with residential real
estate loans include fluctuating land and property values and rising interest
rates with respect to fixed-rate, long-term loans. Residential construction
lending exposes the Company to risks related to builder performance. Consumer
loans are affected primarily by domestic instability and a variety of factors
that may lead to the borrower's unemployment, including deteriorating economic
conditions in one or more segments of a local or broader economy.
<PAGE>
The Bank's lending activities are conducted pursuant to written
policies approved by the Board of Directors intended 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. Regular portfolio reviews
are performed by the Senior Credit Officer to identify potential underperforming
credits, estimate loss exposure and to ascertain compliance with the Bank's
policies. On a quarterly basis, the internal auditor performs an independent
loan review. 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.
24
<PAGE>
The Bank's loan approval policy provides for various levels of
individual lending authority. The maximum lending authority granted by the Bank
to any one individual is $500,000. A combination of approvals from certain
officers may be used to lend up to an aggregate of $750.000. The Bank's
Executive Committee is authorized to approve loans up to $1,000,000. Larger
loans must be approved by the full Board of Directors.
Under Maryland law, the maximum amount which the Bank is permitted to
lend to any one borrower and their related interests may generally not exceed
10% of the Bank's unimpaired capital and surplus which is defined to include the
Bank's capital, surplus, retained earnings and 50% of its reserve for possible
loan losses. Under this authority, the Bank would have been permitted to lend up
to $2.0 million to any one borrower at September 30, 1997. By interpretive
ruling of the Commissioner, Maryland banks have the option of lending up to the
amount that would be permissible for a national bank which is generally 15% of
unimpaired capital and surplus (defined to include a bank's total capital for
regulatory capital purposes plus any loan loss allowances not included in
regulatory capital). Under this formula, the Bank would have been permitted to
lend up to $3.0 million to any one borrower at September 30, 1997. It is
currently the Bank's policy to limit its exposure to any one borrower to no more
than $1.8 million in the aggregate. At September 30, 1997, the largest amount
outstanding to any one borrower and their related interests was $3.2 million.
Non-Performing Loans
It is the current policy of the Bank to discontinue the accrual of
interest when a loan becomes 90 days or more delinquent and circumstances
indicate that collection is doubtful. For fiscal years prior to the 1996 fiscal
year, the Bank's policy was to consider real estate loans on a case-by-case
basis subject to collateral. For the nine months ended September 30, 1997 and
the year ended December 31, 1996, interest of approximately $362,713 and
$457,035, respectively, would have been accrued on non-accrual loans if such
loans had been current in accordance with their original terms. During such
periods, $0 and $28,822, respectively, in interest on such loans was included in
income.
The following table sets forth the amount of the Bank's non-accrual
loans and accruing loans 90 days or more past due at the dates indicated. At
each of the dates indicated, the Bank did not have any troubled debt
restructurings within the meaning of Statement of Financial Accounting Standards
No. 15.
<TABLE>
<CAPTION>
At At December 31,
September 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- -------- -------- -------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual Loans:
Real estate.......................... $ 3,277 $ 4,000 $ 1,086 $ 556 $ 800 $ 925
Installment.......................... 133 168 165 25 15 39
Credit card & related ............... 0 0 4 0 0 0
Commercial........................... 886 378 1,120 74 299 43
--------- ------- ------- ------- ------- -------
Total Nonaccrual Loans.......... 4,276 4,546 2,375 655 1,114 1,007
--------- ------- ------- ------- ------- -------
Accruing Loans Past Due 90 Days
or More:
Real Estate.......................... 0 87 2,967 2,604 1,602 1,702
Installment.......................... 0 0 300 0 0 0
Credit card & related ............... 0 0 28 5 19 0
Commercial........................... 0 0 610 310 424 0
--------- ------- ------- ------- ------- -------
Total Accruing Loans Past Due
90 days or More.............. 0 87 3,905 2,919 2,045 1,702
--------- ------- ------- ------- ------- -------
Total Non-Performing Loans...... $ 4,276 $ 4,633 $ 6,280 $ 3,574 $ 3,159 $ 2,709
========= ======= ======= ======= ======= =======
Non-Performing Loans to
Total Loans.................. 3.89% 3.72% 4.17% 2.32% 2.23% 2.11%
========= ======= ======= ======= ======= =======
Allowance for Credit Losses
to Non-Performing Loans...... 100.00% 109.24% 58.89% 77.39% 80.79% 64.78%
========= ======= ======= ======= ======= =======
</TABLE>
25
<PAGE>
Approximately $2,876,247, or 67.3% of the Bank's non-accrual loans at
September 30, 1997 were attributable to ten borrowers. Charge-offs of $1,076,500
have previously been taken on these loans. Seven of these borrowers with loans
totaling $1,825,416 were in bankruptcy at that date. Because of the legal
protections afforded to borrowers in bankruptcy, collections on such loans are
difficult and the Bank anticipates that such loans may remain delinquent for an
extended period of time. Each of these loans is secured by collateral with a
value well in excess of the principal amount of the Bank's loan.
At September 30, 1997 and December 31, 1996, there were $936,000 and
$1,408,000, respectively, in loans outstanding not reflected in the above table
as to which known information about possible credit problems of borrowers caused
management to have serious doubts as to the ability of such borrowers to comply
with present loan repayment terms. Such loans consist of loans which were not 90
days or more past due but where the borrower is in bankruptcy or has a history
of delinquency or the loan to value ratio is considered excessive due to
deterioration of the collateral or other factors.
At September 30, 1997, the Company had $739,000 in real estate acquired
in partial or total satisfaction of debt compared to $602,000 and $432,926 in
such properties at December 31, 1996 and 1995, respectively. All such properties
are recorded at the lower of cost or fair value at the date acquired and carried
on the balance sheet as other real estate owned. Losses arising at the date of
acquisition are charged against the allowance of credit losses. Subsequent
write-downs that may be required and expense of operation are included in
non-interest expense. Gains and losses realized from the sale of other real
estate owned are included in non-interest income or expense. For a description
of the properties comprising other real estate owned at September 30, 1997. See
"-- Properties."
Allowance for Credit Losses
The allowance for credit losses is established through a provision for
credit losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that the collectibility of the principal
is unlikely. The allowance, based on evaluations of the collectibility of loans
and prior loan loss experience, is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions and trends
that may affect the borrowers' ability to pay.
<PAGE>
Transactions in the allowance for credit losses during the last five
fiscal years were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ -------- -------- -------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balance............ $ 5,061 $ 3,698 $ 3,698 $ 2,764 $ 2,552 $ 1,755 $ 993
--------- --------- -------- ---------- --------- --------- ---------
Loans charged off
Real estate............. 678 659 1,047 1,541 425 98 193
Installment............. 481 627 786 270 29 41 25
Credit card & related .. 0 130 182 194 1 1 7
Commercial.............. 282 3,087 3,453 5,056 520 194 73
--------- --------- -------- ---------- --------- --------- ---------
Total.............. 1,441 3,503 5,468 7,061 975 334 298
--------- --------- -------- ---------- --------- --------- ---------
Recoveries
Real estate............. 40 85 103 33 18 1 41
Installment............. 289 13 57 11 20 19 16
Credit card & related .. 8 2 2 0 0 0 0
Commercial.............. 49 66 73 26 29 31 3
--------- --------- -------- ---------- --------- --------- ---------
Total............... 386 166 235 70 67 51 60
--------- --------- -------- ---------- --------- --------- ---------
Net charge-offs.............. 1,055 3,337 5,233 6,991 908 385 238
Provisions charged to
operations................. 270 2,825 6,596 7,925 1,120 1,080 1,000
--------- --------- -------- ---------- --------- --------- ---------
Ending balance............... $ 4,276 $ 3,186 $ 5,061 $ 3,698 $ 2,764 $ 2,552 $ 1,755
========= ========= ======== ========== ========= ========= =========
Average loans................ $ 121,358 $ 150,800 $146,922 $ 156,219 $ 151,933 $ 139,280 $ 116,783
Net charge-offs to average
loans(1)................... 1.16% 2.95% 3.56% 4.48% 0.60% 0.20% 0.19%
</TABLE>
- ----------
(1)Ratios for nine-month periods are annualized
26
<PAGE>
The Bank's high level of loan charge-offs during the last two fiscal
years is primarily attributable to its lending relationships with Mr. Brian
Davis and various affiliated entities. See "Risk Factors -- Recent Loan Loss
Experience Involving Significant Borrowers." Such loans primarily consisted of
loans for purchases of trucks and other non-real estate secured loans which are
categorized under commercial loans in the above table. In addition, during
fiscal year 1996, the Bank began charging off all non-real estate secured loans
upon 90 days delinquency which contributed to a continued high level of
charge-offs.
The following table shows the allowance for credit losses broken down
by loan category as of September 30, 1997 and December 31, 1996. Such
information for earlier periods is not available.
<TABLE>
<CAPTION>
At September 30, 1997 At December 31, 1996
------------------------------ ------------------------------
Reserve Percent of Loans Reserve Percent of Loans
for Each in Each Category for Each in Each Category
Portfolio Category to Total Loans Category to Total Loans
- --------- -------- -------------- -------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate...................... $ 1,656 71.62% $ 2,109 68.54%
Installment...................... 231 17.02 448 17.17
Credit Card...................... 49 0.96 49 1.11
Commercial....................... 1,388 10.40 2,455 13.18
Unallocated...................... 953 -- -- --
------- ------ ------- ------
Total...................... $ 4,276 100.00% $ 5,061 100.00%
======= ====== ======= ======
</TABLE>
<PAGE>
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 also invests in obligations of certain states and their
political subdivisions.
The following table presents at amortized cost the composition of the
investment portfolio by major category at the dates indicated.
<TABLE>
<CAPTION>
At At December 31,
September 30, -------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities .................... $ 9,566 $ 13,061 $ 15,071 $ 17,099
U.S. Government agencies and
mortgage-backed securities................. 73,318 56,607 30,235 22,162
Obligations of states and political
subdivisions............................... 8,774 25,726 27,380 20,471
Other securities and stock................... 936 748 699 685
--------- -------- -------- ---------
Total investment securities.................. $ 92,594 $ 96,142 $ 73,385 $ 60,417
========= ======== ======== =========
</TABLE>
27
<PAGE>
The following table sets forth the scheduled maturities, book values
and weighted average yields for the Company's investment securities portfolio at
September 30, 1997. Weighted average yields for obligations of states and
political subdivisions are presented on a tax-equivalent basis.
<TABLE>
<CAPTION>
More than
One Year or Less One to Five Years Five to Ten Years Ten Years Total
---------------- ----------------- ----------------- ---------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Book Average Book Average Book Average Book Average Book Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities ........ $3,000 5.40% $ 5,089 6.45% $ 1,477 5.83% $ -- -- % $ 9,566 6.02%
U.S. Government agencies and
mortgage-backed securities...... -- -- 20,272 6.57 22,254 7.14 30,792 6.83 73,318 6.85
Obligations of states and
political subdivisions.......... 255 8.57 2,864 8.70 3,713 9.54 1,942 9.54 8,774 9.23
Other securities and stock....... 936 6.55 -- -- -- -- -- -- 936 6.55
------ ---- -------- ---- -------- ---- ------- ---- ------- ----
Total investment securities. $4,191 5.84% $ 28,225 6.76% $ 27,444 7.39% $32,734 6.99% $92,594 6.99%
====== ==== ======== ==== ======== ==== ======= ==== ======== ====
</TABLE>
At September 30, 1997, 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 other than its investments in Maryland State,
County and Municipal securities which had an aggregate book value of $8.7
million and aggregate market value of $9.1 million at that date. The foregoing
totals include securities payable from or secured by different sources of
revenue or taxing authorities.
Deposits and Sources of Funds
The funds needed by the Bank to make loans are generated by deposit
accounts solicited from the communities surrounding its main office and five
branches in northern Anne Arundel county. Consolidated total deposits were
$232,745,975 as of December 31, 1996. In addition, the Bank may borrow up to $26
million under a line of credit from the Federal Home Loan Bank of Atlanta.
The Bank's deposit products include regular savings accounts
(statements), money market deposit accounts, demand deposit accounts, NOW
checking accounts, IRA accounts and certificates of deposit accounts. Variations
in service charges, terms and interest rates are used to target specific
markets. Ancillary products and services for deposit customers include safe
deposit boxes, money orders and travelers checks, night depositories, automated
clearinghouse transactions, wire transfers, automated teller machines, telephone
banking, and a customer call center.
The Bank obtains deposits principally through its network of six
offices. The Bank does not solicit brokered deposits. At September 30, 1997, the
Bank had approximately $10.5 million in certificates of deposit and other time
deposits of $100,000 including IRA accounts. The following table provides
information as to the maturity of all time deposits of $100,000 or more at
September 30, 1997
Amount
(In thousands)
--------------
Three months or less $ 1,802
Over three through six months 1,979
Over six through 12 months 642
Over 12 months 6,064
-------
Total $10,487
=======
28
<PAGE>
Competition
The Bank faces competition from other community banks and financial
institutions and larger intrastate and interstate banks and financial
institutions compete vigorously (currently, twelve financial institutions
operate within two miles of the Bank's headquarters). Former directors of the
Bank, including its former Chief Executive Officer, have established a new bank
with a main office in Glen Burnie close to the Bank's headquarters. The Bank
anticipates that this new bank will solicit a significant number of its
customers.
