<PAGE>
As filed with the Securities and Exchange Commission on July 1, 1998
Registration No.333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CECIL BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
MARYLAND 6135 52-1883546
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
127 NORTH STREET
ELKTON, MARYLAND 21921-5547
(410) 398-1650
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of the Registrant's Principal Executive Offices)
MARY BEYER HALSEY, PRESIDENT AND CHIEF EXECUTIVE OFFICER
CECIL BANCORP, INC.
127 NORTH STREET
ELKTON, MARYLAND 21921-5547
(410) 398-1650
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
COPIES OF ALL COMMUNICATIONS TO:
HOWARD S. PARRIS, ESQUIRE
HOUSLEY KANTARIAN & BRONSTEIN, P.C.
1220 19TH STREET, N.W., SUITE 700
WASHINGTON, D.C. 20036
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of the registration
statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_] _________
If this form is a post-effective amendment filed pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [_] _________
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
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==============================================================================================================================
Proposed maximum Proposed maximum Amount
Title of each class of Amount to offering price aggregate offering of
securities to be registered be registered per unit price registration fee
==============================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value
per share 156,533 shares (2) N/A $2,078,713.30 (3) $613.22 (3)
==============================================================================================================================
</TABLE>
(1) Represents the estimated maximum number of shares of common stock, par value
$.01 per share, of Cecil Bancorp, Inc. (the "Company"), expected to be
issued in exchange for up to 81,042 shares of common stock, par value $1.00
per share, of Columbian Bank, a Federal Savings Bank ("Columbian"), upon
consummation of the merger of Columbian with a subsidiary of the Company,
described herein.
(3) Estimated solely for the purpose of calculating the registration fee. The
registration fee has been computed pursuant to Rule 457(f)(2) under the
Securities Act of 1933, as amended, based on the book value ($27.59 per
share for 75,343 shares) of shares of Columbian common stock on March 31,
1998.
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
303-307 ST. JOHN STREET
HAVRE DE GRACE, MARYLAND 21078
(410) 939-2313
_____________, 1998
Dear Stockholder:
You are invited to attend a special meeting of stockholders (the
"Special Meeting") of Columbian Bank, a Federal Savings Bank ("Columbian") to be
held at ___________________________, _____________, Maryland, on ______,
__________, 1998 at __:__ _.m., local time. Notice of the Special Meeting, a
Prospectus/Proxy Statement and a Proxy Card are enclosed.
The Special Meeting has been called in connection with the proposed
acquisition of Columbian by Cecil Bancorp, Inc. ("Cecil Bancorp" or the
"Company") through the merger of Columbian with Columbian Interim Savings Bank
("Interim"), a wholly-owned subsidiary of Cecil Bancorp in accordance with the
Reorganization and Merger Agreement dated as of May 29, 1998 by and between
Cecil Bancorp and Columbian (the "Merger Agreement"). Pursuant to the Merger
Agreement (1) Cecil Bancorp will organize Interim as a wholly owned interim
federal savings bank, (2) Interim will merge with and into Columbian with
Columbian surviving as a wholly-owned subsidiary of Cecil Bancorp, and each
outstanding share of Columbian's common stock will be automatically converted
into the right to receive shares of Cecil Bancorp common stock (and cash in lieu
of fractional shares), based upon an exchange ratio as more fully described in
the accompanying Prospectus/Proxy Statement, and (3) the issued and outstanding
shares of Interim common stock will be converted into an equal number of shares
of Columbian common stock, all of which will be owned by Cecil Bancorp. Together
these transactions are referred to herein as the "Merger."
Following the Merger, Cecil Bancorp will hold Columbian, which will
operate as a wholly owned subsidiary of Cecil Bancorp. Consummation of the
Merger is conditioned upon, among other things, receipt of all required
regulatory approvals and approval by Columbian's stockholders.
At the Special Meeting, stockholders of Columbian will consider and
vote upon approval of the Merger and the Merger Agreement. Your Board of
Directors has approved the Merger Agreement, including the Merger, and believes
that the Merger and the Merger Agreement are in the best interests of Columbian
and its stockholders. Accordingly, your Board of Directors unanimously
recommends that you vote FOR approval of the Merger and the Merger Agreement.
You are urged to read the accompanying Prospectus/Proxy Statement,
which provides detailed information concerning the Merger and related matters.
Your vote is important, regardless of the number of shares you own. ON
BEHALF OF THE BOARD OF DIRECTORS, I URGE YOU TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE
SPECIAL MEETING. This will not prevent you from voting in person but will assure
that your vote is counted if you are unable to attend the Special Meeting.
Sincerely,
Donald F. Angert
President
* PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME *
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
303-307 ST. JOHN STREET
HAVRE DE GRACE, MARYLAND 21078
(410) 939-2313
------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, 1998
------------------------------
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Special Meeting") of Columbian Bank, a Federal Savings Bank ("Columbian") will
be held at ____________________________, ___________, Maryland, on ______,
__________, 1998 at __:__ _.m., for the following purposes:
(1) To approve the acquisition of Columbian by Cecil Bancorp, Inc.
("Cecil Bancorp" or the "Company") through the merger of
Columbian with Columbian Interim Federal Savings Bank
("Interim"), a wholly owned subsidiary of Cecil Bancorp, with
Columbian surviving as a wholly-owned subsidiary of Cecil
Bancorp , pursuant to which each outstanding share of
Columbian common stock will be converted into a number of
shares of Company common stock, $.01 par value per share
("Company Common Stock") and cash in lieu of fractional shares
(the "Merger Consideration"), based upon an exchange ratio as
more fully described in the accompanying Prospectus/Proxy
Statement (the "Merger"), and to approve the Reorganization
and Merger Agreement by and between the Company and Columbian,
dated as of May 29, 1998 (the "Merger Agreement") which sets
forth the terms and conditions of the Merger.
NOTE: The Board of Directors of Columbian is not aware of any other business to
come before the Special Meeting.
The Board of Directors of Columbian has fixed the close of business on
____________, 1998 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting. Only stockholders of
record at the close of business on that date will be entitled to notice of and
to vote at the Special Meeting.
By Order of the Board of Directors,
Donald F. Angert
President
Havre de Grace, Maryland
__________, 1998
- --------------------------------------------------------------------------------
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU
PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, PLEASE DATE, SIGN AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
- --------------------------------------------------------------------------------
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME
<PAGE>
PROSPECTUS/PROXY STATEMENT
-------------------------
CECIL BANCORP, INC.
PROSPECTUS
_______ SHARES OF COMMON STOCK
PAR VALUE $.01 PER SHARE
(SUBJECT TO ADJUSTMENT)
-------------------------
-------------------------
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, 1998
-------------------------
This Prospectus/Proxy Statement is being furnished to the holders of
the common stock, par value $1.00 per share ("Columbian Common Stock") of
Columbian Bank, a Federal Savings Bank ("Columbian" or the "Bank") in connection
with the solicitation of proxies by Columbian's Board of Directors for use at
its special meeting of stockholders (the "Special Meeting") to be held at
_____________________, ___________, Maryland, on ________, __________, 1998 at
__:__ _.m., local time.
The purpose of the Special Meeting and the matters to be acted upon are
to consider and vote upon the proposed acquisition of Columbian by Cecil
Bancorp, Inc. ("Cecil Bancorp" or the "Company") through the merger of Columbian
with Columbian Interim Federal Savings Bank ("Interim"), a wholly owned
subsidiary of Cecil Bancorp, with Columbian as the surviving institution, to be
a wholly owned subsidiary of Cecil Bancorp (the "Merger"), in accordance with a
Reorganization and Merger Agreement by and between the Company and Columbian,
dated May 29, 1998 (the "Merger Agreement"), which sets forth the terms and
conditions of the Merger.
Pursuant to the Merger Agreement, each share of Columbian Common Stock
outstanding at the effective date of the Merger (the "Effective Date") (except
for shares owned or held by Columbian or the Company (other than in a fiduciary
capacity or in any 401(k) plan of Columbian), or held by Columbian stockholders
who have perfected their dissenters' rights of appraisal ("Dissenting Shares"))
will be converted into the right to receive a number of shares of Company common
stock, par value $.01 per share (the "Company Common Stock"), determined
pursuant to an exchange ratio (the "Exchange Ratio") determined by the average
of the closing price of a share of Company Common Stock (as reported by
"Bloomberg Business News") for the last five days in which Company Common Stock
was traded prior to OTS approval of the Merger (the "Cecil Trading Price"), and
the Exchange Ratio will therefore be set as follows: (i) if the Cecil Trading
Price is more than $29.375, the Exchange Ratio will be 1.5645; (ii) if the Cecil
Trading Price is more than $27.00 and equal to or less than $29.375, the
Exchange Ratio will be determined by dividing $45.96 by the Cecil Trading Price,
and will be between 1.5645 and 1.7021; (iii) if the Cecil Trading Price is equal
to or more than $20.00 and equal to or less than $27.00, the Exchange Ratio will
be 1.7021; and (iv) if the Cecil Trading Price is less than $20.00, the Exchange
Ratio will be determined by dividing $34.04 by the Cecil Trading Price.
Consummation of the Merger is subject to the satisfaction of a number
of conditions, including the receipt of all regulatory approvals and consents,
with the satisfaction of various conditions required or mutually deemed
necessary in connection with the Merger, and the approval of the Merger
Agreement by the stockholders of Columbian. Applications have been filed with
the appropriate regulatory authorities for the required approvals, consents and
waivers. Stockholder approval of the Merger Agreement requires the affirmative
vote of at least two-thirds of the outstanding shares of Columbian Common Stock.
Columbian's Board of Directors has proposed that its stockholders approve the
Merger Agreement at Columbian's Special Meeting of Stockholders to be held on
__________________, 1998. It is currently anticipated that a maximum of _______
shares of Columbian Common Stock will be outstanding at the
<PAGE>
Effective Date. Based on the closing price per share of Company Common Stock on
_________, 1998, of $______, each share of Columbian Common Stock would be
exchanged for _______ shares of Company Common Stock. The actual number of
shares to be received for each share of Columbian Common Stock at the Effective
Date may be different from this amount depending on the Cecil Trading Price, as
described above. In all cases, cash will be paid in lieu of fractional shares.
The Company has filed a registration statement on Form S-4 with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the shares of
Company Common Stock to be issued upon consummation of the Merger. See
"Available Information." This Prospectus/Proxy Statement constitutes a
prospectus of the Company with respect to the issuance of shares of Company
Common Stock to the stockholders of Columbian upon consummation of the Merger.
THE BOARD OF DIRECTORS OF COLUMBIAN BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF COLUMBIAN'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE MERGER, INCLUDING THE MERGER
AGREEMENT.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY
STATE SECURITIES AUTHORITY OR ANY OTHER GOVERNMENTAL AGENCY NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY
STATE SECURITIES AUTHORITY OR ANY OTHER GOVERNMENTAL AGENCY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC") OR ANY OTHER GOVERNMENTAL AGENCY.
This Prospectus/Proxy Statement and the accompanying proxy card are
first being sent to the stockholders of Columbian on or about ____________,
1998.
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS __________, 1998
<PAGE>
PROSPECTUS/PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION........................................................................................ (i)
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................................................. (i)
FORWARD-LOOKING STATEMENTS...................................................................................
SUMMARY......................................................................................................
The Special Meeting of Columbian Stockholders................................................................
The Parties to the Merger....................................................................................
The Merger...................................................................................................
Comparison of Stockholder Rights.............................................................................
SELECTED FINANCIAL DATA FOR CECIL BANCORP, INC...............................................................
Selected Consolidated Financial Information..................................................................
Consolidated Summary of Operations...........................................................................
Key Operating Ratios.........................................................................................
SELECTED FINANCIAL DATA FOR COLUMBIAN BANK, A FEDERAL SAVINGS BANK..........................................
Selected Financial Condition Data............................................................................
Summary of Operations........................................................................................
Per Common Share.............................................................................................
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION...........................................................
Pro Forma Condensed Combined Balance Sheet...................................................................
Pro Forma Condensed Combined Statement of Earnings...........................................................
Unaudited Pro Forma Combined Per Share Data..................................................................
INFORMATION CONCERNING THE SPECIAL MEETING...................................................................
General......................................................................................................
Solicitation, Voting and Revocability of Proxies.............................................................
THE MERGER...................................................................................................
General......................................................................................................
Background of the Merger.....................................................................................
Reasons for the Merger and Recommendation of the Columbian Board of Directors................................
Opinion of Financial Advisor.................................................................................
Conversion of Columbian Common Stock.........................................................................
Treatment of Columbian Stock Options.........................................................................
Dissenters' Rights of Appraisal..............................................................................
Voting Agreement.............................................................................................
The Surviving Institution....................................................................................
Management after the Merger..................................................................................
Representations and Warranties...............................................................................
Covenants Pending the Merger.................................................................................
No Solicitation..............................................................................................
Stockholder Approval and Additional Covenants of Columbian...................................................
Additional Covenants by Cecil Bancorp........................................................................
Conditions to the Merger.....................................................................................
Stock Option Agreement.......................................................................................
Required Regulatory Approvals................................................................................
Expenses.....................................................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS (continued) PAGE
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<S> <C>
Closing; Effective Date......................................................................................
Employee Benefit Plans after the Merger......................................................................
Interests of Certain Persons in the Merger...................................................................
Federal Income Tax Consequences..............................................................................
Accounting Treatment.........................................................................................
Resale of Company Common Stock; Restrictions on Transfer.....................................................
Vote Required................................................................................................
CECIL BANCORP, INC...........................................................................................
COLUMBIAN BANK, A FEDERAL SAVINGS BANK ......................................................................
BUSINESS OF COLUMBIAN BANK, A FEDERAL SAVINGS BANK...........................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................................................
REGULATION...................................................................................................
BENEFICIAL OWNERSHIP OF COLUMBIAN COMMON STOCK...............................................................
COMMON STOCK PRICES AND DIVIDENDS............................................................................
DESCRIPTION OF COMPANY CAPITAL STOCK.........................................................................
COMPARISON OF STOCKHOLDER RIGHTS.............................................................................
LEGAL MATTERS................................................................................................
EXPERTS......................................................................................................
INDEPENDENT ACCOUNTANTS......................................................................................
OTHER MATTERS................................................................................................
INDEX TO FINANCIAL STATEMENTS OF COLUMBIAN BANK, A FEDERAL SAVINGS BANK......................................
</TABLE>
ANNEXES:
Annex A -- Reorganization and Merger Agreement by and between Cecil Bancorp,
Inc. Columbian Bank, A Federal Savings Bank (includes Stock
Option Agreement as Exhibit B)
Annex B -- Dissenters and Appraisal Rights Regulation
Annex C -- Cecil Bancorp, Inc. Annual Report on Form 10-KSB for the Year
Ended December 31, 1997
Annex D -- Cecil Bancorp, Inc. Quarterly Report on Form 10-Q for the Quarter
Ended March 31, 1998
Annex E -- Opinion of RP Financial, LC.
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED IN THIS
PROSPECTUS/PROXY STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO EXCHANGE OR SELL, OR
A SOLICITATION OF AN OFFER TO EXCHANGE OR PURCHASE, THE SECURITIES OFFERED BY
THIS PROSPECTUS/PROXY STATEMENT, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR TO OR FROM
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE
INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT SPEAKS AS OF THE DATE
HEREOF UNLESS OTHERWISE SPECIFICALLY INDICATED. NEITHER THE DELIVERY OF THIS
PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR COLUMBIAN OR ANY OF THEIR RESPECTIVE
SUBSIDIARIES, OR IN THE INFORMATION SET FORTH HEREIN, SINCE THE DATE OF THIS
PROSPECTUS/PROXY STATEMENT. THIS PROSPECTUS/PROXY STATEMENT DOES NOT COVER ANY
RESALES OF COMPANY COMMON STOCK RECEIVED BY STOCKHOLDERS WHO ARE AFFILIATES OF
THE COMPANY OR COLUMBIAN, WITHIN THE MEANING OF APPLICABLE SECURITIES LAWS, UPON
THE CONSUMMATION OF THE MERGER, AND NO PERSON IS AUTHORIZED TO USE THIS
PROSPECTUS/PROXY STATEMENT IN CONNECTION WITH ANY SUCH RESALE. INFORMATION
CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT REGARDING THE COMPANY HAS BEEN
FURNISHED BY THE COMPANY, AND INFORMATION HEREIN REGARDING COLUMBIAN HAS BEEN
FURNISHED BY COLUMBIAN. NEITHER THE COMPANY NOR COLUMBIAN WARRANTS THE ACCURACY
OR COMPLETENESS OF INFORMATION RELATING TO THE OTHER PARTY.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-4 (together with all amendments and exhibits thereto) under the
Securities Act relating to the shares of Company Common Stock to be issued
pursuant to, and as contemplated by the Merger Agreement. This Prospectus/Proxy
Statement does not contain all the information set forth in the registration
statement, certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. The information omitted may be obtained from the
public reference facilities of the Commission or inspected and copied at the
principal or regional offices of the Commission at the addresses listed below.
The Company and Columbian are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Commission and the OTS, respectively. Such reports, proxy statements and
other information with respect to the Company can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional
offices at Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago,
Illinois 60601, and World Trade Center, 13th Floor, New York, New York 10048.
Copies of such materials also can be obtained from the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Reports, proxy statements and other information that have been filed
electronically with the Commission may also be obtained from the Commission's
Website, the address of which is http://www.sec.gov. Reports, proxy statements
and other information with respect to Columbian may be examined at the principal
office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by the
Company (File No. 0-24926) are hereby incorporated by reference in this
Prospectus/Proxy Statement:
(i) The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997 (also included as Annex C hereto); and
(i)
<PAGE>
(ii) The Company's Quarterly Report on Form 10-Q and Form 10-Q/A
for the quarter ended March 31, 1998 (also included as Annex D
hereto); and
(iii) The Company's Current Report on Form 8-K dated June 4, 1998.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES BY REFERENCE OTHER
DOCUMENTS RELATING TO THE COMPANY WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. THESE DOCUMENTS ARE AVAILABLE, WITHOUT CHARGE, UPON REQUEST DIRECTED
TO MR. THOMAS FOARD, CECIL BANCORP'S CORPORATE SECRETARY, 127 NORTH STREET,
ELKTON, MARYLAND 21921-5547, TELEPHONE (410) 398-1650. IN ORDER TO ENSURE TIMELY
DELIVERY OF ANY REQUESTED DOCUMENTS, THE REQUEST SHOULD BE MADE NO LATER THAN
THE CLOSE OF BUSINESS ON __________, 1998.
FORWARD-LOOKING STATEMENTS
This Prospectus/Proxy Statement contains, or incorporates by reference,
other documents that contain, forward-looking statements with respect to the
financial condition, results of operations and business of Cecil upon
consummation of the Merger and the other transactions contemplated by the Merger
Agreement, including statements relating to: (a) cost savings and accretions to
reported earnings that may be realized from the Merger; (b) impacts on revenues
that may result from the Merger; and (c) restructuring charges that may be
incurred in connection with the Merger. These forward-looking statements involve
certain risks and uncertainties. For example, see "Available Information,"
"Comparative Per Share Data," "Selected Historical And Pro Forma Financial
Data," "The Merger," and "Unaudited Pro Forma Condensed Combined Financial
Statements." Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (1) contemplated cost savings from the Merger cannot be
timely or fully realized; (2) revenues following the Merger are lower than
contemplated; (3) competitive pressure among depository institutions increases
significantly; (4) costs or difficulties related to the integration of the
businesses of Cecil and Columbian are greater than contemplated; (5) changes in
the interest rate environment reduce interest margins; (6) general economic
conditions, either nationally or in the markets in which the Cecil will be doing
business, are less favorable than contemplated; or (7) legislation or changes in
regulatory requirements adversely affect the businesses in which the Company
would be engaged. The forward-looking statements contained in this
Prospectus/Proxy Statement or incorporated herein by reference speak only as of
the date as of which such statements are made, and the Company assume no duty to
update these forward-looking statements to reflect new, changing or
unanticipated events or circumstances. Simon, Master & Sidlow, P.A., has not
compiled, examined or performed any procedures with respect to any
forward-looking statements, nor have they expressed any opinion or any form of
assurance on such information or its achievability, and they assume no
responsibility for, and disclaim any association with, the forward-looking
statements.