The Bank's interest rates, loan and deposit terms, and offered products
and services are governed, to a large extent, by such competition. The Bank
attempts to provide superior service within its community and to know and
facilitate services to its customers. It seeks commercial relationships with
small to medium size businesses which, it believes, would welcome personal
service and flexibility. While it believes it is the sixth largest deposit
holder in Anne Arundel County, Maryland, with an estimated 5.74% market share as
of June 1996 (the latest date for which the Bank has relevant data available),
it believes its greatest competition comes from smaller community banks which
offer similar personalized services.
Other Activities
The Company also owns all outstanding shares of capital stock of GBB
Properties, Inc. ("GBB"), another Maryland corporation which was organized in
1994 and which is engaged in the business of acquiring, holding and disposing of
real property, typically acquired in connection with foreclosure proceedings (or
deeds in lieu of foreclosure) instituted by the Bank or acquired in connection
with branch expansions by the Bank. No branch expansion occurred in 1996.
Employees
At September 30, 1997 the Bank had 130 full-time equivalent employees.
Neither the Company nor GBB currently has any employees.
Properties
The Bank owns its Banking Operations Center, its Executive Offices,
its main banking facility in Glen Burnie, and four branch offices in various
communities in Anne Arundel County, Maryland, all of which are unencumbered. The
Bank also leases a fifth branch office. The Company owns no real estate at
present. At September 30, 1997, GBB owned one parcel of real estate obtained
from a foreclosure by the Bank. The book value of this property was $143,000.
The property consists of office condominiums. GBB intends to sell this property.
At September 30, 1997, the Bank owned three foreclosed real estate properties
having a book value of $596,000, which consisted of residential property which
the Bank is holding for sale.
Legal Proceedings
McCafferty's Restaurant ("McCafferty's") had commenced an adversary
proceeding (McCafferty's, Inc. v. Bank of Glen Burnie Adversary Case, Case No.
96-5137-ESD, U.S. Bankr. Ct., D. Md.) on March 20, 1996 in McCafferty's pending
Chapter 11 bankruptcy case (In re McCafferty's, Inc., Case No. 96-5-2444-SD,
U.S. Bankr. Ct., D. Md.). The United States District Court for the District of
Maryland has assumed jurisdiction (Bank of Glen Burnie v. McCafferty's, Inc.,
Civil Action No. MJG-96-3656, D-Md, 1996). McCafferty's alleges that the Bank,
acting in concert with Brian Davis (McCafferty's former treasurer and chief
financial officer who has pled guilty to fraud against the Bank and various
other banks), defrauded McCafferty's through alleged forgery of loan documents,
improper payment of checks, wrongful diversion of loan proceeds, illegal
overbilling and conspiracy to conceal illegal acts. McCafferty's seeks
$5,000,000 in compensatory damages, $50,000,000 in punitive damages and
declaratory and injunctive relief under numerous counts, including one count
pled under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). On
December 4, 1997, the U.S. District Court dismissed McCafferty's claims under
RICO but denied the Bank's motion to dismiss McCafferty's other claims. The Bank
denies any wrongdoing and any liability, and intends to continue contesting the
litigation vigorously. The Company does not believe that the outcome of this
litigation will have a material adverse effect on its business.
29
<PAGE>
In addition to the foregoing litigation, the Bank is a defendant in
three suits filed in the Circuit Court for Baltimore County by creditors of a
company controlled by Mr. Davis alleging in each case that the Bank improperly
negotiated checks for loan proceeds over forged endorsements. The aggregate
damages sought in First National Bank of Maryland v. The Bank of Glen Burnie
(Case No. 03-C-96-001925 filed February 28, 1996), Elkridge National Bank v. The
Bank of Glen Burnie (Case No.03-C-96-002064 filed March 4, 1996) and Commercial
and Farmers Bank v. The Bank of Glen Burnie (Case No. 03-C-96-002941 filed March
25, 1996) total approximately $2,000,000. In Elkridge National Bank, a judgment
in the amount of $284,000 has been rendered in favor of plaintiffs which the
Bank has appealed. The Bank denies liability in each of these suits. In
addition, the Bank has filed a counter-claim in the First National Bank of
Maryland suit seeking damages in excess of the amounts sought by the plaintiff.
Accordingly, the Bank does not believe that the outcome of these suits will have
a material adverse effect on the Bank.
The Bank is also a defendant in Beal GMC v. The Bank of Glen Burnie
(Case No. C96-32383OC filed October 2, 1996 in Anne Arundel County Circuit
Court) in which it is alleged that employees of the Bank falsely represented to
a third party that checks drawn on Mr. Davis's account and payable to plaintiff
had cleared the Bank. Plaintiff seeks compensatory damages of $500,000 and
punitive damages of $5.0 million. The Bank does not believe that this claim has
merit and is vigorously defending this action.
The Bank is involved in various other legal actions relating to its
business activities. These actions involve claims for money damages which do not
exceed 10% of the Company's consolidated current assets in any one case or in
any group of proceedings presenting in large degree the same legal and factual
issues. The Company does not believe that any ultimate liability or risk of loss
with respect to these actions will materially affect its consolidated financial
position.
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 is required to furnish to the Federal Reserve Board annual and
quarterly reports of its operations at the end of each period and to furnish
such additional information as the Federal Reserve Board may require pursuant to
the BHCA. The Company is also subject to regular inspection 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; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) 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") 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 the minimum time
period (not exceeding five years) specified by the statutory law 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.
30
<PAGE>
Additionally, beginning on June 1, 1997, the federal banking agencies
are authorized to 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
after the date of enactment of the Reigle- Neal Act and prior to June 1, 1997
which applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. The State of Maryland did not pass
such a law during this period. Interstate acquisitions of branches will be
permitted only if the law of the state in which the branch is located permits
such acquisitions. Interstate mergers and branch acquisitions will also be
subject to the nationwide and statewide insured deposit concentration amounts
described above.
The BHCA also prohibits, with certain exceptions, a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The activities of the Company are
subject to these legal and regulatory limitations under the BHCA and the Federal
Reserve Board's regulations thereunder. Notwithstanding the Federal Reserve
Board's prior approval of specific nonbanking activities, the Federal Reserve
Board has the power to 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 has adopted guidelines
regarding the capital adequacy of bank holding companies, which require 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 has the power to
prohibit dividends by bank holding companies if their actions constitute unsafe
or unsound practices. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view 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 are required to give the Federal Reserve Board
notice 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 purchases or redemptions 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.
31
<PAGE>
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 subject to the supervision of the Commissioner and the FDIC.
The Commissioner and FDIC regularly examine the operations of the Bank,
including but not limited to 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 is required to
furnish quarterly and annual call reports to the Commissioner and FDIC. The
FDIC's enforcement authority includes the power to remove officers and directors
and the authority 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. Some of the aspects of the lending and
deposit business of the Bank that are subject to regulation by the Federal
Reserve Board and the FDIC include 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 set forth specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
Capital Adequacy. The Federal Reserve Board and the FDIC have
established guidelines with respect to the maintenance of appropriate levels of
capital by bank holding companies and state non-member banks, respectively. The
regulations impose two sets of capital adequacy requirements: minimum leverage
rules, which require bank holding companies and banks to maintain a specified
minimum ratio of capital to total assets, and risk-based capital rules, which
require the maintenance of specified minimum ratios of capital to
"risk-weighted" assets.
The regulations of 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 are expected to 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 would be expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve Board has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, 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 elements include, 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 perpetual debt and mandatory convertible securities; and
subordinated debt and intermediate-term preferred stock.
32
<PAGE>
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 exposure to declines in the economic value of
their capital due to changes in interest rates 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 the exposure of a
bank's net economic value to changes in interest rates. 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 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,
1996, the Bank was well-capitalized as defined by the FDIC's regulations.
Branching. Maryland law provides that, 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. The Reigle-Neal Act also
requires the appropriate federal banking agencies to prescribe regulations by
June 1, 1997 which prohibit any out-of-state bank from using the interstate
branching authority primarily for the purpose of deposit production. These
regulations must include guidelines to ensure that interstate branches operated
by an out-of-state bank in a host state are reasonably helping to meet the
credit needs of the communities which they serve.
Dividend Limitations. Pursuant to the Maryland Financial Institutions
Code, 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 the
payment of dividends by prohibiting a Maryland bank from declaring a dividend on
its shares of common stock until its surplus fund equals the amount of required
capital stock or, if the surplus fund does not equal the amount of capital
stock, in an amount in excess of 90% of net earnings. 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 also has authority 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. Under the MOU, the Bank may not pay a
dividend without prior notice to the Commissioner and the FDIC if its ratio of
Tier 1 capital to assets would be less than 6.0%. In addition, dividends may not
exceed 50% of net operating income after taxes for the period declared without
the prior written consent of the FDIC and the Commissioner.
33
<PAGE>
Deposit Insurance. The Bank is required to pay semi-annual assessments
based on a percentage of its insured deposits to the FDIC for insurance of its
deposits by the Bank Insurance Fund ("BIF"). Under the Federal Deposit Insurance
Act, the FDIC is required to set semi-annual assessments for BIF-insured
institutions to maintain the designated reserve ratio of the BIF 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 BIF.
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. Based
on the data reported to regulators for the date closest to the last day of the
seventh month preceding the semi-annual assessment period, 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 such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund. Under the current assessment
schedule, well-capitalized banks with the best supervisory ratings are not
required to pay any premium for deposit insurance. All BIF-insured banks,
however are required to pay an assessment to the FDIC in an amount equal to 1.3
basis points times their assessable deposits to help fund interest payments on
certain bonds issued by the Financing Corporation, an agency established by the
federal government to finance takeovers of insolvent thrifts.
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, and for all
such transactions with all affiliates a state non-member bank is 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 nonmember bank (such as the
Company) and any companies which are controlled by such parent holding company
are affiliates of the state nonmember 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 and 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 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 may
not be made on terms more favorable than those afforded other borrowers and are
restricted as to type, amount and terms of credit.
34
<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below is information about the directors, executive officers
and significant employees of the Company, the Bank and GBB. Directors of the
Company are elected by stockholders annually for one-year terms. Unless
indicated otherwise, the positions stated for each individual are positions held
in the Company and in each of its subsidiaries, and the positions stated are
positions which are currently held and which have been held for at least the
past five years.
Name Age Director Since
- ---- --- --------------
Directors:
Theodore L. Bertier 69 1997
Retired since 1993. Manager of design and drafting department of Westinghouse
Electric Corp. prior to retirement. Previously served as a director of the Bank
from 1970 through 1995.
Shirley Boyer 60 1995
Owner/Manager of a large number of residential properties in Anne Arundel
County, Maryland. Thirteen years experience in various banks (1954-1967) in
positions from Teller to Assistant Branch Manager.
Thomas Clocker 62 1995
Owner/Operator of Angel's Food Market in Pasadena, Maryland since 1960. Charter
member of and assisted in founding Pasadena Business Association. Community
involvement including local charities, schools, church, scout groups and
athletic programs.
John E. Demyan 49 1990
Chairman of the board since 1995. Director of the Company and the Bank from 1990
through 1994. Completed Maryland Banking School in 1994. Owner/Manager of
commercial and residential properties in northern Anne Arundel County, Maryland.
Alan E. Hahn 62 1997
Owner/Manager of residential real estate. Retired information systems manager.
Charles L. Hein 75 1997
Retired clergyman. Purchaser and restorer of residential properties. Mortgagee
of residential properties.
F. William Kuethe, Jr. 64 1995
President and Chief Executive Officer of the Company and the Bank since 1995.
Director of the Bank from 1963 through 1989. Former President - Glen Burnie
Mutual Savings Bank from 1960 through 1995. Licensed appraiser and real estate
broker. Banking experience from 1960 to present at all levels.
35
<PAGE>
Frederick W. Kuethe, III 37 1988
Vice President of the Company since 1995. Director of the Bank since 1988.
Software design and systems integration - Northrop Grumman Corp. (formerly
Westinghouse Electric Corporation). Chairman of Data Processing Committee for
the Bank. Graduated from Maryland Banking School. Frederick W. Kuethe, III is
the son of F. William Kuethe, Jr.
Eugene P. Nepa 67 1997
Retired. Mechanical engineer at Premier Rides Incorporated 1992-1997.
William N. Scherer, Sr. 75 1995
Attorney specializing in wills and estates. Formerly accountant and tax
specialist.
Karen B. Thorwarth 40 1995
Manager, Yacht Department - Basil-Voges, Inc. of Annapolis, Maryland. Licensed
insurance agent specializing in underwriting and marketing private pleasure
yacht insurance. Member - Annapolis Yacht Club.
Mary Lou Wilcox 49 1997
Elementary school teacher.
Executive Officers who are not Directors:
Dorothy A. Abel 55
Secretary of the Company since 1995. Vice President and Secretary of the Bank
since 1990.
Michael L. Derr 46
Vice President Operations of the Bank since 1992. Assistant Vice President
Operations of the Bank since 1989.
Michael Livingston 43
Chief Lending Officer of the Bank since 1996. Regional Vice President and
commercial loan officer with Citizens Bank from March 1993 until April 1996.
Comptroller with Land Services Group from April 1992 through January 1993.
John E. Porter 43
Treasurer and Chief Financial Officer of the Company since 1995. Vice President,
Treasurer and Chief Financial Officer of the Bank since 1990.
Secretary/Treasurer of GBB since 1995.
Robert J. Riedel 55
Vice President of the Bank since 1990.