(ii)
<PAGE>
SUMMARY
This summary does not purport to be complete and is qualified in its
entirety by the detailed information and definitions appearing elsewhere herein,
the annexes hereto and documents incorporated by reference herein.
THE SPECIAL MEETING OF COLUMBIAN STOCKHOLDERS
The Special Meeting will be held on ____________, __________, 1998 at
____________________, Havre de Grace, Maryland at __:__ _.m. At the Special
Meeting, stockholders of Columbian will consider and vote upon a proposal to
approve the Merger and the Merger Agreement. Stockholders of record at the close
of business on _________, 1998 (the "Record Date") will be entitled to one vote
for each share then so held. The presence, in person or by proxy, of a majority
of the total number of outstanding shares of Columbian Common Stock is necessary
to constitute a quorum at the Special Meeting. The affirmative vote of the
holders of at least two-thirds of the issued and outstanding shares of Columbian
Common Stock is required to approve the Merger and the Merger Agreement.
For additional information, see "Information Concerning the Special
Meeting" herein.
THE PARTIES TO THE MERGER
Cecil Bancorp, Inc. Cecil Bancorp was incorporated under the laws of
the State of Maryland in July 1994. On November 10, 1994, Cecil Federal
converted from mutual to stock form and reorganized into the holding company
form of ownership as a wholly owned subsidiary of the Company. The Company is
primarily engaged in the business of directing, planning and coordinating the
business activities of Cecil Federal. The Company's common stock is registered
with the Commission under the Exchange Act. The Company is classified as a
unitary savings institution holding company subject to regulation by the OTS of
the Department of the Treasury.
At March 31, 1998, the Company had total assets of $67.1 million and
stockholders' equity of $7.6 million, on a consolidated basis, and through Cecil
Federal, had deposits of $56.1 million and net loans receivable of $54.0
million. Cecil Federal exceeds all current regulatory capital requirements.
Cecil Federal is a community-oriented financial institution which
commenced operations in 1959 as a Federal mutual savings and loan association.
It converted to a Federal mutual savings bank in January 1993 and, effective
November 10, 1994, Cecil Federal converted from mutual to stock form. Its
deposits have been federally insured up to applicable limits, and it has been a
member of the Federal Home Loan Bank ("FHLB") system since 1959. Cecil Federal's
deposits are currently insured by the Savings Association Insurance Fund
("SAIF") of the FDIC and it is a member of the FHLB of Atlanta.
Cecil Federal's primary business, as conducted through its two offices
located in Elkton and North East, Maryland, is the origination of mortgage loans
secured by single-family residential real estate located primarily in Cecil
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less, savings accounts
and transaction accounts. To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to
four-family residences, home equity loans and land loans. Cecil Federal also
makes consumer loans including education loans, personal and commercial lines of
credit, automobile loans and loans secured by deposit accounts. Cecil Federal
purchases mortgage-backed securities and invests in other liquid investment
securities when warranted by the level of excess funds.
Cecil Federal has two wholly owned subsidiaries, Cecil Service
Corporation and Cecil Financial Services Corporation. Cecil Service
Corporation's primary business is leasing agent for the North East Plaza Branch,
and Cecil Financial Services Corporation offers a full range of brokerage and
investment services at Cecil Federal's two branches, through a partnership with
UVEST Investment Services.
(iii)
<PAGE>
Cecil Bancorp's executive offices are located at 127 North Street,
Elkton, Maryland 21921. The telephone number is (410) 398-1650.
Columbian Bank, a Federal Savings Bank . Columbian was originally
chartered by the State of Maryland in 1893. The Bank became a member of the FHLB
System and obtained federal deposit insurance in October 1985. In January 1989,
Columbian converted to a federal stock institution and on September 26, 1990,
Columbian changed its name to Columbian Bank, a Federal Savings Bank and became
a federally chartered stock savings bank.
The Bank's principal business consists of accepting deposits from the
general public and investing those funds in mortgage loans and other investments
permitted to federal savings banks. The Bank's principal market area is Harford
County, Maryland, which it serves through its office located in Havre de Grace,
Maryland Harford County is located approximately 25 miles from Baltimore,
Maryland and 20 miles from Wilmington, Delaware. Although Harford County is
primarily rural, it has experienced significant population growth in recent
years due to its proximity to these metropolitan areas. In terms of assets and
deposits, Columbian is the smallest depository institution currently serving
Harford County. The Bank is the only locally owned and operated savings bank in
Havre de Grace.
At March 31, 1998, Columbian had total assets of $30.2 million,
deposits of $27.6 million, net loans receivable of $18.6 million, cash and
investment securities of $10.6 million and stockholders' equity of $2.1 million.
Columbian's executive offices are located at 303-307 St. John Street,
Havre de Grace, Maryland 21078, and its main telephone number is (410) 939-2313.
THE MERGER
General. The Merger Agreement provides for the acquisition of Columbian
by Cecil Bancorp as follows: (1) Cecil Bancorp will organize Interim as a wholly
owned interim federal savings bank (2) Interim will merge with and into
Columbian with Columbian surviving as a wholly-owned subsidiary of Cecil
Bancorp, and each outstanding share of Columbian's common stock will be
automatically converted into the right to receive shares of Company Common Stock
(and cash in lieu of fractional shares), based upon an exchange ratio as more
fully described below and (3) the issued and outstanding shares of Interim
common stock will be converted into an equal number of shares of Columbian
common stock, all of which will be owned by Cecil Bancorp. Together these
transactions are referred herein as the "Merger."
The Board of Directors of Columbian considered the Merger and the terms
of the Merger Agreement, including the Exchange Ratio, in light of economic,
financial, legal, market and other factors and concluded that the Merger is in
the best interests of Columbian and its stockholders. THE BOARD OF DIRECTORS OF
COLUMBIAN UNANIMOUSLY RECOMMENDS THAT COLUMBIAN'S STOCKHOLDERS VOTE FOR APPROVAL
OF THE MERGER AND THE MERGER AGREEMENT.
For additional information, see "The Merger -- General," "-- Background
of the Merger" and "-- Reasons for the Merger and Recommendations of the
Columbian Board of Directors" herein and the Merger Agreement attached as Annex
A hereto.
Conversion of Columbian Common Stock. Pursuant to the Merger Agreement,
each share of Columbian Common Stock outstanding at the Effective Date (except
for shares owned or held by Columbian or the Company (other than in a fiduciary
capacity or in any 401(k) plan of Columbian), or Dissenting Shares) will be
converted into the right to receive a number of shares of Company Common Stock,
determined pursuant to the Exchange Ratio based upon the Cecil Trading Price.
The Cecil Trading Price will be determined by the average of the closing price
of a share of Company Common Stock (as reported by "Bloomberg Business News")
for the last five days in which Company Common Stock was traded prior to OTS
approval of the Merger, and the Exchange Ratio will therefore be set as follows:
(i) if the Cecil Trading Price is more than $29.375, the Exchange Ratio will be
1.5645; (ii) if the Cecil Trading Price is more than $27.00 and equal to or less
than $29.375, the Exchange Ratio will be determined by dividing $45.96
(iv)
<PAGE>
by the Cecil Trading Price, and will be between 1.5645 and 1.7021; (iii) if the
Cecil Trading Price is equal to or more than $20.00 and equal to or less than
$27.00, the Exchange Ratio will be 1.7021; and (iv) if the Cecil Trading Price
is less than $20.00, the Exchange Ratio will be determined by dividing $34.04 by
the Cecil Trading Price. It is currently anticipated that a maximum of 128,053
shares of Columbian Common Stock will be outstanding at the Effective Date.
Based on the closing price per share of Company Common Stock on _________, 1998,
of $24.25, each share of Columbian Common Stock would be exchanged for 1.7021
shares of Company Common Stock. The actual number of shares to be received for
each share of Columbian Common Stock at the Effective Date may be different from
this amount depending on the Cecil Trading Price, as described above. In all
cases, cash will be paid in lieu of fractional shares.
Treatment of Stock Options. At the Effective Date, each option
outstanding under Columbian's stock option plan shall be converted into an
option to purchase the number of shares of Company Common Stock equal to the
number of shares of Columbian Common Stock issuable immediately prior to the
Effective Date upon exercise of such option (without regard to restrictions on
exercisability) multiplied by the Exchange Ratio upon the same terms and
conditions under the relevant option as were applicable immediately prior to the
Effective Time, except that the exercise price will be equal to the exercise
price of the option prior to the Effective Date divided by the Exchange Ratio.
For additional information, see "The Merger -- Treatment of Columbian Stock
Options" herein.
Exchange of Stock Certificates. Prior to the Effective Date, the
Company will appoint an exchange agent (the "Exchange Agent") to effect the
exchange of stock certificates in connection with the Merger. As soon as
practicable after the Effective Date, the Exchange Agent will send a notice and
letter of transmittal to each Columbian stockholder of record at such date
advising such stockholder of the effectiveness of the Merger and the procedure
for surrendering to the Exchange Agent outstanding certificates formerly
evidencing Columbian Common Stock in exchange for new certificates of Company
Common Stock and cash in lieu of fractional shares. Promptly following receipt
of such notice and transmittal form, holders of Columbian Common Stock
certificates should surrender their certificates in accordance with the
specified procedures. Upon surrender, each Columbian Common Stock certificate
will be canceled. See "The Merger -- Conversion of Columbian Common Stock --
Exchange of Columbian Stock Certificates."