36
<PAGE>
Directors' Fees
Each director receives a $700 fee for attending each meeting of the
board of directors of the Bank or of committees of the board of the Bank. During
1996, $137,900 were paid in directors' fees. No additional fees are paid for
service on the Company's Board of Directors.
The Company maintains a Director Stock Purchase Plan pursuant to which
directors may purchase the Common Stock at its fair market value on the date an
option is granted. At December 31, 1996, there were 17,700 shares of Common
Stock reserved for issuance under the plan. No options are currently outstanding
under the plan. The plan was suspended in 1996.
Compensation Committee
A compensation committee of directors of the Bank approved by its board
sets director compensation. The Bank's board sets the compensation of the chief
executive officer. The chief executive officer sets the compensation of the
other executive officers. Executive officers are placed at certain grade levels
with the salary range of each grade level established by the compensation
committee, subject to board approval, based on comparable salaries paid by
similar financial institutions. Within such range, an individual's salary is
based on a performance review conducted by the board or president, as indicated
above. Bonuses are discretionary and largely based on the Bank's financial
performance.
Executive Compensation
The following table sets forth the compensation paid by the Company and
the Bank to F. William Kuethe, Jr., their chief executive officer, during the
years indicated.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
----------------------------------- --------------------------
Restricted Securities
Name and Other Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation Award(s) Options Compensation
- ------------------ ---- ------ ----- ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
F. William Kuethe, Jr. 1996 $80,000 $ -- $ -- -- -- $35,183 (2)
1995 65,538 7,500 250 (1) -- 250 16,904
1994 -- 1,500 -- -- -- 35,109
</TABLE>
- --------------
(1) Mr. Kuethe's 1995 "Other Annual Compensation" consisted solely of the
differences between the exercise price of stock options exercised by him
during the respective years and the fair market value of the shares at the
time of exercise as determined by information furnished by Legg Mason.
(2) Mr. Kuethe's "Other Compensation" for 1996 consisted of $15,170 in paid
insurance premiums, $16,100 in directors' fees and $3,913 in appraisal fees.
Stock Option Plan. Under the Employee Stock Purchase Plan, employees of
the Bank, including its chief executive officer, may receive the right to
purchase shares of the Company's Common Stock, at a per share price equal to the
greater of (a) 15% less than the market price for such shares on the date of
grant or exercise (whichever is lower) or (b) their book value as of the end of
the Company's fiscal year preceding the grant date. Options have been awarded on
the basis of five shares for every $1,000 of salary and bonus paid during the
preceding year although the plan leaves the amount of option awards at the
discretion of the board as long as the board applies uniform salary guidelines.
11,320 options were granted on July 1, 1995 and could be exercised at any time
through September 30, 1996. At December 31, 1996, there were 31,780 shares
reserved for issuance under the plan. The plan was suspended in 1996, and no
options have been granted thereunder since the July 1995 grant.
37
<PAGE>
The options issued to Mr. Kuethe referenced in the first note to the
Summary Compensation Table were issued under the Director Stock Option Plan. Mr.
Kuethe neither received nor exercised any options in 1996. (Neither the Company
nor the Bank grants any stock appreciation rights.)
Pension Plan. The Bank maintains a defined benefit pension plan for
substantially all employees pursuant to which benefits are based on the
employee's average rate of earnings and years of service. Vesting occurs after
six months of employment but benefits are reduced for job termination within ten
years of employment and for early retirement. A participant's pension is based
on the average amount of his annual earnings for his five most highly paid
consecutive years during the ten years immediately preceding his retirement. His
pension is determined by multiplying 2% of the "covered" portion of this amount
and .65% of any additional portion by the lesser of the number of his years of
service or 20. The "covered" portion is his social security taxable wage basis
taken over a period of up to 35 years. The following table shows the estimated
annual benefits payable upon retirement in specified compensation and years of
service classifications based on the assumption that the "covered" portion
equals $65,400 (the current maximum salary subject to social security tax) for
all employees receiving more than such amount and that the highest salary
payable is $100,000 per annum. Currently, no employee earns this much and the
Bank does not anticipate that any employee will in the foreseeable future.
Years of Service
----------------------------------------------
Remuneration 5 10 15 20
------------ ----- ------ ------ ----
$40,000 $4,000 $8,000 $12,000 $16,000
60,000 6,000 12,000 18,000 24,000
80,000 7,015 14,029 21,044 28,058
100,000 7,665 15,329 22,994 30,658
The total compensation covered by the pension plan for the year ended
December 31, 1996 was $2,965,047.19. 2.2% of the covered compensation represents
compensation paid to F. William Kuethe, Jr. His credited years of service is two
years.
Benefits under the pension plan are not subject to deduction for social
security payments or other offsets.
Certain Relationships and Related Transactions
The executive officers and directors of the Bank, and their
affiliates, enter into loan transactions with the Bank 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
September 30, 1997, December 31, 1996, 1995, and 1994, the outstanding amounts
of such loans were $1,239,705, $2,587,122, $2,878,742, and $685,613,
respectively. Loans to directors and executive officers declined during the
current year after certain directors serving during 1996 and 1995 were not
re-elected to the Board of Directors. The election of new directors having
outstanding loans in 1995 is the main reason for the increase in 1995 and 1996.
38
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of September 30, 1997
concerning ownership of the Company's 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, the individual listed in the Summary Compensation Table included
above and all executive officers and directors as a group. Ownership figures
have not been adjusted for a 1% stock dividend paid on October 1, 1997. Each
person listed has sole voting and sole investment power with respect to the
shares listed across from his name except as noted otherwise.
Amount and Nature
Name of Beneficial Ownership Percent of Class
- ---- ----------------------- ----------------
John E. Demyan 1/ 74,202 2/ 8.40%
- -
F. William Kuethe, Jr. 3/ 113,090 4/ 12.80%
- -
Theodore L. Bertier 6,479 5/ *
-
Shirley Boyer 4,456 *
Thomas Clocker 2,799 *
Alan E. Hahn 4,456 *
Charles L. Hein 36,204 6/ 4.10%
-
Frederick W. Kuethe, III 8,341 7/ *
-
Eugene P. Nepa 34,918 3.95%
William N. Scherer, Sr. 2,460 8/ *
-
Karen B. Thorwarth 505 *
Mary Lou Wilcox 319 *
All directors and executive
officers as a group 293,634 33.22%
Ethel Webster 9/ 169,191 19.14%
-
<PAGE>
- ---------------------------
* Less than 1.0% of shares outstanding.
1/ Mr. Demyan's address is 101 Crain Highway, S.E., Glen Burnie, Maryland
- - 21061.
2/ Includes 3,000 shares owned by Mr. Demyan's spouse as to which he disclaims
- - beneficial ownership.
3/ Mr. Kuethe's address is 101 Crain Highway, S.E., Glen Burnie, Maryland
- - 21061.
4/ F. William Kuethe, Jr. has shared voting and shared investment power with
- - respect to 20,097 of these shares.
5/ Theodore L. Bertier has shared voting and shared investment power with
- - respect to 679 of these shares.
6/ Charles L. Hein has shared voting and shared investment power with respect
- - to 23,570 of these shares.
7/ Frederick W. Kuethe, III has shared voting and shared investment power with
- - respect to 8,158 of these shares.
8/ William N. Scherer, Sr. has shared voting and shared investment power with
- - respect to 2,367 of these shares.
9/ Mrs. Webster's address is 104 W. Pasadena Road, Pasadena, Maryland.
- -
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 5,000,000 shares of Common Stock. As
of October 15, 1997, there were 883,858 shares outstanding. 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 may be issued in either certificated or
uncertificated form. The Common Stock of the Company 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 Common Stock of the Company 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 Common Stock of the Company possess
exclusive voting rights in the Company. Each holder of Common Stock is entitled
to one vote per share. Directors are elected by a plurality of the votes cast. 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.
Preemptive Rights. Holders of the Common Stock of the Company are
entitled to preemptive rights with respect to any additional shares which may be
issued by the Company. Preemptive rights generally entitle stockholders to
subscribe to any and all issuances of the Common Stock on a proportionate basis
and in an amount equal to the ratio that each individual stockholder's total
number of shares bears to the total number of shares of Common Stock
outstanding. Under the Maryland General Corporation Law, however, pre-emptive
rights do not apply to: (1) stock issued to obtain any of the capital required
to initiate the corporate enterprise; (2) stock issued for at least its fair
value in exchange for consideration other than money; (3) stock remaining
unsubscribed for after being offered to stockholders; (4) treasury stock sold
for at least its fair value; (5) stock issued or issuable under articles of
merger; (6) stock which is not presently entitled to be voted in the election of
directors issued for at least its fair value; (7) stock, including treasury
stock, issued to an officer or other employee of the corporation or its
subsidiary on terms and conditions approved by the stockholders by the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter; and (8) any other issuance of shares if the applicability of preemptive
rights is impracticable.
Transfer Agent and Registrar. The Bank acts as transfer agent and
registrar for the Common Stock.
<PAGE>
Certain Voting Requirements
Articles of Incorporation and Bylaws. The Company's Articles of
Incorporation provide that the affirmative vote of 80% of the outstanding shares
of stock of the Company entitled to vote shall be required for the approval of:
(a) any amendment to the Articles of Incorporation; (b) the consolidation of the
Company with one or more corporations to form a new consolidated corporation;
(c) the merger of the Company with another corporation or the merger of one or
more corporations into the Company; (d) the sale, lease or exchange or other
transfer of all or substantially all, of the property and assets of the Company,
including its goodwill; (e) the participation of the Company in a share
exchange, the stock of which is to be acquired; or (f) the voluntary
liquidation, dissolution or winding up of the Company. The Company's Bylaws
require the affirmative vote of a majority 80% of the votes entitled to be cast
at an election of directors in order to remove a director. In addition, the
Bylaws may only be amended by the stockholders by an affirmative vote of 80% of
the votes entitled to be cast on the matter.
40
<PAGE>
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.
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.
41
<PAGE>
Unless the charter or bylaws provide otherwise, if voting rights are
not approved at the meeting or if the acquiring person does not deliver an
acquiring person statement within 10 days following a control share acquisition
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except 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.
PLAN OF DISTRIBUTION
The Company will not engage any outside broker-dealers in connection
with the sale of shares of the Common Stock pursuant to the Plans. Certain
directors and executive officers of the Company will assist the Company in the
administration of the Plans. None of such directors and executive officers will
receive compensation for such services. None of such directors and executive
officers are registered as securities brokers or dealers under federal or
applicable state securities laws, nor are any of such persons affiliated with
any broker or dealer. Because none of such persons are in the business of either
effecting securities transactions for others or buying and selling securities
for their account, they are not required to register as broker or dealers under
the federal securities laws. In addition, the proposed activities of such
directors and executive officers are exempted from registration pursuant to a
specific safe-harbor provision under Rule 3a4-1 under the 1934 Act.
Substantially similar exemptions from registration are available under
applicable state securities laws.
Under the Company's Articles of Incorporation, the Company shall
indemnify a present or former director or officer of the company in connection
with a proceeding to the fullest extent permitted by Section 2-418 of the
Maryland General Corporation Law. Such section provides that a Maryland
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. The Company has been
advised that, insofar as indemnification for liabilities under the Securities
Act of 1933 (the "Act") may be permitted under these provisions, it is the
position of the Securities and Exchange Commission (the "Commission") that such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
EXPERTS
The Consolidated Financial Statements of Glen Burnie Bancorp at
December 31, 1996 appearing in this Prospectus and included in the Registration
Statement on Form S-1 filed with the Commission have been audited by Trice &
Geary LLC, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. The Consolidated
Financial Statements of the Company at December 31, 1995 and 1994 and for the
years then ended have been audited by Rowles & Company, LLP, independent
auditors, as set forth in their report therein appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
42
<PAGE>
On April 11, 1996 the Company's Board of Directors decided not to
reengage Rowles & Company, LLP to audit the Company's consolidated financial
statements for its 1996 fiscal year. Such accountants' report on the Company's
consolidated financial statements for each of its prior two fiscal years did not
contain an adverse opinion or a disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope or accounting principles. There were no
disagreements between the Company and Rowles & Company, LLP. On June 27, 1996,
the Company's board of directors decided to engage Trice & Geary LLC to perform
such function and Trice & Geary LLC was so engaged on August 16, 1996.
LEGAL MATTERS
The legality of the Common Stock offered hereby has been passed upon
for the Company by Housley Kantarian & Bronstein, P.C., Washington, D.C.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Reports and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission in Washington, D.C., and at 7 World Trade Center, Suite 1300, New
York, NY 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661.
Copies of such material can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission maintains a Web site that contains reports and
other information regarding the Company and other registrants that file
electronically with the Commission: The address of such site is
http://www.sec.gov.
The Company since its inception 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.
43
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995
AND 1994
Reports of Independent Auditors........................................F-1
Financial Statements
Consolidated Balance Sheets...................................F-3
Consolidated Statements of Income.............................F-4
Consolidated Statements of Changes in Stockholders' Equity....F-5
Consolidated Statements of Cash Flows.........................F-6
Notes to Consolidated Financial Statements....................F-8
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 and 1996
Financial Statements
Condensed Consolidated Balance Sheets.........................F-31
Condensed Consolidated Statements of Income...................F-32
Condensed Consolidated Statements of Cash Flows...............F-33
Notes to Condensed Consolidated Financial Statements..........F-34
<PAGE>
Report of Independent Auditors
The Board of Directors
Glen Burnie Bancorp and Subsidiaries
Glen Burnie, Maryland
We have audited the accompanying consolidated balance sheet of Glen Burnie
Bancorp and Subsidiaries as of December 31, 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
year then ended. 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 audit. The consolidated
financial statements of Glen Burnie Bancorp and Subsidiaries as of December 31,
1995 and 1994 were audited by other auditors whose report dated March 8, 1996
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Glen Burnie Bancorp and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Note 9 to the Consolidated Financial Statements, the Company
changed its method of accounting for post-retirement health care benefits in
1995.