Dissenters' Appraisal Rights. Pursuant to Section 552.14 of Title 12 of
the Code of Federal Regulations, stockholders of Columbian will have dissenters'
appraisal rights in connection with the Merger. Such rights will entitle
stockholders who do not vote in favor of the Merger Agreement and who comply
with certain other conditions to receive the appraised value of their shares of
Columbian Common Stock rather than receiving the Merger Consideration.
Stockholders desiring to exercise their appraisal rights should be aware that
the failure to comply strictly with the provisions of Section 552.14 may result
in the waiver or forfeiture of their appraisal rights. A stockholder who votes
in favor of the Merger Agreement will have waived such stockholder's rights of
appraisal and will nullify any previously filed written demand for appraisal.
See "The Merger -- Dissenters' Rights of Appraisal" and Annex B hereto.
Voting Agreement. Concurrent with the execution of the Merger
Agreement, each of the Directors of Columbian entered into an agreement with the
Company (the "Voting Agreement") to vote their shares of Columbian Common Stock
in favor of the Merger Agreement and the Merger. The Voting Agreement covers the
shares of Columbian Common Stock beneficially owned by each of the Columbian
Directors as of May 29, 1998, as well as any shares subsequently acquired. A
total of __________ shares of Columbian Common Stock (a total of _____% of the
shares outstanding as of the Record Date) are covered by the Voting Agreement.
See "The Merger -- Voting Agreement."
Conditions to the Merger. The obligations of the Company and Columbian
to effect the Merger are solely and jointly subject to a number of conditions
including, among other things, the receipt of Columbian stockholder and
regulatory approval of the Merger and receipt of an opinion with respect to the
tax effects of the Merger. For additional information, see "The Merger --
Conditions to Consummation of the Merger" herein.
(v)
<PAGE>
Required Regulatory Approvals. The Merger is subject to the approval of the
OTS. Following approval of the Merger, the U.S. Department of Justice may review
the Merger and raise objections on antitrust grounds. For additional
information, see "The Merger -- Required Regulatory Approvals" herein.
Termination of the Merger. The Merger Agreement may be terminated at
any time before the Effective Date, whether before or after approval by
Columbian stockholders, in a number of circumstances, including: (a) by mutual
consent of the parties; (b) at the election of either party, if the closing of
the Merger shall not have occurred on or before December 31, 1998; provided that
the failure to close is not due to the failure of the terminating party to
perform an obligation under the Merger Agreement; (c) by either party upon the
occurrence of an event which renders satisfaction of one or more of the
conditions to the obligations of the other party impossible; (d) by either party
in the event of a breach by the other party of any representation, warranty or
covenant contained in the Merger Agreement, which breach results in a material
and adverse change as to the breaching party which would have a material adverse
effect on the financial condition, business or operations of the breaching party
and which breach cannot be or has not been cured within 30 days after the
delivery of written notice to the breaching party of such breach; or (e) by
either party if the Cecil Trading Price as determined pursuant to the Merger
Agreement, is less than $17.625. For additional information, see "The Merger --
Amendment or Termination of the Merger Agreement."
Stock Option. In connection with execution of the Merger Agreement,
Cecil Bancorp and Columbian executed a Stock Option Agreement (the "Stock Option
Agreement") pursuant to which Columbian granted Cecil Bancorp an option (the
"Option") to purchase up to 14,993 authorized but unissued shares of Columbian
Common Stock (constituting approximately 19.9 percent of the shares of Columbian
Common Stock outstanding) at a price of $29.50 per share, such number of shares
and exercise price being subject to adjustment under certain circumstances. The
Option is exercisable only upon the occurrence and continuation of certain
events that could jeopardize consummation of the Merger pursuant to the terms of
the Merger Agreement. For additional information about the Stock Option
Agreement, see "The Merger -- Stock Option Agreement" and the text of the Stock
Option Agreement, which is attached to the Merger Agreement as Exhibit B, which
agreement is attached hereto as Annex A.
Opinion of Financial Advisor. The Board of Directors of Columbian has
received a written opinion of RP Financial, LC. ("RP Financial"), Columbian's
financial advisor, that, as of the date of such opinion, based upon and subject
to the assumptions, factors and limitations set forth therein, the Merger
Consideration is fair to the stockholders of Columbian from a financial point of
view. RP Financial's opinion is updated as of the close of business on
_________, 1998. A copy of RP Financial's opinion dated __________, 1998 is
attached as Annex E hereto, and the description set forth herein is qualified in
its entirety by reference to this opinion. See "The Merger -- Opinion of
Financial Advisor."
Interests of Certain Persons in the Merger. Certain members of
Columbian's management and Board of Directors have interests in the Merger in
addition to their interests as stockholders of Columbian generally. Those
interests relate to, among other things, officer's employee benefits and
employment agreements, and provisions in the Merger Agreement regarding
indemnification and director and officer insurance information.
For additional information, see "The Merger -- Management after the
Merger," "-- Employee Benefit Plans after the Merger" and "-- Interests of
Certain Persons in the Merger" herein.
Federal Income Tax Consequences. The Company and Columbian will rely
upon an opinion of Housley Kantarian & Bronstein, P.C. to the effect that, among
other things, (i) the Merger will be treated for federal income tax purposes as
a tax-free reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"); and (ii) a Columbian stockholder who receives
Company Common Stock in exchange for Columbian Common Stock will not give rise
to gain or loss to such stockholders, except for cash received for fractional
shares redeemed or for Dissenting Shares. For additional information, see "The
Merger -- Federal Income Tax Consequences" herein.
(vi)
<PAGE>
Accounting Treatment. The Merger will be accounted for as a pooling of
interests transaction, in accordance with generally accepted accounting
principles, so that there will not be any adjustments to the carrying value of
Columbian's assets and liabilities reflecting their fair values at the date of
the Merger.
COMPARISON OF STOCKHOLDER RIGHTS
As a result of the Merger, holders of Columbian Common Stock, whose
rights are presently governed by federal law and regulations and the Charter and
Bylaws of Columbian, will become stockholders of the Company, a Maryland
corporation. Accordingly, their rights will be governed by Maryland General
Corporation Law, and the Articles of Incorporation and Bylaws of the Company.
Certain differences arise from this change of governing law, as well as from
distinctions between the Charter and Bylaws of Columbian and the Articles of
Incorporation and Bylaws of the Company. These differences relate to the
issuance of capital stock, payment of dividends, special meetings of
stockholders, the rights of stockholders to dissent, vacancies on the Board of
Directors, the number and term of directors, removal of directors, approval of
mergers, consolidations, sale of substantially all assets and certain business
combinations, limitations on acquisitions of capital stock, advance notice
requirements for nominations of directors and presentation of new business at
meetings of stockholders and amendment of the Charter and Bylaws of Columbian
and the Articles of Incorporation and Bylaws of the Company. Further, the
Company, as a general business corporation, will be able to enter into various
lines of business unlike the Bank, which, as a regulated savings bank, is
restricted in the businesses in which it may engage. See "The Merger --
Comparison of Stockholders' Rights."
(vii)
<PAGE>
SELECTED FINANCIAL DATA FOR CECIL BANCORP, INC.
Set forth below are selected consolidated financial and other data of
Cecil Bancorp, Inc. This financial data should be read in conjunction with the
Consolidated Financial Statements of Cecil Bancorp and Subsidiaries and notes
thereto included in the Form 10-KSB for the year ended December 31, 1997 and the
Form 10-Q for the quarter ended March 31, 1998, attached as Annex C and Annex D,
respectively, to this Prospectus/Proxy Statement. Results for the three months
ended March 31, 1998 should not be considered indicative of results to be
expected for the year ended December 31, 1998.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
MARCH 31, ----------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------------- ------ ------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total amount of:
Assets.................................. $ 67,072 $ 63,660 $ 60,264 $ 53,991 $ 47,517 $44,783
Loans receivable, net (1)............... 55,159 54,678 51,488 47,154 39,181 34,485
Cash and investment securities.......... 8,370 5,368 5,167 4,500 6,045 8,498
Mortgage-backed securities.............. 1,627 1,817 2,165 872 1,026 545
Savings accounts........................ 56,134 52,954 47,365 44,649 39,500 41,064
Borrowings.............................. 1,750 1,750 4,500 1,250 -- --
Stockholders' Equity.................... 7,592 7,484 7,053 7,031 7,073 3,216
- --------------------------------------------------------------------------------------------------------------------------
Number of:
Real estate loans outstanding........... 1,711 1,202 1,194 1,131 1,328 1,023
Savings accounts........................ 7,298 7,222 6,755 6,533 6,326 6,302
Offices................................. 2 2 2 2 2 2
</TABLE>
- ----------
(1) Includes loans held for sale and mortgage-servicing rights.
(viii)
<PAGE>
CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- -------- ------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income....................... $ 1,285 $ 1,190 $ 5,018 $ 4,655 $ 3,975 $ 3,218 $ 3,249
Interest expense...................... 640 578 2,438 2,236 1,867 1,557 1,609
Net interest income before provision
for loan losses..................... 645 612 2,580 2,419 2,108 1,661 1,640
Provision for loan losses............. 23 10 87 103 35 34 28
--------- --------- --------- -------- ------- --------- ---------
Net interest income after provision
for loan losses..................... 622 602 2,493 2,316 2,073 1,627 1,612
Noninterest income.................... 98 71 352 316 234 223 257
Noninterest expense (1)............... 476 433 1,842 2,015 1,794 1,334 1,209
Income before income taxes and
cumulative effect of accounting
change.............................. 244 240 1,003 617 513 516 660
Federal income tax expense............ 84 88 437 302 196 202 257
--------- --------- --------- -------- ------- --------- ---------
Income before cumulative effect
of accounting change................ 160 152 566 315 317 314 403
Cumulative effect of accounting change -- -- -- -- -- -- 10
--------- --------- --------- -------- ------- --------- ---------
Net income (2)........................ $ 160 $ 152 $ 566 $ 315 $ 317 $ 314 $ 413
========= ========= ========= ======== ======= ========= =========
Other Comprehensive Loss
Unrealized gain (losses) on investment
securities, net of deferred taxes (7) (16) 6 11 5 (3) N/A
--------- --------- --------- -------- ------- --------- ---------
Comprehensive income.................. $ 153 $ 136 $ 572 $ 326 $ 322 $ 411 $ N/A
========= ========= ========= ======== ======= ========= =========
Basic earnings per common share....... $ 0.36 $ 0.35 $ 1.29 $ 0.72 $ 0.72 $ 0.71 $ N/A
========= ========= ========= ======== ======= ========= =========
Diluted earnings per common share..... $ 0.36 $ 0.35 $ 1.28 $ 0.72 $ N/A $ N/A $ N/A
========= ========= ========= ======== ======= ========= =========
Cash dividends paid per common share $ 0.10 $ 0.10 $ 0.63 $ 0.56 $ 0.56 $ N/A $ N/A
========= ========= ========= ======== ======= ========= =========
</TABLE>
- ---------
(1) For the year ended December 31, 1996, includes a one-time special
assessment of $270,000 imposed by the Omnibus Consolidated Appropriations
Act to fully fund the SAIF.
(2) After-tax effect to net income of the special assessment to fully fund the
SAIF which was $166,000. Without the special assessment, net earnings would
have been $481,000.
(ix)
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income divided
by average total assets)..................... 1.97% 1.01% 0.90% 0.54% (a) 0.62%
Return on average equity (net income
divided by average equity)................... 8.45 8.53 7.72 4.50 (b) 4.53
Equity-to-assets ratio (average equity
divided by average total assets)............. 11.46 11.82 11.66 12.07 13.77
Interest rate spread............................ 3.81 3.91 4.01 3.90 3.88
Net interest margin............................. 4.13 4.27 4.35 4.32 4.33
Average interest-earning assets as a
percentage of average interest-bearing
liabilities................................... 107.87 109.00 108.32 110.63 111.69
ASSET QUALITY RATIOS:
Nonperforming loans as a percentage
of total loans............................... 0.76 0.77 1.10 0.50 0.46
Nonperforming assets as a percentage
of total assets.............................. 1.08 0.64 0.95 0.43 0.40
Net charge-offs to average loans................ -- 0.02 0.06 0.04 0.06
Allowance for loan losses as a
percentage of total loans..................... 0.36 0.23 0.32 0.23 0.24
Allowance for loan losses as a
percentage of non-performing loans............ 47.65 32.00 29.31 40.14 52.77
</TABLE>
- ---------
(a) For the year ending December 31, 1996, this number is net of after-tax
effect of special SAIF assessment. Without the special assessment, this
ratio would have been 0.83%.
(b) For the year ending December 31, 1996, this number is net of after-tax
effect of special SAIF assessment. Without the special assessment, this
ratio would have been 6.88%.
(x)
<PAGE>
SELECTED FINANCIAL DATA FOR COLUMBIAN BANK, A FEDERAL SAVINGS BANK
Set forth below are selected financial and other data of Columbian
Bank, a Federal Savings Bank. This financial data should be read in conjunction
with the Financial Statements of Columbian Bank, a Federal Savings Bank and
notes thereto included in this Prospectus/Proxy Statement. Results for the three
months ended March 31, 1998 should not be considered indicative of results to be
expected for the year ended December 31, 1998.
SELECTED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
MARCH 31, -----------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- ------ ------ ------ ------ -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total amount of:
Interest bearing deposits in other banks $ 1,651 $ 1,638 $ 1,097 $ 3,003 $ 2,170 $ 4,021
Federal funds sold.................... 1,009 572 200 50 100 2,850
Investments available for sale........ 2,516 2,385 2,135 2,568 -- --
Investment held to maturity........... 2,500 2,845 4,099 3,499 6,770 3,363
Mortgage backed securities............ 2,254 2,348 3,140 4,062 4,559 5,086
Loans receivable, net................. 18,615 18,805 18,513 17,635 15,575 14,164
Assets................................ 30,205 30,233 30,988 32,038 30,141 30,546
Deposits.............................. 27,630 27,642 28,772 29,715 27,981 28,503
Stockholders' equity (1).............. 2,077 2,029 1,864 1,862 1,926 1,789
Book value per share...................... 27.59 28.15 26.96 26.93 27.85 25.88
</TABLE>
- -----------
(1) Consists of net conversion proceeds and substantially restricted retained
earnings both appropriated and unappropriated.
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................. $ 564 $ 566 $ 2,334 $ 2,402 $ 2,329 $ 2,083 $ 2,118
Interest expense................. 372 388 1,546 1,632 1,581 1,311 1,221
-------- --------- --------- --------- --------- --------- --------
Net interest income.............. 192 178 788 770 748 772 897
Provision for loan losses........ -- -- -- 24 77 -- 42
-------- --------- --------- --------- --------- --------- --------
Net interest income after provision
for loan losses.............. 192 178 788 746 671 772 855
Other income..................... 15 13 96 59 30 34 31
Non-interest expense (1)......... 147 136 634 794 761 563 563
Income tax provision (benefit)... 17 19 87 (17) (19) 86 124
Cumulative effect of a change in
accounting for income taxes... -- -- -- -- -- -- 25
-------- --------- --------- --------- --------- --------- --------
Net income (loss)................ $ 43 $ 36 $ 163 $ 28 $ (41) $ 157 $ 225
======== ========= ========= ========= ========= ========= ========
PER COMMON SHARE
Basic and diluted earnings
(loss) per share before
cumulative effect of a
change in accounting for
income taxes................ $ 0.58 $ 0.49 $ 2.29 $ 0.39 $ (0.58) $ 2.21 $ 2.80
Basic and diluted earnings per
share for cumulative effect
of a change in accounting
for income taxes........... -- -- -- -- -- -- 0.36
-------- --------- --------- --------- --------- --------- --------
Basic and diluted earnings
(loss) per share............ $ 0.58 $ 0.49 $ 2.29 $ 0.39 $ (0.58) $ 2.21 $ 3.16
======== ========= ========= ========= ========= ========= ========
Cash dividends paid (2).......... $ 0.10 $ 0.10 $ 0.30 $ 0.20 $ 0.40 $ 0.30 $ 0.30
</TABLE>
- -----------
(1) Increase for year ended December 31, 1995 is the result of accruing $200,256
to correct certain loan portfolio computational errors recently resolved.
(2) In 1998 and 1997, a 3% stock dividend was also paid.
(xi)
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED RATIOS
Return on Average Assets..... 0.57% 0.46% 0.53% 0.09% (0.13)% 0.52% 0.77%
Return on Average Equity..... 8.35 7.63 8.44 1.48 (2.19) 8.47 13.31
Equity to Assets............. 6.88 6.08 6.71 6.02 5.81 6.39 5.86
Dividend Pay-out Ratio....... 17.98 20.23 13.20 50.00 N/A 13.16 9.26
NUMBER OF:
Real estate loans outstanding 329 293 339 299 283 296 268
Savings accounts............. 2,579 2,631 2,575 2,602 2,701 2,528 2,530
Offices open (full service).. 1 1 1 1 1 1 1
</TABLE>
(xii)
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED)
PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following unaudited pro forma condensed combined balance sheet for
Cecil Bancorp, post-Merger, has been prepared based on the historical
consolidated balance sheets for Columbian and Cecil Bancorp as of March 31,
1998. This combined balance sheet gives effect to the Merger accounted for as a
pooling of interests, based on each share of Columbian Common Stock exchanged on
a tax-free basis for 1.7021 shares of Company Common Stock. The pro forma
condensed combined balance sheet should be read in conjunction with the
historical consolidated financial statements and notes thereto included
elsewhere herein or incorporated herein by reference. The pro forma balance
sheet is not necessarily indicative of the actual financial position that would
have occurred had the Merger been consummated March 31, 1998, or that may be
obtained in the future.
(xiii)
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------------------------------------------
PRO FORMA PRO FORMA
COLUMBIAN CECIL BANCORP ADJUSTMENTS COMBINED
--------- ------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and interest bearing cash............ $ 2,082 $ 4,826 $ -- $ 6,908
Federal funds sold........................ 1,009 -- -- 1,009
Investment securities
Securities held-to-maturity........... 2,500 3,008 -- 5,508
Securities available-for-sale......... 2,516 535 -- 3,051
Mortgage-backed securities
Securities held-to-maturity........... 2,254 378 -- 2,632
Securities available-for-sale......... -- 1,249 -- 1,249
Loans held for sale....................... -- 1,094 -- 1,094
Loans receivable, net..................... 18,615 53,962 -- 72,577
Real estate owned......................... 374 317 -- 691
Office properties, equipment and leasehold
improvements.......................... 342 642 -- 984
Stock in Federal Home Loan Bank
of Atlanta............................. 215 458 -- 673
Accrued interest receivable............... 211 434 -- 645
Mortgage servicing rights................. -- 103 -- 103
Prepaid expenses.......................... 3 59 -- 62
Other assets.............................. 84 7 -- 71
-------- --------- -------- ---------
TOTAL ASSETS.......................... $ 30,205 $ 67,072 $ -- $ 97,277
======== ========= ======== =========
LIABILITIES
Checks outstanding in excess of bank
balance............................. 80 -- -- 80
Savings deposits....................... 27,630 56,134 -- 83,764
Advance payments by borrowers for
property taxes and insurance......... 261 913 -- 1,174
Employee stock ownership debt.......... -- 270 -- 270
Other liabilities...................... 157 410 -- 567
Deferred taxes......................... -- 3 -- 3
Advances from Federal Home Loan Bank
of Atlanta........................... -- 1,750 -- 1,750
-------- --------- -------- ---------
TOTAL LIABILITIES.................... 28,128 59,480 -- 82,608
-------- --------- -------- ---------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value (Columbian)
$.01 par value (Cecil) (1).......... 75 5 (74) 6
Additional paid in capital............. 523 4,000 74 4,597
Employee stock ownership debt.......... -- (270) -- (270)
Deferred compensation - Management
Recognition Plan..................... -- (118) -- (118)
Retained earnings, substantially restricted 1,455 3,964 -- 5,419
Accumulated other comprehensive income. 24 11 -- 35
-------- --------- -------- ---------
TOTAL STOCKHOLDERS' EQUITY........... 2,077 7,592 -- 9,664
-------- --------- -------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........... $ 30,205 $ 67,072 $ -- $ 97,277
======== ========= ======== =========
</TABLE>
- --------
(1) The pro forma adjustments to Cecil Bancorp's capital stock and paid-in
capital accounts give effect to the issuance of 1.7021 shares of Company
Common Stock in the Merger in exchange for each outstanding share of
Columbian Common Stock. Represents the stated value of $.01 per share times
the 128,153 shares of Company Common Stock deemed issued subsequent to the
Merger. No consideration has been given in the pro forma amounts for cash
payments made on fractional shares.