Trice & Geary LLC
Salisbury, Maryland
February 12, 1997
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and
Stockholders
Glen Burnie Bancorp and Subsidiaries
Glen Burnie, Maryland
We have audited the accompanying consolidated balance sheets of Glen
Burnie Bancorp and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Glen Burnie Bancorp and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 11 to the financial statements, the Company
changed its method of accounting for postretirement health care benefits in
1995.
/s/ ROWLES & COMPANY, LLP
Baltimore, Maryland
March 8, 1996
F-2
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C>
Cash and due from banks ................................................... $ 10,665,680 $ 7,992,328 $ 6,768,528
Interest bearing deposits in other financial institutions ................. 1,836,981 1,457,693 1,037,788
Federal funds sold ........................................................ 10,175,000 -- 1,800,000
Investment securities available for sale, at fair value ................... 54,906,836 68,597,172 3,273,076
Investment securities held to maturity (fair value
1996 $41,998,402; 1995 $6,092,901; 1994 $55,751,053) ................... 41,667,057 6,001,675 57,128,637
Ground rents, at cost ..................................................... 267,974 269,825 269,825
Loans, less allowance for credit losses
1996 $5,060,592; 1995 $3,698,271; 1994 $2,763,874 ...................... 124,672,414 150,471,768 153,814,422
Premises and equipment, at cost, less
accumulated depreciation .............................................. 4,154,465 4,248,830 4,661,344
Accrued interest receivable ............................................... 1,937,928 2,154,599 2,236,803
Prepaid income taxes ...................................................... 1,055,974 3,164,915 277,636
Deferred income taxes ...................+.................................. 1,380,966 263,860 778,818
Other real estate owned ................................................... 602,285 432,926 417,993
Other assets .............................................................. 1,001,141 1,109,145 469,862
------------- ------------- -------------
Total assets ..................................................... $ 254,324,701 $ 246,164,736 $ 232,934,732
============= ============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Non-interest-bearing demand ............................................ $ 49,412,930 $ 45,147,023 $ 41,081,119
Interest-bearing ....................................................... 183,333,045 175,973,740 167,484,534
------------- ------------- -------------
Total deposits ................................................... 232,745,975 221,120,763 208,565,653
Short-term borrowings ..................................................... 547,937 1,757,722 2,226,568
Dividends payable ......................................................... 44,193 218,208 169,987
Accrued interest payable on deposits ...................................... 214,977 229,715 186,823
Other liabilities ......................................................... 2,185,249 2,300,942 108,668
------------- ------------- -------------
Total liabilities ................................................ 235,738,331 225,627,350 211,257,699
------------- ------------- -------------
Commitments and contingencies
Stockholders' equity
Common stock, par value $10, authorized 5,000,000 shares;
issued and outstanding 1996 883,858 shares;
1995 872,838 shares; 1994 708,083 shares .............................. 8,838,588 8,728,383 7,080,834
Surplus ................................................................. 6,192,900 5,917,043 5,450,852
Retained earnings ....................................................... 3,290,077 5,146,724 9,154,546
Net unrealized appreciation (depreciation) on securities
available for sale, net of income taxes .............................. 264,805 745,236 (9,199)
------------- ------------- -------------
Total stockholders' equity ....................................... 18,586,370 20,537,386 21,677,033
------------- ------------- -------------
Total liabilities and stockholders' equity ....................... $ 254,324,701 $ 246,164,736 $ 232,934,732
============= ============= =============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.
F-3
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income on
Loans, including fees .......................... $ 13,081,364 $ 14,475,876 $ 14,085,642
U.S. Treasury securities ....................... 822,215 987,119 1,037,453
U.S. Government agency securities .............. 2,846,357 1,599,850 1,450,536
State and municipal securities ................. 1,517,827 1,261,886 1,218,119
Federal funds sold ............................. 261,423 138,678 101,537
Other .......................................... 116,708 137,296 51,814
------------ ------------ ------------
Total interest income .................... 18,645,894 18,600,705 17,945,101
------------ ------------ ------------
Interest expense on
Deposits ....................................... 7,711,989 7,172,845 6,008,866
Short-term borrowings .......................... 49,652 88,723 68,276
------------ ------------ ------------
Total interest expense ................... 7,761,641 7,261,568 6,077,142
------------ ------------ ------------
Net interest income ...................... 10,884,253 11,339,137 11,867,959
Provision for credit losses ....................... 6,596,000 7,925,000 1,120,000
------------ ------------ ------------
Net interest income after
provision for credit losses .......... 4,288,253 3,414,137 10,747,959
------------ ------------ ------------
Other income
Service charges on deposit accounts ............ 1,042,355 948,021 956,643
Other fees and commissions ..................... 483,537 449,567 480,019
Gains on investment securities ................. 144,565 506,695 78,169
Proceeds from insurance settlement ............. 560,000 -- --
------------ ------------ ------------
Total other income ....................... 2,230,457 1,904,283 1,514,831
------------ ------------ ------------
Other expenses
Salaries ....................................... 3,346,927 2,954,742 2,831,455
Employee benefits .............................. 1,288,037 1,182,490 1,156,763
Occupancy ...................................... 528,528 465,732 484,738
Furniture and equipment ........................ 739,115 741,602 645,707
Restructuring and litigation charges ........... -- 1,407,641 --
Other expenses ................................. 3,116,472 1,987,405 2,020,773
------------ ------------ ------------
Total other expenses ..................... 9,019,079 8,739,612 7,139,436
------------ ------------ ------------
Income (loss) before income taxes ................. (2,500,369) (3,421,192) 5,123,354
Federal and state income taxes (benefits) ......... (1,480,192) (1,694,444) 1,606,761
------------- ------------- ------------
Net income (loss) ................................. $ (1,020,177) $ (1,726,748) $ 3,516,593
============= ============= ============
Net income (loss) per share of common stock ....... $ (1.16) $ (2.01) $ 4.22
============= ============= ============
Weighted-average shares of common stock outstanding 881,211 861,116 833,849
============= ============= ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-4
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
on
Common Stock Securities
----------------------- Retained Available
Shares Par Value Surplus Earnings For Sale
------ --------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993 583,402 $5,834,024 $5,290,979 $7,491,574 $ --
Unrealized appreciation on securities
available for sale at January 1, 1994 -- -- -- -- 132,529
Net income -- -- -- 3,516,593 --
Stock split effected in the form of 20%
stock dividend 117,705 1,177,053 -- (1,177,053) --
Issuance of shares for employee and
director stock purchase plans 4,605 46,050 96,247 -- --
Shares retired (10,558) (105,580) (237,574) -- --
Cash dividends, $.80 per share -- -- -- (676,568) --
Dividends reinvested 12,929 129,287 301,200 -- --
Net change in unrealized depreciation
on securities available for sale -- -- -- -- (141,728)
------- ---------- ---------- ----------- ----------
Balances, December 31, 1994 708,083 7,080,834 5,450,852 9,154,546 (9,199)
Net loss -- -- -- (1,726,748) --
Stock split effected in the form of 20%
stock dividend 145,472 1,454,719 -- (1,454,719) --
Issuance of shares for employee and
director stock purchase plans 8,488 84,880 191,174 -- --
Cash dividends, $.96 per share -- -- -- (826,355) --
Dividends reinvested 10,795 107,950 275,017 -- --
Net change in unrealized appreciation
on securities available for sale -- -- -- -- 754,435
-------- ---------- ----------- ---------- ---------
Balances, December 31, 1995 872,838 8,728,383 5,917,043 5,146,724 745,236
Net loss -- -- -- (1,020,177) --
Issuance of shares for employee and
director stock purchase plans 200 2,000 3,384 -- --
Cash dividends, $.95 per share -- -- -- (836,470) --
Dividends reinvested 10,820 108,205 272,473 -- --
Net change in unrealized appreciation
on securities available for sale -- -- -- -- (480,431)
-------- ---------- ---------- ----------- ---------
Balances, December 31, 1996 883,858 $8,838,588 $6,192,900 $ 3,290,077 $ 264,805
======== ========== ========== =========== =========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.
F-5
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,020,177) $(1,726,748) $ 3,516,593
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation, amortization, and accretion 606,650 564,533 529,474
Provision for credit losses 6,596,000 7,925,000 1,120,000
Losses on other real estate owned 13,192 136,800 123,000
Deferred income taxes (benefits) (814,821) 40,272 56,559
Gains on disposal of assets, net (144,318) (509,982) (139,646)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 216,671 82,204 (278,740)
(Increase) decrease in prepaid income taxes and
other assets 2,108,195 (2,943,020) (356,943)
Increase (decrease) in accrued interest payable (14,738) 42,892 5,310
Increase (decrease) in other liabilities (115,693) 266,301 (182,651)
------------ ----------- ----------
Net cash provided by operating activities 7,430,961 3,878,252 4,392,956
------------ ----------- ----------
Cash flows from investing activities:
Proceeds from disposals of investment securities:
Maturities of held to maturity investment securities 4,984,661 10,266,038 11,405,887
Maturities of available for sale investment securities 9,707,289 500,000 --
Sales of available for sale investment securities 10,103,956 20,109,830 2,530,156
Purchases of held to maturity investment securities (40,650,194) (493,391) (12,512,137)
Purchases of available for sale investment securities (6,711,564) (41,033,354) (3,282,257)
(Increase) decrease in loans, net 19,203,353 (4,794,585) (13,617,098)
Proceeds from sales of other real estate -- 588,747 553,922
Purchases of other real estate (182,551) -- --
Purchases of premises and equipment (449,275) (600,331) (478,025)
Purchase of intangibles -- (544,652) --
------------ ----------- -----------
Net cash used in investing activities (3,994,325) (16,001,698) (15,399,552)
------------ ----------- -----------
Cash flows from financing activities:
Increase in deposits, net 11,625,212 12,555,110 5,654,923
Increase (decrease) in short-term borrowings (1,209,785) (468,846) 957,307
Cash dividends paid (1,010,485) (778,134) (663,965)
Common stock dividends reinvested 380,678 382,967 430,487
Issuance of common stock 5,384 276,054 142,297
Common stock retired -- -- (343,154)
------------ ----------- -----------
Net cash provided by financing activities 9,791,004 11,967,151 6,177,895
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents 13,227,640 (156,295) (4,828,701)
Cash and cash equivalents, beginning of year 9,450,021 9,606,316 14,435,017
------------ ----------- -----------
Cash and cash equivalents, end of year $22,677,661 $ 9,450,021 $ 9,606,316
============ =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.
F-6
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplementary Cash Flow Information:
Interest paid $ 7,776,379 $7,218,676 $6,071,832
Income taxes paid (refunded) $(1,718,184) 1,152,564 1,691,297
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.
F-7
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
The Bank provides financial services to individuals and corporate
customers located in Anne Arundel County and surrounding areas of
Central Maryland, and is subject to competition from other financial
institutions. The Bank is also subject to the regulations of certain
Federal and State agencies and undergoes periodic examinations by those
regulatory authorities. The accounting policies of the Bank conform to
generally accepted accounting principles and to general practices
within the banking industry.
Significant accounting policies not disclosed elsewhere in the
consolidated financial statements are as follows:
Principles of Consolidation:
The consolidated financial statements include the accounts of Glen
Burnie Bancorp (the Company) and its subsidiaries, The Bank of Glen
Burnie (the Bank) and GBB Properties, Inc., a company engaged in the
acquisition and disposition of other real estate. Intercompany balances
and transactions have been eliminated. The Parent Only financial
statements of the Company account for the subsidiaries using the equity
method of accounting.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
Securities Held to Maturity:
Bonds, notes and debentures for which the Bank has the positive intent
and ability to hold to maturity are reported at cost, adjusted for
premiums and discounts that are recognized in interest income using the
straight-line method over the period to maturity. Securities
transferred into held to maturity from the available for sale portfolio
are recorded at fair value at time of transfer with unrealized gains or
losses reflected in equity and amortized over the remaining life of the
security.
Securities Available for Sale:
Marketable debt and equity securities not classified as held to
maturity are classified as available for sale. Securities available for
sale may be sold in response to changes in interest rates, loan demand,
changes in prepayment risk and other factors. Securities available for
sale are carried at fair value, with unrealized gains or losses based
on the difference between amortized cost and fair value reported as a
separate component of stockholders' equity, net of deferred tax.
Realized gains and losses, using the specific identification method,
are included as a separate component of non-interest income. Premiums
and discounts are recognized in interest income using the straight-line
method over the period to maturity.
Loans and Allowance for Credit Losses:
On January 1, 1995, the Bank adopted Financial Accounting Standards
Board (FASB) Statement No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by FASB Statement No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and
Disclosures." Statement No. 114, as amended, requires that the
measurement of a loan's impairment be based on the present value of the
loan's expected future cash flows or, alternatively, the observable
market price of the loan or the fair value of the collateral. The
effect of adopting Statement No. 114 was not material.