(xiv)
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENTS OF EARNINGS
The following unaudited pro forma condensed combined statements of
earnings of the Cecil Bancorp Post-Merger have been prepared based upon the
historical results of operations of Cecil Bancorp and Columbian for each of the
three years ended December 31, 1997, 1996 and 1996 and for the three months
ended March 31, 1998 and 1997. The pro forma condensed statements of earnings
present the combined income and expense of Cecil Bancorp and Columbian and
Columbian assuming the companies had been merged as of the beginning of the
periods indicated. THE PRO FORMA RESULTS MAY NOT BE INDICATIVE OF THE RESULTS
THAT WOULD HAVE OCCURRED IF THE MERGER HAD OCCURRED AS OF THE BEGINNING OF THE
PERIODS INDICATED OR WHICH MAY BE OBTAINED IN THE FUTURE. THE PRO FORMA RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE HISTORICAL CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------
PRO FORMA COMBINED
COLUMBIAN CECIL BANCORP ADJUSTMENTS PRO FORMA
----------- ------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income........................... $ 564 $ 1,285 $ -- $ 1,849
Interest expense.......................... 372 640 -- 1,012
----------- --------- -------- ---------
Net interest income....................... 192 645 -- 837
Provision for loan losses................. -- 23 -- 23
----------- --------- -------- ---------
Net interest income after
provision for loan losses............. 192 622 -- 814
Other income.............................. 15 98 -- 113
Noninterest expenses...................... 147 476 -- 623
Income before income taxes................ 60 244 -- 304
Income taxes.............................. 17 84 -- 101
----------- --------- -------- ---------
Net income................................ $ 43 $ 160 $ -- $ 203
=========== ========= ======== =========
</TABLE>
- --------------
(a) Based on combined weighted average shares deemed outstanding at the
respective dates for Cecil Bancorp and Columbian, giving effect to the
1.7021 exchange ratio applied to Columbian's outstanding shares.
Computations are based on 570,735, 563,248, 560,016, 558,385 and 563,738
shares deemed outstanding for the three months ended March 31, 1998 and
1997, and the years ended December 31, 1997, 1996 and 1995. Diluted earnings
per share for Cecil Bancorp, post-Merger is not presented based on
materiality.
(xv)
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
--------------------------------------------------------------
PRO FORMA COMBINED
COLUMBIAN CECIL BANCORP ADJUSTMENTS PRO FORMA
----------- ------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income........................... $ 566 $ 1,190 $ -- $ 1,756
Interest expense.......................... 385 578 -- 966
----------- --------- -------- ---------
Net interest income....................... 178 612 -- 790
Provision for loan losses................. -- 10 -- 10
----------- --------- -------- ---------
Net interest income after
provision for loan losses............. 178 602 -- 780
Other income.............................. 13 71 -- 84
Noninterest expenses...................... 136 433 -- 569
Income before income taxes................ 55 240 -- 295
Income taxes.............................. 19 88 -- 107
----------- --------- -------- ---------
Net income................................ $ 36 $ 152 $ -- $ 188
=========== ========= ======== =========
</TABLE>
- --------------
(a) Based on combined weighted average shares deemed outstanding at the
respective dates for Cecil Bancorp and Columbian, giving effect to the
1.7021 exchange ratio applied to Columbian's outstanding shares.
Computations are based on 570,735, 563,248, 560,016, 558,385 and 563,738
shares deemed outstanding for the three months ended March 31, 1998 and
1997, and the years ended December 31, 1997, 1996 and 1995. Diluted
earnings per share for Cecil Bancorp, post-Merger is not presented based on
materiality.
(xvi)
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------
PRO FORMA COMBINED
COLUMBIAN CECIL BANCORP ADJUSTMENTS PRO FORMA
----------- ------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income........................... $ 2,334 $ 5,018 $ -- $ 7,352
Interest expense.......................... 1,546 2,438 -- 3,984
----------- --------- -------- ---------
Net interest income....................... 788 2,580 -- 3,368
Provision for loan losses................. -- 87 -- 87
----------- --------- -------- ---------
Net interest income after
provision for loan losses............. 788 2,493 -- 3,281
Other income.............................. 96 352 -- 448
Noninterest expenses...................... 634 1,842 -- 2,476
Income before income taxes................ 250 1,003 -- 1,253
Income taxes.............................. 87 437 -- 524
----------- --------- -------- ---------
Net income................................ $ 163 $ 566 $ -- $ 729
=========== ========= ======== =========
</TABLE>
- --------------
(a) Based on combined weighted average shares deemed outstanding at the
respective dates for Cecil Bancorp and Columbian, giving effect to the
1.7021 exchange ratio applied to Columbian's outstanding shares.
Computations are based on 570,735, 563,248, 560,016, 558,385 and 563,738
shares deemed outstanding for the three months ended March 31, 1998 and
1997, and the years ended December 31, 1997, 1996 and 1995. Diluted
earnings per share for Cecil Bancorp, post-Merger is not presented based on
materiality.
(xvii)
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------
PRO FORMA COMBINED
COLUMBIAN CECIL BANCORP ADJUSTMENTS PRO FORMA
----------- ------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income........................... $ 2,402 $ 4,655 $ -- $ 7,057
Interest expense.......................... 1,632 2,236 -- 3,868
----------- --------- -------- ---------
Net interest income....................... 770 2,419 -- 3,189
Provision for loan losses................. 24 103 -- 127
----------- --------- -------- ---------
Net interest income after
provision for loan losses............. 746 2,316 -- 3,062
Other income.............................. 59 316 -- 375
Noninterest expenses...................... 794 2,015 -- 2,809
Income before income taxes................ 11 617 -- 628
Income taxes.............................. (17) 302 -- 285
----------- --------- -------- ---------
Net income................................ $ 28 $ 315 $ -- $ 343
=========== ========= ======== =========
</TABLE>
- --------------
(a) Based on combined weighted average shares deemed outstanding at the
respective dates for Cecil Bancorp and Columbian, giving effect to the
1.7021 exchange ratio applied to Columbian's outstanding shares.
Computations are based on 570,735, 563,248, 560,016, 558,385 and 563,738
shares deemed outstanding for the three months ended March 31, 1998 and
1997, and the years ended December 31, 1997, 1996 and 1995. Diluted earnings
per share for Cecil Bancorp, post-Merger is not presented based on
materiality.
(xviii)
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------
PRO FORMA COMBINED
COLUMBIAN CECIL BANCORP ADJUSTMENTS PRO FORMA
----------- ------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income........................... $ 2,329 $ 3,975 $ -- $ 6,304
Interest expense.......................... 1,581 1,867 -- 3,448
----------- --------- -------- ---------
Net interest income....................... 748 2,108 -- 2,856
Provision for loan losses................. 77 35 -- 112
----------- --------- -------- ---------
Net interest income after
provision for loan losses............. 671 2,073 -- 2,744
Other income.............................. 30 234 -- 264
Noninterest expenses...................... 761 794 -- 2,555
Income before income taxes................ (60) 513 -- 453
Income taxes.............................. (19) 196 -- 177
----------- --------- -------- ---------
Net income................................ $ (41) $ 317 $ -- $ 276
=========== ========= ======== =========
</TABLE>
- --------------
(a) Based on combined weighted average shares deemed outstanding at the
respective dates for Cecil Bancorp and Columbian, giving effect to the
1.7021 exchange ratio applied to Columbian's outstanding shares.
Computations are based on 57-,735, 563,248, 560,016, 558,385 and 563,738
shares deemed outstanding for the three months ended March 31, 1998 and
1997, and the years ended December 31, 1997, 1996 and 1995. Diluted
earnings per share for Cecil Bancorp, post-Merger is not presented based on
materiality.
(xix)
<PAGE>
UNAUDITED PRO FORMA COMBINED PER SHARE DATA
The following table presents selected per share data for the Company
and Columbian on a historical and pro forma combined basis as if the Merger had
been effective as of the dates or the beginning of the periods indicated.
The Merger is expected to be accounted for as a pooling, and pro forma
data is derived in accordance with such method. Such pro forma equivalent per
share amounts as to net income or loss from continuing operations, dividends and
book value are computed by multiplying the pro forma combined amounts by an
Exchange Ratio of 1.7021. Such Exchange Ratio is based on the closing price per
share of Company Common Stock on _________, 1998 of $______, and assumes that a
total of 75,291 shares of Columbian Common Stock are outstanding at the
Effective Date.
Historical information for the Company and Columbian is derived from
the respective consolidated financial statements incorporated by reference
herein or included elsewhere herein. The pro forma results might not be
indicative of the results that would have occurred if the Merger had occurred at
the beginning of the periods indicated or which may be obtained in the future.
The information below should be read in conjunction with such historical
consolidated financial statements of the Company and the financial statements of
Columbian.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income per common share:
Cecil Bancorp historical............. $ 0.36 $ 0.35 $ 1.29 $ 0.72 $ 0.72
Columbian historical................. 0.58 0.49 2.29 0.39 (0.58)
Pro forma combined (1)............... 0.36 0.33 1.30 0.61 0.49
Cecil Bancorp pro forma equivalent 0.36 0.33 1.30 0.61 0.49
Dividends declared per common share:
Cecil Bancorp historical............. 0.10 0.10 0.63 0.56 0.56
Columbian historical................. 0.10 0.10 0.30 0.20 0.40
Pro forma combined (1)............... 0.09 0.10 0.52 0.47 0.48
Cecil Bancorp forma equivalent....... 0.09 0.10 0.52 0.47 0.48
</TABLE>
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
1998 1997
-------------- ------------
<S> <C> <C>
Book value per common share:
Cecil Bancorp historical.......................... $16.15 $ 15.92
Columbian historical.............................. 27.59 28.15
Pro forma combined (1)............................ 16.16 16.04
Cecil Bancorp pro forma equivalent................ 16.16 16.04
</TABLE>
- -------------
(1) Per share data presented in the above table is based upon an Exchange Ratio
of 1.7021 and the issuance of 128,153 and 122,687 shares of Company Common
Stock for the three months ended March 31, 1998 and the year ended December
31, 1997, respectively.
(xx)
<PAGE>
INFORMATION CONCERNING THE SPECIAL MEETING
GENERAL
This Prospectus/Proxy Statement is being furnished to the stockholders
of Columbian as part of the solicitation of proxies by its Board of Directors
from holders of the outstanding shares of Columbian Common Stock for use at the
Special Meeting to be held on __________, 1998, and any adjournments thereof.
This Prospectus/Proxy Statement, and the accompanying proxy card, are first
being mailed to stockholders of Columbian on or about _________, 1998.
The principal purpose of the Special Meeting is to consider and vote
upon the approval of the Merger pursuant to which Columbian will become a
subsidiary of Cecil Bancorp through a merger with an interim subsidiary of Cecil
Bancorp, and the Merger Agreement by and among the Company and Columbian, which
sets forth the terms and conditions of the Merger. See "The Merger -- Conversion
of Columbian Common Stock." The Merger is subject to certain conditions,
including regulatory approval of the OTS.
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
The Board of Directors of Columbian has fixed the close of business on
_________, 1998 as the record date (the "Record Date") for the determination of
the Columbian stockholders entitled to notice of and to vote at the Special
Meeting. Accordingly, only holders of record of shares of Columbian Common Stock
at the close of business on such date will be entitled to vote at the Special
Meeting, with each such share entitling its owner to one vote on all matters
properly presented at the Special Meeting. On the Record Date, there were
approximately ___ holders of record of the _________ shares of Columbian Common
Stock then outstanding. The presence, in person or by proxy, of a majority of
the total number of outstanding shares of Columbian Common Stock entitled to
vote at the Special Meeting is necessary to constitute a quorum at the Special
Meeting. Abstentions and broker non-votes will be treated as shares present at
the Special Meeting for purposes of determining the presence of a quorum. The
affirmative vote of at least two-thirds of the issued and outstanding shares of
Columbian Common Stock is required to approve the Merger and the Merger
Agreement. Each of the directors of Columbian has entered into a Voting
Agreement with the Company in which they have agreed to vote all of the
__________ shares of outstanding Columbian Common Stock beneficially owned by
them (in their individual capacities) as of the Record Date FOR approval of the
Merger and the Merger Agreement. See also "The Merger -- Voting Agreement."
If the accompanying proxy card is properly executed and returned to
Columbian in time to be voted at the Special Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
EXECUTED BUT UNMARKED PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER AND
THE MERGER AGREEMENT. Except for procedural matters incident to the conduct of
the Special Meeting, the Board of Directors of Columbian does not know of any
matters other than those described in the Notice of Special Meeting that are to
come before the Special Meeting. If any other matters are properly brought
before the Special Meeting, the persons named in the Columbian proxy will vote
the shares represented by such proxy on such matters as determined by a majority
of Columbian's Board of Directors. Abstentions and broker non-votes will not be
voted and therefore, with respect to the proposal to approve the Merger and the
Merger Agreement, abstentions and broker non-votes will have the same effect as
votes against approval of the proposal.
1
<PAGE>
The presence of a stockholder at the Special Meeting will not
automatically revoke such stockholder's proxy. A stockholder may, however,
revoke a proxy at any time prior to its exercise by filing a written notice of
revocation with, or by delivering a duly executed proxy bearing a later date to,
the Corporate Secretary of Columbian at its headquarters address or by attending
the Special Meeting and voting in person.
The cost of soliciting proxies for the Special Meeting will be borne by
Columbian. In addition to use of the postal system, proxies may be solicited
personally or by telephone or telegraph by directors, officers and employees of
Columbian, who will not be specially compensated for such activities.
THE MERGER
The following information with respect to the Merger, insofar as it
relates to matters contained in the Merger Agreement, including the exhibits
thereto, is qualified in its entirety by reference to the full text of such
agreement, which is attached as Annex A to this Prospectus/Proxy Statement and
is incorporated by reference herein.
GENERAL
The Merger Agreement provides for the acquisition of Columbian by Cecil
Bancorp as follows: (1) Cecil Bancorp will organize Interim as a wholly owned
interim federal savings bank (2) Interim will merge with and into Columbian with
Columbian surviving as a wholly-owned subsidiary of Cecil Bancorp, and each
outstanding share of Columbian's common stock will be automatically converted
into the right to receive shares of Company Common Stock (and cash in lieu of
fractional shares), based upon an exchange ratio as more fully described below
and (3) the issued and outstanding shares of Interim common stock will be
converted into an equal number of shares of Columbian Common Stock, all of which
will be owned by Cecil Bancorp. For additional information regarding the Merger,
see the Merger Agreement, which is attached as Annex A hereto.
BACKGROUND OF THE MERGER
For more than 105 years, Columbian has operated as a community oriented
savings institution, primarily serving the banking needs of the residents of
Harford County in Northern Maryland. While Columbian's emphasis on accepting
deposits from the general public and originating single-family mortgage loans
has remained relatively constant over the years, the financial markets have
changed considerably, especially due to the significant consolidation among
financial institutions, both in Columbian's market area and nationwide. The
Board of Directors has also recognized that Columbian would need to make
significant investments in technology and facilities in order to continue to
serve the growing Harford County market.
These factors have caused the Board of Directors of Columbian to
evaluate, from time to time, the relative merits of an affiliation with another
financial institution versus continuing as an independent entity, as well as
other strategies, with the goal of maximizing stockholder value, while
maintaining its commitment to serving the residents of its market area. In
January of 1998, the Planning Committee of Columbian discussed, as one
possibility, a strategic merger with another small community bank as a means of
accomplishing these goals. Discussions focused on the need to maximize the
return on stockholders' equity in order to increase the price of Columbian's
stock, the growth potential of Columbian as an independent entity, bank
personnel issues and possible branch office expansion. The possibility of
operating as a subsidiary of a larger financial institution was also discussed.
A determination by the Planning Committee was made to engage RP Financial to
assist Columbian in evaluating its options. In early March of 1998, RP
Financial's engagement was approved by the full Board of Directors in order to
assist the Board, and to determine a fair range of value for Columbian Common
Stock if Columbian were to remain independent, and alternatively, in a sale of
control scenario.
2
<PAGE>
Due to their overlapping market areas, Columbian President Donald F.
Angert and Cecil Bancorp President Mary B. Halsey had, over the years,
informally discussed the possibility of an affiliation between the institutions.
The similarities in the community orientation of both institutions and the ways
in which their market areas complemented each other made such a combination
appear attractive. For Columbian stockholders, a business combination with Cecil
Bancorp also would: (i) provide ownership in a larger financial institution with
greater human resources and products and services; (ii) expand the market area
served; (iii) enhance the combined institution's ability to compete; (iv)
provide additional resources to direct to the potential new branch office
facility in Havre de Grace, and; (v) provide for ownership in stock that is more
liquid and returns a higher dividend rate than the Columbian Common Stock. In
early April of 1998, Columbian, through RP Financial, received a verbal
indication of interest from Cecil Bancorp suggesting a share exchange
transaction in which Columbian stockholders would receive approximately $40.00
per share in Company Common Stock.
Approximately one week thereafter, RP Financial met with Columbian's
Board of Directors and addressed Columbian's fair market value as an independent
institution and in a sale of control scenario. RP Financial concluded the price
indicated by Cecil Bancorp was consistent with the fair market value of
Columbian Common Stock in a merger scenario. Further discussion of Columbian's
options resulted in the Board authorizing RP Financial to request additional
information from Cecil Bancorp regarding the potential terms of a combination
between the institutions.
Approximately one week thereafter, Columbian, through RP Financial,
received a written non-binding indication of interest which provided additional
details of the proposed combination. In late April, Columbian authorized RP
Financial and legal counsel to negotiate the terms of a definitive agreement
with Cecil Bancorp. During early May, this negotiation process continued between
representatives of Columbian and representatives of Cecil Bancorp.
On May 26, 1998, Columbian's Board of Directors met with legal counsel
to review and discuss the non-financial terms of the Merger Agreement. On May
27, 1998, Columbian's Board of Directors met with RP Financial to review and
discuss the contents of the Merger Agreement from a financial perspective. RP
Financial also provided the Board of Columbian with its written opinion that the
Merger Consideration to be received by Columbian was fair from a financial point
of view to Columbian's stockholders. On May 29, 1998, the Merger Agreement was
executed by Columbian and Cecil Bancorp.
REASONS FOR THE MERGER AND RECOMMENDATIONS OF THE COLUMBIAN BOARD OF DIRECTORS
The Board of Directors of Columbian believes that the terms of the
Merger Agreement are fair to, and in the best interests of, Columbian and its
stockholders. In addition, the Board of Directors of Columbian, by unanimous
vote, approved the Merger Agreement and the transaction contemplated thereby and
recommends that the stockholders of Columbian vote for approval and adoption of
the Merger Agreement and the transaction contemplated thereby.