Loans are carried at the amount of unpaid principal, adjusted for
deferred loan fees and origination costs. Interest on loans is accrued
based on the principal amounts outstanding. It is the Bank's policy to
discontinue the accrual of interest when a loan is specifically
determined to be impaired or when principal or interest is delinquent
for ninety days or more. When a loan is placed on a nonaccrual status,
all interest previously accrued but not collected is reversed against
current period interest income. Interest income generally is not
recognized on specific impaired loans unless the likelihood of further
loss is remote. Cash collections on such loans are applied as
reductions of the loan principal balance and no interest income is
recognized on those loans until the principal balance has been
collected. Interest income on other nonaccrual loans is recognized only
to the extent of interest payments received.
F-8
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 1. Summary of Significant Accounting Policies (continued)
The allowance for credit losses is established through a provision for
credit losses charged to expense. Loans are charged against the
allowance for credit losses when management believes that the
collectibility of the principal is unlikely. The allowance, based on
evaluations of the collectibility of loans and prior loan loss
experience, is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible.
The evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions and
trends that may affect the borrower's ability to pay.
While management believes it has established the allowance for credit
losses in accordance with generally accepted principles and has taken
into account the views of its regulators and the current economic
environment, there can be no assurance that in the future the Bank's
regulators or its economic environment will not require further
increases in the allowance.
Other Real Estate Owned (OREO):
OREO comprises properties acquired in partial or total satisfaction of
problem loans. The properties are recorded at the lower of cost or fair
value at the date acquired. Losses arising at the time of acquisition
of such properties are charged against the allowance for credit losses.
Subsequent write-downs that may be required and expenses of operation
are included in non-interest expense. Gains and losses realized from
the sale of OREO are included in non-interest income or expense.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of assets.
Intangible Assets:
Costs incurred in the organization of the Company are being amortized
over five years. Computer software is recorded at cost, and amortized
over three to five years. A deposit acquisition premium is recorded at
cost, and is being amortized over 10 years on the straight-line method.
Income Taxes:
The provision for Federal and State income taxes is based upon the
results of operations, adjusted for tax-exempt income. Deferred income
taxes are provided by applying enacted statutory tax rates to temporary
differences between financial and taxable income.
Temporary differences which give rise to deferred tax assets relate
principally to the allowance for credit losses, unearned income on
loans, other real estate owned, accrued compensation and benefits, tax
deduction carryovers, and alternative minimum tax credit carryovers.
Temporary differences which give rise to deferred tax liabilities
relate principally to accumulated depreciation, accretion of discount
on investment securities, and prepaid pension expense.
F-9
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 1. Summary of Significant Accounting Policies (continued)
Credit Risk:
The Bank has deposits in other financial institutions in excess of
amounts insured by the Federal Deposit Insurance Corporation.
Cash and Cash Equivalents:
The Bank has included cash and due from banks, interest bearing
deposits in other financial institutions, and Federal funds sold as
cash and cash equivalents for the purpose of reporting cash flows. The
Federal Reserve Board requires the Bank to maintain noninterest-bearing
cash reserves against certain categories of average deposit
liabilities. Such reserves averaged approximately $2,200,000 during the
year ended December 31, 1996.
Net Income Per Share:
Net income per share of common stock has been computed on the
weighted-average shares of common stock outstanding, giving retroactive
effect to stock dividends declared. Shares issued under stock option
plans are excluded from the computation, since the effect of those
shares is immaterial.
Financial Statement Presentation:
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year's presentation.
F-10
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 2. Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 6,575,244 $ 54,518 $ 7,793 $ 6,621,969
U.S. Government agency 20,625,552 43,627 199,626 20,469,553
Mortgage-backed 1,913,804 24,355 25,673 1,912,486
State and municipal 24,612,517 568,919 26,908 25,154,528
----------- ---------- -------- -----------
53,727,117 691,419 260,000 54,158,536
Federal Home Loan Bank stock 748,300 -- -- 748,300
----------- ---------- -------- -----------
$54,475,417 $ 691,419 $260,000 $54,906,836
=========== ========== ======== ===========
Held to maturity
U.S. Treasury $ 6,485,244 $ 59,711 $ 19,992 $ 6,524,963
U.S. Government agency 34,067,907 270,302 23,166 34,315,043
Mortgage-backed -- -- -- --
State and municipal 1,113,906 44,490 -- 1,158,396
----------- ---------- -------- -----------
$41,667,057 $ 374,503 $ 43,158 $41,998,402
=========== ========== ======== ===========
December 31, 1995
Available for sale
U.S. Treasury $10,067,337 $ 142,506 $ 7,845 $10,201,998
U.S. Government agency 26,187,078 287,223 3,601 26,470,700
Mortgage-backed 3,049,947 92,520 -- 3,142,467
State and municipal 27,379,975 732,408 29,076 28,083,307
----------- ---------- -------- -----------
66,684,337 1,254,657 40,522 67,898,472
Federal Home Loan Bank stock 698,700 -- -- 698,700
----------- ---------- -------- -----------
$67,383,037 $1,254,657 $ 40,522 $68,597,172
=========== ========== ======== ===========
Held to maturity
U.S. Treasury $ 5,003,789 $ 84,106 $ 3,750 $ 5,084,145
U.S. Government agency 997,886 10,870 -- 1,008,756
----------- ---------- -------- -----------
$ 6,001,675 $ 94,976 $ 3,750 $ 6,092,901
=========== ========== ======== ===========
</TABLE>
F-11
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 2. Investment Securities (continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1994 Cost Gains Losses Value
----------------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 1,494,530 $ 4,272 $ 24,102 $ 1,474,700
U.S. Government agency 500,000 -- -- 500,000
State and municipal 608,832 5,678 834 613,676
----------- -------- ---------- -----------
2,603,362 9,950 24,936 2,588,376
Federal Home Loan Bank stock 684,700 -- -- 684,700
----------- -------- ---------- -----------
$ 3,288,062 $ 9,950 $ 24,936 $ 3,273,076
=========== ======== ========== ===========
Held to maturity
U.S. Treasury $15,604,747 $ 18,616 $ 590,301 $15,033,062
U.S. Government agency 19,767,888 40,982 700,178 19,108,692
Mortgage-backed 1,894,261 19,336 45,941 1,867,656
State and municipal 19,861,741 414,704 534,802 19,741,643
----------- -------- ---------- -----------
$57,128,637 $493,638 $1,871,222 $55,751,053
=========== ======== ========== ===========
</TABLE>
In 1995, the FASB granted a one-time opportunity to reclassify
securities. The Bank reclassified securities with amortized cost
approximating $41.2 million and net unrealized gains approximating $1.2
million from held to maturity to available for sale.
Contractual maturities of investment securities at December 31, 1996,
1995, and 1994, are shown below. Actual maturities may differ from
contractual maturities because debtors may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------ ---------------------------
Amortized Fair Amortized Fair
December 31, 1996 Cost Value Cost Value
----------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Due within one year $ 2,728,910 $ 2,733,114 $ 1,500,791 $ 1,506,090
Due over one to five years 10,870,162 10,969,608 19,969,083 20,087,636
Due over five to ten years 12,578,991 12,838,012 15,113,223 15,265,730
Due over ten years 25,635,252 25,705,658 5,083,960 5,138,946
Mortgage-backed, due in monthly
installments 1,913,802 1,912,144 -- --
----------- ----------- ------------ -----------
$53,727,117 $54,158,536 $ 41,667,057 $41,998,402
=========== =========== ============ ===========
</TABLE>
F-12
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 2. Investment Securities (continued)
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
-------------------------- -----------------------------
Amortized Fair Amortized Fair
December 31, 1995 Cost Value Cost Value
----------------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Due within one year $ 6,239,463 $ 6,272,876 $ -- $ --
Due over one to five years 16,130,873 16,449,969 5,258,197 5,328,052
Due over five to ten years 15,308,097 15,747,636 743,478 764,849
Due over ten years 25,955,957 26,285,524 -- --
Mortgage-backed, due in monthly
installments 3,049,947 3,142,467 -- --
----------- ----------- ---------- ----------
$66,684,337 $67,898,472 $ 6,001,675 $6,092,901
=========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------- -----------------------------
Amortized Fair Amortized Fair
December 31, 1994 Cost Value Cost Value
----------------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Due within one year $ 499,490 $ 503,750 $ 6,598,185 $ 6,604,743
Due over one to five years 1,495,040 1,470,950 34,059,243 33,071,197
Due over five to ten years -- -- 9,926,296 9,730,426
Due over ten years 608,832 613,676 4,650,652 4,477,031
Mortgage-backed, due in monthly
installments -- -- 1,894,261 1,867,656
---------- ---------- ------------ -----------
$2,603,362 $2,588,376 $57,128,637 $55,751,053
========== ========== =========== ===========
</TABLE>
Proceeds from sales of investment securities prior to maturity were
$10,103,956, $20,338,033, and $2,530,156 for the years ended December
31, 1996, 1995 and 1994, respectively. Gains of $154,119 and losses of
$9,554 were realized on those sales for 1996. Gains of $563,764 and
losses of $72,482 were realized on those sales for 1995. Gains of
$62,385 and losses of $18,738 were realized on those sales for 1994.
Income tax expense relating to net gains on sales of investment
securities was $55,831, $189,733, and $16,856 for the years ended
December 31, 1996, 1995, and 1994, respectively.
Securities with amortized cost of approximately $4,999,000,
$6,008,000, and $3,000,000 were pledged as collateral for short-term
borrowings and financial instruments with off-balance sheet risk at
December 31, 1996, 1995 and 1994, respectively.
Investment securities include obligations of the State of Maryland and
its subdivisions with an amortized cost of $16,982,447, $18,839,735,
and $20,217,039 at December 31, 1996, 1995, and 1994, respectively.
F-13
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 3. Loans
Major categories of loans are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Mortgage
Residential $36,504,904 $ 38,142,356 $ 35,078,486
Commercial 47,757,381 46,888,141 39,397,909
Construction and land development 5,514,565 14,264,761 21,014,457
Lease financing 7,537,563 13,241,832 15,597,789
Demand and time 9,557,470 13,123,542 12,680,512
Installment 23,714,889 29,382,484 33,584,949
----------- ------------ -----------
130,586,772 155,043,116 157,354,102
Unearned income on loans (853,766) (873,077) (775,806)
----------- ------------ -----------
129,733,006 154,170,039 156,578,296
Allowance for credit losses (5,060,592) (3,698,271) (2,763,874)
----------- ------------ -----------
$124,672,414 $150,471,768 $153,814,422
============ ============ ============
</TABLE>
The Bank makes loans to customers located primarily in Anne Arundel
County and surrounding areas of Central Maryland. Although the loan
portfolio is diversified, its performance will be influenced by the
economy of the region.
Executive officers, directors, and their affiliated interests enter
into loan transactions with the Bank in the ordinary course of
business. These loans are made on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
loans with unrelated borrowers. At December 31, 1996, 1995, and 1994,
the amounts of such loans outstanding were $2,587,122, $2,878,742, and
$685,613, respectively. During 1996 loan additions and deletions were
$10,000 and $301,620, respectively.
The allowance for credit losses is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 3,698,271 $ 2,763,874 $ 2,552,355
Provision for credit losses 6,596,000 7,925,000 1,120,000
Recoveries 234,614 70,047 67,663
Loans charged off (5,468,293) (7,060,650) (976,144)
----------- ----------- -----------
Balance, end of year $ 5,060,592 $ 3,698,271 $ 2,763,874
=========== =========== ===========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted
to $4,545,581, $2,374,643, and $654,568 at December 31, 1996, 1995,
and 1994, respectively. Interest that would have been accrued under
the terms of these loans was $457,035, $191,200, and $38,469 for the
years ended December 31, 1996, 1995, and 1994, respectively.
F-14
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 3. Loans (continued)
Information regarding loans classified by the Bank as impaired as of
and for the year ended December 31, 1996 follows:
Loans classified as impaired $5,953,621
Allowance for credit losses on impaired loans 1,232,366
Average balance of impaired loans 6,563,679
Following is a summary of cash receipts for 1996 on impaired loans and
how they were applied:
Cash receipts applied to reduce principal balance $ 194,535
Cash receipts recognized as interest income 182,795
-----------
Total cash receipts $ 377,330
===========
The Bank has no commitments to loan additional funds to the borrowers
of impaired or non-accrual loans.
The Bank identified impaired loans of $407,597 as of December 31, 1995.
No specific allowance for credit losses related to impaired loans was
provided. These loans were identified as impaired near the end of 1995,
and no payments were received on these loans since they were classified
as impaired.
Outstanding loan commitments, unused lines of credit and letters of
credit are as follows:
1996 1995 1994
----------- ----------- -----------
Loan commitments
Construction and land development $ 1,865,000 $ 3,145,000 $ 2,354,000
Other mortgage loans 185,000 703,000 1,181,900
Lease financing -- 395,000 750,000
----------- ----------- -----------
$ 2,050,000 $ 4,243,000 $ 4,285,900
=========== =========== ===========
Unused lines of credit
Home-equity lines $ 2,944,867 $ 2,678,990 $ 2,561,861
Commercial lines 8,030,635 13,430,907 18,424,323
Unsecured consumer lines 3,434,501 2,419,052 1,886,600
----------- ----------- -----------
$14,410,003 $18,528,949 $22,872,784
=========== =========== ===========
Letters of credit $ 3,132,661 $ 4,297,760 $ 4,467,523
=========== =========== ===========
F-15
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 3. Loans (continued)
Loan commitments and lines of credit are agreements to lend to
customers as long as there is no violation of any con ditions of the
contracts. Loan commitments generally have interest rates fixed at
current market amounts, fixed expiration dates, and may require payment
of a fee. Lines of credit generally have variable interest rates.
Letters of credit are commitments issued to guarantee the performance
of a customer to a third party.
The Bank's exposure to credit loss in the event of nonperformance by
the customer is the contractual amount of the commitment. Loan
commitments, lines of credit and letters of credit are made on the same
terms, including collateral, as outstanding loans. As of December 31,
1996 and 1995, $139,382 and $108,000, respectively, has been provided
as an allowance for credit losses related to these financial
instruments with off-balance sheet risk, which is reflected as a
reduction of loans.
Note 4. Premises and Equipment
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
Useful
lives 1996 1995 1994
----- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Land $ 509,803 $ 509,803 $ 896,170
Buildings 5-50 years 3,713,427 3,494,122 3,467,732
Equipment and fixtures 5-30 years 3,640,241 3,430,771 3,037,146
Construction in progress 46,505 29,019 65,024
----------- ---------- -----------
7,909,976 7,463,715 7,466,072
Accumulated depreciation (3,755,511) (3,214,885) (2,804,728)
----------- ---------- ----------
$ 4,154,465 $ 4,248,830 $ 4,661,344
=========== =========== ===========
</TABLE>
Depreciation expense was $543,393, $533,197, and $511,919 for the years
ended December 31, 1996, 1995, and 1994, respectively. Amortization of
software and intangible assets was $110,602, $50,332, and $24,686 for
the years ended December 31, 1996, 1995, and 1994, respectively.
The Bank leases its South Crain Highway branch. Minimum obligations
under the lease are $23,460 per year until the lease expires in June
2000. The Bank is also required to pay maintenance costs. Rent expense
totaled $37,188 and $11,681 for the years ended December 31, 1996 and
1995, respectively.
Note 5. Short-Term Borrowings
Short-term borrowings are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Notes payable - U.S. Treasury $ 547,937 $ 282,722 $ 726,568
Federal funds purchased -- 975,000 --
Securities sold under repurchase agreement -- 500,000 --
Federal Home Loan Bank notes -- -- 1,500,000
---------- ---------- ----------
$ 547,937 $1,757,722 $2,226,568
========== ========== ==========
</TABLE>
F-16
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 5. Short-Term Borrowings (continued)
The Bank may borrow up to $26 million under a line of credit with the
Federal Home Loan Bank. The line of credit is secured by a floating
lien on the Bank's residential mortgage loans and by investment
securities with an amortized cost of $2,001,304 at December 31, 1996.
Notes payable to the U.S. Treasury are Federal treasury tax and loan
deposits accepted by the Bank from its customers to be remitted on
demand to the Federal Reserve Bank. The Bank pays interest on these
balances at a slight discount to the Federal funds rate. The note
payable is secured by investment securities with an amortized cost of
approximately $1,497,000 at December 31, 1996.
The Bank also has available $2,000,000 in short-term secured credit and
a $1,000,000 letter of credit facility from another bank.
Note 6. Deposits
Major classifications of interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
NOW and SuperNOW $ 22,792,376 $ 22,289,849 $ 22,272,708
Money market 26,210,655 27,602,041 32,880,823
Savings 48,192,967 46,752,665 52,830,352
Certificates of deposit,
$100,000 or more 8,620,096 9,844,841 7,804,644
Other time deposits 77,516,951 69,484,344 51,696,007
------------ ------------ ------------
$183,333,045 $175,973,740 $167,484,534
============ ============ ============
</TABLE>
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
1996
1997 $ 54,112,139
1998 9,679,941
1999 8,444,168
2000 8,895,663
2001 and thereafter 5,005,136
-------------
$ 86,137,047
=============
Interest expense on certificates of deposit of $100,000 or more was
$484,267, $394,092, and $312,993, for the years ended December 31,
1996, 1995, and 1994, respectively.
Deposit balances of executive officers and directors and their
affiliated interests totaled approximately $1,067,000 at December 31,
1996.
The Bank had no brokered deposits as of and for the years ended
December 31, 1996, 1995, and 1994.
F-17
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 7. Income Taxes
The components of income tax expense (benefits) for the years ended
December 31, 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current
Federal $ (936,608) $(1,494,542) $1,204,547
State (266,880) (240,172) 345,654
----------- ----------- -----------
(1,203,488) (1,734,714) 1,550,201
Deferred (276,704) 40,270 56,560
----------- ----------- -----------
Income tax expense (benefits) $(1,480,192) $(1,694,444) $1,606,761
=========== =========== ===========
</TABLE>
A reconciliation of income tax expense (benefits) computed at the
statutory rate of 34 percent to the actual income tax expense for the
years ended December 31, 1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Income (loss) before income taxes $(2,500,369) $(3,421,192) $ 5,123,354
=========== =========== ===========
Taxes computed at Federal income
tax rate $ (850,125) $(1,163,205) $ 1,741,940
Increase (decrease) resulting from
Tax-exempt income (541,681) (384,915) (377,591)
State income taxes, net of
Federal benefit (90,739) (154,710) 237,724
Non-deductible expenses 2,353 8,386 4,688
----------- ----------- -----------
Income tax expense (benefits) $(1,480,192) $(1,694,444) $ 1,606,761
=========== =========== ===========
</TABLE>
Sources of deferred income taxes and the tax effects of each for the
years ended December 31, 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Depreciation $ (30,990) $ (5,786) $ (1,155)
Securities discount accretion 9,380 (7,465) 4,714
Provision for credit losses (241,077) 149,670 (107,971)
Unearned income on loans 106,816 (16,343) 150,535
Deferred compensation and benefit
plans (56,096) (79,806) 10,437
Charitable contributions (35,987) -- --
Write-downs on other real estate owned (28,192) -- --
Deferred rent (558) -- --
--------- --------- ---------
Deferred income tax expense (benefits) $(276,704) $ 40,270 $ 56,560
========= ========= =========
</TABLE>
F-18
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 7. Income Taxes (Continued)
The components of the net deferred tax asset as of December 31, 1996,
1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for credit losses $1,078,459 $ 837,381 $ 987,052
Unearned income on loans 31,469 138,285 121,942
Deferred compensation and benefit plans 122,116 87,543 7,443
Other real estate owned 28,192 -- --
Charitable contributions 35,987 -- --
Alternative minimum tax credits 538,117 -- --
Deferred rent 558 -- --
Net unrealized depreciation on investment
securities available for sale -- -- 5,788
---------- ---------- ----------
1,834,898 1,063,209 1,122,225
---------- ---------- ----------
Deferred tax liabilities:
Accumulated depreciation 214,211 245,201 250,987
Securities discount accretion 34,750 25,370 32,835
Prepaid pension contributions 38,357 59,879 59,585
Net unrealized appreciation on investment
securities available for sale 166,614 468,899 --
---------- ---------- ----------
453,932 799,349 343,407
---------- ---------- ----------
Net deferred tax asset $ 1,380,966 $ 263,860 $ 778,818
=========== ========== ==========
</TABLE>
F-19
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 8. Pension and Profit Sharing Plans
The Bank has a defined benefit pension plan covering substantially all
of its employees. Benefits are based on the employee's average rate of
earnings for the five consecutive years before retirement. The Bank's
funding policy is to contribute annually an amount between the minimum
and maximum actuarially determined contribution, using the frozen entry
age actuarial cost method. Assets of the plan are held in a trust fund
principally comprised of growth and income mutual funds managed by
another bank.
The following table sets forth the financial status of the plan at
December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Accumulated benefit obligation
Vested $ 2,244,790 $ 2,183,088 $ 2,003,059
Nonvested 280,661 63,366 98,277
----------- ----------- -----------
$ 2,525,451 $ 2,246,454 $ 2,101,336
=========== =========== ===========
Plan assets at fair value $ 3,720,145 $ 3,399,653 $ 2,767,215
Projected benefit obligation (3,804,330) (3,365,078) (3,085,573)
----------- ----------- -----------
Plan assets in excess of (less than)
projected benefit obligation (84,185) 34,575 (318,358)
Unrecognized prior service cost 174,327 199,924 225,521
Unrecognized net (gain) loss 70,020 (6,440) 332,303
Unamortized net asset from transition (60,843) (73,012) (85,181)
----------- ----------- -----------
Prepaid pension expenses included in other assets $ 99,319 $ 155,047 $ 154,285
=========== =========== ===========
Net pension expense includes the following:
Service cost $ 208,566 $ 177,998 $ 175,424
Interest cost 286,590 256,958 232,123
Actual return on assets (284,900) (577,586) 96,951
Net amortization and deferral 15,472 364,911 (314,269)
----------- ----------- -----------
Net pension expense $ 225,728 $ 222,281 $ 190,229
=========== =========== ===========
Assumptions used in the accounting for net pension expense were:
Discount rates 8.5% 8.5% 8.5%
Rate of increase in compensation levels 6.5% 6.5% 6.5%
Long-term rate of return on assets 8.5% 8.5% 8.5%
</TABLE>
The Bank also has a defined contribution retirement plan qualifying
under Section 401(k) of the Internal Revenue Code that is funded
through a profit sharing agreement and voluntary employee
contributions. The Bank's contributions to the plan are determined
annually by the Board of Directors. The plan covers substantially all
employees. The Bank's contributions to the plan included in expense
were $165,100 and $154,900 for the years ended December 31, 1995 and
1994, respectively. No contributions were made for 1996.
F-20
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 9. Post-Retirement Health Care Benefits
The Bank provides health care benefits to employees who retire at age
65. The plan is funded only by the Bank's monthly payments of insurance
premiums due. The following table sets forth the financial status of
the plan at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accumulated post-retirement benefit obligation
Retirees $ 229,258 $ 185,057
Other active participants, not fully eligible 648,414 482,922
--------- ---------
877,672 667,979
Unrecognized net gain 23,715 --
Unrecognized transition obligation (601,181) (535,126)
--------- ---------
Accrued post-retirement benefit cost $ 300,206 $ 132,853
========= =========
Net post-retirement benefit expense for the years ended December 31,
1996 and 1995 includes the following:
Service cost $ 71,381 $ 55,885
Interest cost 69,792 56,778
Amortization of unrecognized transition obligation 33,399 33,399
--------- ---------
Net post-retirement benefit expense $ 174,572 $ 146,062
========= =========
Assumptions used in the accounting for net post-retirement benefit
expense were:
Health care cost trend rate 8.0% 8.0%
Discount rate 8.5% 8.5%
</TABLE>
If the assumed health care cost trend rate were increased to 9.0%, the
total of the service and interest cost components of net periodic
post-retirement health care benefit cost would increase by $36,816 and
$28,808, for the years ended December 31, 1996 and 1995, respectively,
and the accumulated post-retirement benefit obligation would increase
by $200,496 and $161,117 as of December 31, 1996 and 1995,
respectively.
F-21
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 10. Other Operating Expenses
Other operating expenses include the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- ----------
<S> <C> <C> <C>
Professional services $1,454,449 $329,849 $ 245,932
Stationery, printing and supplies 218,397 278,366 235,500
Postage and delivery 271,050 253,253 201,094
FDIC assessment 33,595 237,565 455,250
Directors fees and expenses 196,622 133,202 159,518
Marketing 124,897 118,948 97,671
Data processing 129,449 97,608 92,237
Correspondent bank services 115,864 78,631 53,285
Telephone 59,808 49,021 38,598
Liability insurance 71,015 45,075 48,405
Losses and expenses on real estate owned 45,445 23,733 107,553
Other 395,881 342,154 285,730
---------- ---------- ----------
$3,116,472 $1,987,405 $2,020,773
========== ========== ==========
</TABLE>
Note 11. Litigation and Restructuring Charges
In 1995, two opposing groups ran for election to the Board of
Directors. The Company incurred legal expenses and entered into a
severance agreement with a former executive officer in connection with
this restructuring at costs totaling $687,841. The Company also
incurred losses of $719,800 to settle the claim of a borrower who
asserted damages for discrimination. These nonrecurring charges are
included as a separate line item in operating expenses for 1995.
Note 12. Contingencies
The Bank is a defendant in certain claims and legal actions arising in
the course of business. The Bank is being sued for a total of
approximately $4,000,000 in five separate cases for allegedly honoring
checks with invalid endorsements. The Bank is also being sued for
alleged fraud by a customer in bankruptcy seeking $5,000,000 in
compensatory damages and $50,000,000 in punitive damages. Legal counsel
has advised the Bank that this plaintiff has failed to produce any
evidence to support these claims. The Bank has also filed a claim with
a former insurance provider seeking to recover in excess of $5,000,000
from loan losses sustained over the prior two years. In the opinion of
management, after consultation with legal counsel, the ultimate
disposition of these matters is not known at this time.
F-22
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 13. Stockholders' Equity
At December 31, 1996, the Company had two types of stock-based
compensation plans, which are described below. The bank applies
Accounting Principles Board Opinion ("APB") No. 25 and related
Interpretations in accounting for these plans. No compensation cost has
been recognized in the accompanying Consolidated Financial Statements
for those plans. If compensation cost for the Company's two types of
stock-based compensation plans had been determined based on the fair
value at the grant dates for awards under those plans consistent with
the methods outlined in SFAS No. 123, "Accounting for Stock-Based
Compensation," there would be no change to 1996 net income, as no
options were granted during 1996.
Employees who have completed one year of service are eligible to
participate in the employee stock option purchase plan. The plan allows
employees to buy stock at 85 percent of the fair market value on the
date the option is granted. The director stock purchase plan allows
directors to buy stock at the fair market value on the date the option
is granted. Activity under these plans is as follows:
Employees Directors
----------------- ------------------
Shares Prices Shares Prices
------ ------ ------ ------
January 1, 1994 2,245 $24.17 -- $ --
Granted 7,625 24.08 2,850 28.33
Exercised (3,426) (2,100)
------ ------
December 31, 1994 6,444 24.08 750 28.33
Granted 6,479 26.92 3,300 31.67
Expired (1,782) (150)
Exercised (6,586) (3,600)
------ ------
December 31, 1995 4,555 26.92 300 31.67
Expired (4,355) --
Exercised (200) (300)
------ ------
December 31, 1996 -- --
====== ======
Shares reserved for issuance under the plans:
December 31, 1994 8,566 21,300
December 31, 1995 31,980 17,700
December 31, 1996 31,780 17,700
The number of shares and prices per share for 1995 and 1994 have been
retroactively adjusted for the stock dividend declared December 14,
1995.
Purchase options granted on July 1, 1994 and 1995 expired on October 1,
1995 and 1996, respectively.
The Company's dividend reinvestment and stock purchase plan allows
participating stockholders to invest their cash dividends in stock at
95 percent of the fair market value on the dividend payment date.
During 1996 and 1995, 10,820 and 10,795 shares of common stock,
respectively, were purchased under the plan. At December 31, 1996,
there were 94,370 shares of common stock reserved for issuance under
the plan.
In October 1996, Glen Burnie Bancorp suspended participating in the
dividend reinvestment and stock purchase plans until the Company
completes additional filings with the Securities and Exchange
Commission.
The Board of Directors may suspend or discontinue any of the plans at
its discretion.
In 1994, an institutional holder of Glen Burnie Bancorp stock desired
to dispose of a large block of shares it held in trust. The Company
purchased and retired the 10,558 shares from this block that were not
promptly sold in the open market.
Note 14. Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements
administered by federal and state 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. 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
principles. 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) of total and Tier I capital to
risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1996, 1995, and 1994, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier I risk-based, Tier I
leverage ratios. There are no conditions or events since that
notification that management believes have changed the institution's
category.
F-23
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 14. Regulatory Capital Requirements (Continued)
A comparison of the Bank's capital as of December 31, 1996, 1995, and
1994 with its minimum requirements is approximately as follows:
For Capital
Adequacy Purposes
Actual ------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
As of December 31, 1996
Total Capital $18,109,000 12.5% $11,590,000 8.0%
(to Risk-Weighted Assets)
Tier I Capital 17,367,000 12.0% 5,789,000 4.0%
(to Risk-Weighted Assets)
Tier I Capital 17,367,000 7.0% 14,886,000 6.0%
(to Average Assets)
As of December 31, 1995
Total Capital 21,168,000 13.6% 12,437,000 8.0%
(to Risk-Weighted Assets)
Tier I Capital 19,203,000 12.4% 6,218,000 4.0%
(to Risk-Weighted Assets)
Tier I Capital 19,203,000 8.2% 9,367,000 4.0%
(to Average Assets)
As of December 31, 1994
Total Capital
(to Risk-Weighted Assets) 23,677,000 15.3% 12,341,000 8.0%
Tier I Capital
(to Risk-Weighted Assets) 21,728,000 14.1% 6,171,000 4.0%
Tier I Capital
(to Average Assets 21,728,000 9.4% 9,246,000 4.0%
F-24
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 15. Regulatory Matters
In June, 1996 the Bank entered into a Memorandum of Understanding with
the Federal Deposit Insurance Corporation and the State Bank
Commissioner of the State of Maryland to accomplish corrective actions
regarding matters including violations of law, loan collection and
delinquencies, loan administration, methodology for allowance for
credit loss calculations, management reporting, strategic planning, and
maintenance of capital.
Note 16. Fair Values of Financial Instruments
The following table shows the estimated fair value and the related
carrying values of the Company's financial instruments at December 31,
1996. Items which are not financial instruments are not included.
1996
---------------------------
Carrying Fair
Amount Value
------------ ------------
Financial assets:
Cash and due from banks $ 10,665,680 $ 10,665,680
Interest-bearing deposits in other financial
institutions 1,836,981 1,836,981
Federal funds sold 10,175,000 10,175,000
Investment securities available for sale 54,906,836 54,906,836
Investment securities held to maturity 41,667,057 41,993,324
Loans, less allowance for credit losses 124,672,414 120,992,000
Ground rents 267,974 267,974
Accrued interest receivable 1,937,928 1,937,928
Financial liabilities:
Deposits 232,745,975 232,702,000
Short-term borrowings 547,937 547,937
Accrued interest payable 214,977 214,977
Unrecognized financial instruments:
Commitments to extend credit 16,460,003 16,460,003
Standby letters of credit 3,132,661 3,132,661
For purposes of the disclosures of estimated fair value, the following
assumptions were used.
Loans:
The estimated fair value for loans is determined by discounting future
cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Investment securities:
Estimated fair values are based on quoted market prices.
F-25
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 16. Fair Values of Financial Instruments (continued)
Deposits:
The estimated fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, NOW accounts and money
market accounts, is equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The fair value of
certificates of deposit is based on the rates currently offered for
deposits of similar maturities. The fair value estimates do not include
the benefit that results from the low-cost funding provided by the
deposit liabilities compared to the cost of borrowing funds in the
market.
Other assets and liabilities:
The estimated fair values for cash and due from banks, interest-bearing
deposits in other financial institutions, Federal funds sold, accrued
interest receivable and payable, and short-term borrowings are
considered to approximate cost because of their short-term nature.
Other assets and liabilities of the Bank that are not defined as
financial instruments are not included in the above disclosures, such
as property and equipment. Also, non-financial instruments typically
not recognized in the financial statements nevertheless may have value
but are not included in the above disclosures. These include, among
other items, the estimated earnings power of core deposit accounts, the
trained work force, customer goodwill, and similar items.
The estimated fair values of the Company's financial instruments for
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 9,450,021 $ 9,450,021 $ 7,806,316 $ 7,806,316
Federal funds sold -- -- 1,800,000 1,800,000
Investment securities 74,598,847 74,690,073 60,401,713 59,024,129
Variable rate loans 35,148,040 35,148,040 40,448,637 40,448,637
Accrued interest receivable 2,154,599 2,154,599 2,236,803 2,236,803
Financial liabilities
Noninterest-bearing deposits 45,147,023 45,147,023 41,081,119 41,081,119
Variable rate deposits 96,644,555 96,644,555 107,983,883 107,983,883
Short-term borrowings 1,757,722 1,757,722 2,226,568 2,226,568
Interest and dividends payable 447,923 447,923 356,810 356,810
</TABLE>
The fair values of investment securities were estimated using a matrix
that considers yield to maturity, credit quality, and marketability.
This method of valuation is permitted by the FASB, but may not be
indicative of net realizable or liquidation values.
It was not practicable to estimate the fair value of loans with fixed
maturities, deposit liabilities with fixed maturities, or outstanding
credit commitments. The Company did not have available resources to
estimate fair values based on quoted prices or discounted cash flows
for individual accounts or groups of accounts.
F-26
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 16. Fair Values of Financial Instruments (continued)
Maturities and weighted-average interest rates on loans and deposits
with fixed maturities were as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
---------------------- --------------------
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Loans
Maturing within one year $ 21,326,466 8.7% $ 20,520,984 8.7%
Maturing over one to five years 48,258,718 9.0% 48,715,788 8.8%
Maturing over five years 50,309,892 9.1% 47,668,693 9.3%
------------ ------------
$119,895,076 $116,905,465
============ ============
Deposits
Maturing within three months $ 17,035,145 5.7% $ 13,342,709 4.0%
Maturing over three to six months 16,598,147 5.8% 12,985,504 4.8%
Maturing over six months to one year 13,014,695 5.7% 12,643,752 5.0%
Maturing over one to five years 32,681,198 6.5% 20,528,686 5.8%
------------ ------------
$ 79,329,185 $ 59,500,651
============ ============
</TABLE>
Note 17. Adoption of Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (SFAS No. 121), requires that certain long-lived assets be
reviewed for impairment whenever events or circumstances indicate that
the carrying amount of an asset may not be recoverable. An impairment
loss is recognized if the sum of expected future cash flows is less
than the carrying amount of the asset and its face value. An impairment
loss is measured based on the difference between the carrying amount of
the asset and its fair value. The Bank adopted this pronouncement in
1996, and there are no asset impairment adjustments reflected in the
1996 consolidated financial statements.
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" (SFAS No. 122), requires that rights to
serviced mortgage loans be recognized as an intangible asset when the
underlying loans are sold and the servicing rights related to these
loans are retained. The standard also requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair
value of such rights. The Bank has not sold any loans for which it has
maintained servicing rights and, accordingly, the adoption of this
pronouncement has no effect on the 1996 consolidated financial
statements.
F-27
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 18. Parent Company Financial Information
The Balance Sheets, Statements of Income, and Statements of Cash Flows
for Glen Burnie Bancorp (Parent Only) are presented below:
<TABLE>
<CAPTION>
Balance Sheets
- -------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C>
Cash $ 122,167 $ 264,757 $ --
Investment in The Bank of Glen Burnie 18,109,107 20,478,884 21,718,390
Investment in GBB Properties, Inc. 373,357 -- 1,899
Land -- -- 384,700
Other assets 25,932 27,142 16,582
------------ ------------ ------------
Total assets $ 18,630,563 $ 20,770,783 $ 22,121,571
============ ============ ============
Liabilities and Stockholders' Equity
Dividend payable $ 44,193 $ 218,208 $ 169,987
Due to affiliates -- 15,189 274,551
------------ ------------ ------------
Total liabilities 44,193 233,397 444,538
------------ ------------ ------------
Stockholders' equity
Common Stock 8,838,588 7,273,664 7,080,834
Stock dividend to be distributed -- 1,454,719 --
Surplus 6,192,900 5,917,043 5,450,852
Retained earnings 3,290,077 5,146,724 9,154,546
Net unrealized appreciation (depreciation) on
securities available for sale, net of
income taxes 264,805 745,236 (9,199)
------------ ------------ ------------
Total stockholders' equity 18,586,370 20,537,386 21,677,033
------------ ------------ ------------
Total liabilities and stockholders'
equity $ 18,630,563 $ 20,770,783 $ 22,121,571
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Statements of Income
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend from subsidiaries $ 885,000 $ 315,000 $ --
Expenses 6,632 61,775 7,060
----------- ----------- ----------
Income (loss) before income taxes and equity in
undistributed net income (losses) of subsidiaries 878,368 253,225 (7,060)
Income tax benefit 2,255 21,056 5,970
Equity in undistributed net income (losses)
of subsidiaries (1,900,800) (2,001,029) 3,517,683
----------- ----------- ----------
Net income (loss) $(1,020,177) $(1,726,748) $3,516,593
=========== =========== ==========
</TABLE>
F-28
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 18. Parent Company Financial Information (Continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,020,177) $(1,726,748) $ 3,516,593
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
(Increase) decrease in other assets 1,210 (10,560) (3,588)
(Decrease) increase in due to subsidiaries (10,000) (264,551) 274,551
Equity in net (income) losses of subsidiaries 1,900,800 2,001,029 (3,517,684)
---------- ----------- ----------
Net cash provided (used) by operating activities 871,833 (830) 269,872
---------- ----------- ----------
Cash flows from investing activities:
Disposal of land -- 384,700 --
Capital contributed (390,000) -- (10,000)
---------- ----------- ----------
Net cash provided (used) in investing activities (390,000) 384,700 (10,000)
---------- ----------- ----------
Cash flows from financing activities:
Proceeds from dividend reinvestment plan 380,678 382,967 430,487
Proceeds from sales of common stock 5,384 276,054 142,297
Shares retired -- -- (343,154)
Dividends paid (1,010,485) (778,134) (663,965)
---------- ----------- ----------
Net cash used in financing activities (624,423) (119,113) (434,335)
----------- ----------- ----------
Increase (decrease) in cash (142,590) 264,757 (174,463)
Cash, beginning of year 264,757 -- 174,463
----------- ----------- ------------
Cash, end of year $ 122,167 $ 264,757 $ --
=========== =========== ============
</TABLE>
F-29
<PAGE>
Glen Burnie Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Note 19. Quarterly Results of Operations (Unaudited)
The following is a summary of the Company's unaudited quarterly results
of operations:
<TABLE>
<CAPTION>
1996 Three months ended
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) December 31 September 30 June 30 March 31
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 4,567 $ 4,789 $ 4,466 $ 4,824
Interest expense 1,925 1,947 1,917 1,973
Net interest income 2,642 2,842 2,549 2,851
Provision for credit losses 3,771 375 2,075 375
Net securities gains 50 6 2 87
Income (loss) before income taxes (2,599) 585 (1,342) 856
Net income (loss) (1,436) 450 (671) 637
Net income (loss) per share $ (1.64) $ .51 $ (.76) $ .73
</TABLE>
<TABLE>
<CAPTION>
1995 Three months ended
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) December 31 September 30 June 30 March 31
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 4,667 $ 4,739 $ 4,661 $ 4,534
Interest expense 1,973 1,874 1,768 1,647
Net interest income 2,694 2,865 2,893 2,887
Provision for credit losses 7,275 150 225 275
Net securities gains 377 16 106 8
Income (loss) before income taxes (6,987) 1,262 1,214 1,090
Net income (loss) (4,185) 855 847 756
Net income (loss) per share $ (4.87) $ .99 $ .99 $ .88
</TABLE>
<TABLE>
<CAPTION>
1994 Three months ended
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) December 31 September 30 June 30 March 31
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $4,701 $4,589 $4,422 $4,233
Interest expense 1,595 1,533 1,489 1,460
Net interest income 3,106 3,056 2,933 2,773
Provision for credit losses 300 370 225 225
Net securities gains 5 49 1 23
Income before income taxes 1,215 1,359 1,386 1,163
Net income 838 927 947 805
Net income per share $1.00 $1.11 $1.14 $ .97
</TABLE>
F-30
<PAGE>
GLEN BURNIE BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,421 $ 12,503
Federal funds sold 1,150 10,175
Investment securities available for sale, at fair value 45,952 54,907
Investment securities held to maturity, at cost (fair value
September 30 $47,993, December 31 $41,993) 48,327 41,667
Loans receivable, net of allowance for credit losses
September 30 $4,276; December 31 $5,061 109,961 124,672
Premises and equipment at cost, net of accumulated depreciation 4,430 4,154
Other real estate owned 739 602
Goodwill 436 477
Other assets 5,826 5,168
---------- ---------
Total assets $ 226,242 $ 254,325
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 205,003 $ 232,746
Short-term borrowings 1,016 548
Other liabilities 1,366 2,444
---------- ---------
Total liabilities $ 207,385 $ 235,738
---------- ---------
STOCKHOLDERS' EQUITY:
Common stock, par value $10, authorized 5,000,000 shares;
issued and outstanding: September 30 901,624 shares;
December 31 883,858 shares 9,016 8,839
Surplus 6,457 6,193
Retained earnings 3,180 3,290
Net unrealized appreciation on securities available for sale,
net of income taxes 204 265
---------- ---------
Total stockholders' equity 18,857 18,587
---------- ---------
Total liabilities and stockholders' equity $ 226,242 $ 254,325
========== =========
</TABLE>
F-31
<PAGE>
GLEN BURNIE BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
(Unaudited)
Nine Months Ended
September 30,
--------------------
1997 1996
-------- ------
Interest income on
Loans, including fees $ 8,253 $ 10,132
U.S. Treasury and U.S. Government agency securities 3,987 2,535
State and municipal securities 858 1,155
Other 249 256
-------- --------
Total interest income 13,347 14,078
-------- --------
Interest expense on
Deposits 5,228 5,796
Short-term borrowings 60 41
-------- --------
Total interest expense 5,288 5,837
-------- --------
Net interest income 8,059 8,241
Provision for credit losses 270 2,825
-------- -------
Net interest income after provision for
credit losses 7,789 5,416
--------- --------
Other income
Service charges on deposit accounts 862 884
Other fees and commissions 153 158
Other non-interest income 78 101
Gains on investment securities 227 95
--------- -------
Total other income 1,320 1,238
--------- -------
Other expenses
Salaries and employee benefits 3,843 3,592
Occupancy 956 1,003
Other expenses 4,060 1,961
--------- -------
Total other expenses 8,859 6.55
--------- -------
Income (loss) before income taxes 250 98
Income tax expense (benefit) (329) (317
--------- -------
Net income (loss) $ 579 $ 415
========= =======
Net income (loss) per share of common stock $ 0.64 $ 0.46
========= =======
Weighted-average shares of common stock outstanding 901,624 898,021
========= =======
F-32
<PAGE>
GLEN BURNIE BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except per share amounts)
(Unaudited)
Nine Months Ended
September 30,
1997 1996
--------- -------
Cash flows from operating activities:
Net income $ 579 $ 415
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, amortization, and accretion 261 (501)
Provision for credit losses 270 2,825
Changes in assets and liabilities:
(Increase) decrease in other asset (580) 2,809
Decrease in other liabilities (1,088) (1,849)
Net cash provided (used) by operating activities $ (558) $ 3,699
-------- --------
Cash flows from investing activities:
Proceeds from disposals of investment securities 31,848 13,135
Purchases of investment securities (29,450) (31,595)
Decrease in loans, net 14,441 10,981
Purchases of premises and equipment (691) (237)
Purchases of other real estate (596) (156)
Disposal of other real estate 407 --
Proceeds from sales of premises and equipment 5 --
------- --------
Net cash provided (used) by investing activities 15,964 (7,872)
-------- -------
Cash flows from financing activities:
Increase (decrease) in deposits, net (27,743) 5,456
Increase (decrease) in short-term borrowings 468 313
Dividends paid (238) (745)
Issuance of common stock -- 381
-------- --------
Net cash provided (used) by financing activities (27,513) 5,405
-------- --------
Increase (decrease) in cash and cash equivalents (12,107) 1,232
Cash and cash equivalents, beginning of year 22,678 9,468
-------- --------
Cash and cash equivalents, end of period $ 10,571 $ 10,700
======== ========
F-33
<PAGE>
GLEN BURNIE BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE-1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do not
include all information and notes necessary for a complete presentation of
financial position, results of operations, changes in stockholders' equity, and
cash flows in conformity with generally accepted accounting principles. However,
all adjustments (consisting only of normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the unaudited
consolidated financial statements have been included in the results of
operations for the nine months ended September 30, 1997 and 1996.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
NOTE-2 - EARNINGS PER SHARE
Information for net income per share and weighted average shares
outstanding for prior periods have been restated to reflect 1% stock dividends
declared in June and September, 1997.
F-34
<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 $ 1,458
Blue Sky fees and expenses 3,785
Legal fees and expenses 60,000
Printing and Engraving 7,500
Accounting fees and expenses 7,500
Miscellaneous 2,500
-----------
Total $ 82,743
===========
Item 14. Indemnification of Directors and Officers
The Company's Articles of Incorporation provide that all current and
former directors and officers are entitled to receive indemnification in
connection with any proceeding to the fullest extent permitted by Section 2-418
of the Corporations and Associations Article of the Annotated Code of Maryland.
Such section 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.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant made the following sales of
common stock from treasury which were not registered under the Securities Act of
1933. All sales were for cash at the then-market price per share. No discounts
or commissions were involved. The Registrant believes that in each case the
transaction qualified for the exemption from registration provided for
transactions not involving a public offering under Section 4(2) of the
Securities Act of 1933.
<TABLE>
<CAPTION>
Date Title of Securities # of Shares Purchaser Aggregate Price
---- ------------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
10/10/97 Common Stock 0.201867 James Myers $ 4.55
09/23/97 Common Stock 1.465641 Dorothy & John Lis 34.44
08/29/97 Common Stock 0.444319 Dorothy & John Lis 11.10
08/05/97 Common Stock 3.263788 Dorothy & John Lis 81.60
05/08/97 Common Stock 6.686628 James Myers 160.48
10/03/96 Common Stock 4.677508 James Myers 154.36
04/10/96 Common Stock 4.568418 James Myers 171.31
02/02/96 Common Stock 2.354221 James Myers 82.98
12/28/95 Common Stock 6.903338 James Myers 279.59
08/01/95 Common Stock 1.400000 James Myers 53.90
</TABLE>
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit List
------------
<S> <C>
3.1 Articles of Incorporation. Incorporated herein by reference to
Exhibit 3.1 to the Annual Report on Form 10-K of Glen Burnie
Bancorp for its Fiscal Year Ended December 31, 1995, SEC File
Number 33-62278 (the "1995 Form 10-K")
3.2 By-Laws. Incorporated herein by reference to Exhibit 3.2 to the 1995 Form 10-K
* 5 Opinion of Housley Kantarian & Bronstein, P.C.
* 10.1 Glen Burnie Bancorp Stockholder Purchase Plan.
* 10.2 Glen Burnie Bancorp Dividend Reinvestment and Stock Purchase Plan.
10.3 Glen Burnie Bancorp Director Stock Purchase Plan. Incorporated herein by reference to Exhibit 10.3
to the 1995 Form 10-K
10.4 The Bank of Glen Burnie Employee Stock Purchase Plan. Incorporated herein by reference Exhibit
10.4 to Amendment Number 1 to the 1995 Form 10-K
10.5 The Bank of Glen Burnie Pension Plan. Incorporated herein by reference to Exhibit 10.5 to the 1995
Form 10-K
16 Letter re: change in certifying public accountant. Incorporated herein by reference to Exhibit 16 to
the 1995 Form 10-K
21 Subsidiaries of the registrant. Incorporated herein by reference to Exhibit 21 to the 1995 Form 10-K
23.1 Consent of Trice & Geary LLC
23.2 Consent of Rowles & Company, LLP.
* 23.3 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 as originally filed)
27 Financial Data Schedule
</TABLE>
- ----------
* Previously filed.
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
II-2
<PAGE>
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.
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 Glen Burnie,
State of Maryland, on December 12, 1997.
GLEN BURNIE BANCORP
By: /s/ F. William Kuethe, Jr.
--------------------------------------
F. William Kuethe, 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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ F. William Kuethe, Jr. President and Director December 12, 1997
- ----------------------------------- (Principal Executive Officer)
F. William Kuethe, Jr.
/s/ John E. Porter* Chief Financial Officer December 12, 1997
- ----------------------------------- (Principal Financial Officer)
John E. Porter
/s/ Beatrice S. McQuarrie* Assistant Treasurer of the Bank December 12, 1997
- ----------------------------------- (Principal Accounting Officer)
Beatrice S. McQuarrie
/s/ John E. Demyan* Chairman of the Board, Director December 12, 1997
- -----------------------------------
John E. Demyan
/s/ Theodore L. Bertier, Jr.* Director December 12, 1997
- -----------------------------------
Theodore L. Bertier, Jr.
/s/ Shirley E. Boyer Director December 12, 1997
- -----------------------------------
Shirley E. Boyer
/s/ Thomas Clocker* Director December 12, 1997
- -----------------------------------
Thomas Clocker
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Alan E. Hahn* Director December 12, 1997
- -----------------------------------
Alan E. Hahn
/s/ Charles L. Hein* Director December 12, 1997
- -----------------------------------
Charles L. Hein
/s/ F. W. Kuethe, III* Director December 12, 1997
- -----------------------------------
F. W. Kuethe, III
/s/ Eugene P. Nepa* Director December 12, 1997
- -----------------------------------
Eugene P. Nepa
/s/ William N. Scherer, Sr.* Director December 12, 1997
- -----------------------------------
William N. Scherer, Sr.
/s/ Karen Thorwarth* Director December 12, 1997
- -----------------------------------
Karen Thorwarth
/s/ Mary L. Wilcox* Director December 12, 1997
- -----------------------------------
Mary L. Wilcox
*By: /s/ F. William Kuethe, Jr.
------------------------------
F. William Kuethe, Jr.
Attorney-in-Fact
</TABLE>
Exhibit 23.1
[TRICE & GEARY LLC LETTERHEAD]
Board of Directors
Glen Burnie Bancorp
We hereby consent to the use of our report dated February 12, 1997 and
to the references to our firm under the heading "Experts" in the prospectus
included in the Registration Statement on Form S-1 being filed by Glen Burnie
Bancorp with respect to its Dividend Reinvestment and Stock Purchase Plan and
Stockholder Purchase Plan.
TRICE & GEARY LLC
/s/ Trice & Geary LLC
December 12, 1997
Exhibit 23.2
[ROWLES & COMPANY, LLP LETTERHEAD]
Board of Directors
Glen Burnie Bancorp
We hereby consent to the use of our report dated March 8, 1996 on the
consolidated financial statements of Glen Burnie Bancorp as of December 31, 1995
and for the two years then ended and to the references to our firm under the
heading "Experts" in the prospectus included in Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1 (File No. 333-37073) being filed by the
Company for its Dividend Reinvestment and Stock Purchase Plan and Stockholder
Purchase Plan.
ROWLES & COMPANY, LLP
December 12, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the Condensed
Consolidated Financial Statements of Glen Burnie Bancorp and its subsidiaries
for the nine months ending September 30, 1997 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000890066
<NAME> sd4poa$f
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 9,421
<INT-BEARING-DEPOSITS> 46
<FED-FUNDS-SOLD> 1,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,952
<INVESTMENTS-CARRYING> 48,327
<INVESTMENTS-MARKET> 47,993
<LOANS> 114,237
<ALLOWANCE> 4,276
<TOTAL-ASSETS> 226,242
<DEPOSITS> 205,003
<SHORT-TERM> 1,016
<LIABILITIES-OTHER> 1,366
<LONG-TERM> 0
0
0
<COMMON> 9,016
<OTHER-SE> 9,841
<TOTAL-LIABILITIES-AND-EQUITY> 226,242
<INTEREST-LOAN> 8,253
<INTEREST-INVEST> 4,845
<INTEREST-OTHER> 249
<INTEREST-TOTAL> 13,347
<INTEREST-DEPOSIT> 5,228
<INTEREST-EXPENSE> 5,228
<INTEREST-INCOME-NET> 8,059
<LOAN-LOSSES> 270
<SECURITIES-GAINS> 227
<EXPENSE-OTHER> 8,859
<INCOME-PRETAX> 250
<INCOME-PRE-EXTRAORDINARY> 579
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 579
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 5.13
<LOANS-NON> 4,276
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 936
<ALLOWANCE-OPEN> 5,061
<CHARGE-OFFS> 1,441
<RECOVERIES> 386
<ALLOWANCE-CLOSE> 4,276
<ALLOWANCE-DOMESTIC> 3,323
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 936
</TABLE>