In considering the terms and conditions of the Merger Agreement, the
Board of Directors of Columbian considered a number of factors. It did not
assign any relative or specific weights to the factors considered. The material
factors considered were:
The Financial Terms and Structure of the Merger. The Board of
-----------------------------------------------
Directors of Columbian is of the view that, based on historical and
anticipated trading ranges for Company Common Stock, the value of the
consideration to be received by the stockholders of Columbian
represents a fair multiple of Columbian per share book value and
earnings. The Board of Directors of Columbian believes that the Merger
provides holders of the Columbian Common Stock with the opportunity to
receive a premium over the prices per share of Columbian Common Stock
at which individual purchases have occurred in the past and will enable
them to participate as the Company stockholders, on a tax-deferred
basis, in the expanded opportunities for growth and profitability made
possible by the Merger. Additionally, the Board of Directors recognizes
that the shares of Company Common Stock provide a somewhat more liquid
investment as compared to shares of Columbian
3
<PAGE>
Common Stock. The Board of Directors of Columbian also considered that
the Merger will qualify as a tax- free organization under the Code.
See " -- Federal Income Tax Consequences."
The Non-Financial Terms of the Merger. The Board of Directors
-------------------------------------
of Columbian considered the social and economic effect on the
employees, depositors and customers of, and other dealings with, Cecil
Bancorp and Cecil Federal, and on the communities in which Cecil
Federal is located or operates. The Board of Directors of Columbian
believes that the Merger and the resulting structure whereby Columbian
will remain a separate subsidiary of Cecil Bancorp will result in a
combined entity that is (i) committed to serving the banking and other
financial needs of Columbian's depositors, employees, customers and
communities, (ii) capable of competing relatively more effectively with
larger financial institutions that have exerted increasing competitive
pressures, (iii) well-capitalized, and (iv) emphasizes the local
orientation that Columbian has exhibited over the last 105 years.
Columbian's Board of Directors then concluded that the Company
including Cecil Federal and Columbian would be an excellent successor
to Columbian's existing owners.
THE COLUMBIAN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
MERGER AGREEMENT AND THE MERGER BE ADOPTED AND APPROVED BY ALL
STOCKHOLDERS.
OPINION OF FINANCIAL ADVISOR
The Columbian Board of Directors retained RP Financial in March 1998 as
its financial advisor, which included negotiating financial terms of the Merger
with Cecil Bancorp and rendering its opinion with respect to the Merger
Consideration from a financial point of view to Columbian stockholders in the
event Columbian entered into an agreement to be acquired. In requesting RP
Financial's advice and opinion, the Columbian Board did not give any special
instructions to RP Financial, nor did it impose any limitations upon the scope
of the investigation that RP Financial might wish to conduct to enable it to
give its opinion. RP Financial has delivered to Columbian its written opinion,
dated May 27, 1998, and its updated opinion as of August __, 1998, to the effect
that, based upon and subject to the matters set forth therein, as of the date
thereof, the Merger Consideration is fair to the holders of Columbian Common
Stock from a financial point of view. The opinion of RP Financial is directed
toward the consideration to be received by Columbian stockholders and does not
constitute a recommendation to any Columbian stockholder to vote in favor of
approval of the Merger Agreement. A copy of the RP Financial opinion is set
forth as Annex E to this Prospectus/Proxy Statement and should be read in its
entirety by stockholders of Columbian. RP Financial has consented to the
inclusion and description of its written opinion in this Prospectus/Proxy
Statement.
RP Financial was selected by Columbian to act as its financial advisor
because of RP Financial's expertise in the valuation of businesses and their
securities for a variety of purposes, including its expertise in connection with
mergers and acquisitions of savings and loan associations, savings banks,
savings and loan holding companies, commercial banks and bank holding companies.
In recent years, RP Financial has provided certain planning and valuation work
for Columbian. RP Financial also previously performed the annual valuation for
Cecil Bancorp's employee stock ownership plan ("ESOP") since the ESOP was
formed. RP Financial was engaged by Columbian on March 9, 1998, pursuant to the
terms set forth in a mutually executed engagement letter ("Engagement Letter").
RP Financial estimates that it will receive from Columbian total professional
fees of approximately $20,000, of which $15,000 has been paid to date, plus
reimbursement of certain out-of-pocket expenses, for its services in connection
with the Merger. In addition, Columbian has agreed to indemnify and hold
harmless to the fullest extent permitted by law, RP Financial, any affiliates of
RP Financial, and the respective directors, officers, agents and employees of RP
Financial or their successors and assigns who act for or on behalf of RP
Financial in connection with the services called for under the Engagement Letter
from and against any and all losses, claims, damages and liabilities, joint or
several, that RP Financial may become obligated to pay, to which RP may become
subject or for which RP Financial may become liable, in connection with any of
the services rendered pursuant to or matters that are the subject or arise of
the services rendered pursuant to the Engagement Letter, provided that Columbian
will be under no obligation to indemnify RP Financial hereunder if a court of
competent jurisdiction determines by a final nonappealable judgment that RP
Financial
4
<PAGE>
was negligent or acted in bad faith with respect to any actions or omissions of
RP Financial related to a matter for which indemnification is sought hereunder.
Any time devoted by employees of RP Financial to situations for which
indemnification is provided hereunder, shall be an indemnifiable cost payable by
Columbian at the normal hourly professional rate chargeable by such employee.
Columbian shall pay for or reimburse the reasonable expenses, including
attorney's fees, incurred by RP Financial in advance of the final disposition of
any proceeding within thirty days of the receipt of such request if RP Financial
furnishes to Columbian; (1) a written statement of RP Financial's good faith
belief that it is entitled to indemnification hereunder; and (2) a written
undertaking to repay the advance if it ultimately is determined in a final
adjudication of such proceeding that it or he is not entitled to such
indemnification.
In rendering its fairness opinion, RP Financial reviewed and analyzed
the following material, the most recent of which includes: (i) the Merger
Agreement including exhibits; (ii) financial and other information for
Columbian, all with regard to balance and off-balance sheet composition,
profitability, interest rates, volumes, maturities, trends, credit risk,
interest rate risk, liquidity risk and operations including (a) unaudited
financial statements for the fiscal years ended December 31, 1995 through 1997;
(b) stockholder, regulatory and internal financial and other reports through
March 31, 1998, (c) the most recent proxy statement for Columbian and (d)
Columbian's management and Board comments regarding past and current business,
operations, financial condition and future prospects; and (iii) financial and
other information for Cecil Bancorp including (a) audited financial statements
for the fiscal years ended December 31, 1996 and 1997, incorporated in Cecil
Bancorp's Annual Report to Stockholders, (b) regulatory and internal financial
and other reports through March 31, 1998, (c) Cecil Bancorp's Registration
Statement on Form S-4 as filed with the Commission on July 1, 1998; and (d)
Cecil Bancorp's management comments regarding past and current business,
operations, financial condition and future prospects.
In rendering its opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning
Columbian and Cecil Bancorp as furnished by the respective institutions to RP
Financial for review for purposes of its opinion, as well as publicly-available
information regarding other financial institutions and economic and demographic
data. Columbian and Cecil Bancorp did not restrict RP Financial as to the
material it was permitted to review. RP Financial did not perform or obtain any
independent appraisals or evaluations of the assets and liabilities and
potential and/or contingent liabilities of Columbian or Cecil Bancorp.
RP Financial expresses no opinion on matters of a legal, regulatory,
tax or accounting nature or the ability of the Merger as set forth in the Merger
Agreement to be consummated. In rendering its opinion, RP Financial assumed that
in the course of obtaining the necessary regulatory and governmental approvals
for the Merger, no restriction will be imposed on Cecil Bancorp that would have
a material adverse effect on the ability of the Merger to be consummated as set
forth in the Merger Agreement.
RP Financial's opinion was based solely upon the information available
to it and the economic, market and other circumstances as they existed as of May
27, 1998 and August __, 1998; events occurring after the most recent date could
materially affect the assumptions used in preparing the opinion.
In connection with rendering its opinion dated May 27, 1998 and updated
as of August __, 1998, RP Financial performed a variety of financial analyses
that are summarized below. Although the evaluation of the fairness, from a
financial point of view, of the Merger Consideration was to some extent
subjective based on the experience and judgment of RP Financial, and not merely
the result of mathematical analyses of financial data, RP Financial relied, in
part, on the financial analyses summarized below in its determinations. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analyses or summary description. RP Financial believes
its analyses must be considered as a whole and that selecting portions of such
analyses and factors considered by RP Financial without considering all such
analyses and factors could create an incomplete view of the process underlying
RP Financial's opinion. In its analyses, RP Financial took into account its
assessment of general business, market, monetary, financial and economic
conditions, industry performance and other matters, many of which are beyond the
control of Columbian and Cecil Bancorp, as well as RP Financial's experience in
securities valuation, its knowledge of financial institutions and its experience
in similar transactions. With respect to the comparable transactions analysis
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described below, no public company utilized as a comparison is identical to
Columbian and such analyses necessarily involve complex considerations and
judgments concerning the differences in financial and operating characteristics
of the companies and other factors that could affect the acquisition values of
the companies concerned. The analyses were prepared solely for purposes of RP
Financial providing its opinion as to the fairness of the Merger Consideration
and do not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Any estimates contained in RP
Financial's analyses are not necessarily indicative of future results of values,
which may be significantly more or less favorable than such estimates. None of
the analyses performed by RP Financial was assigned a greater significance by RP
Financial than any other.
Comparable Transaction Analysis. RP Financial compared the Merger on
the basis of stated multiples of reported earnings, tangible book value, assets
and core deposit premium of Columbian implied by the Merger Consideration to be
paid to the holders of Columbian Common Stock with the same ratios in pending
and completed acquisitions of: (a) Maryland publicly-traded and non-publicly
traded savings and loan associations and savings and loan holding companies, and
(b) MidAtlantic Region publicly-traded and non-publicly traded savings and loan
associations and savings and loan holding companies.
The Maryland acquisitions pending or completed from 1996 to date
included ____ institutions with assets up to $_____ billion. The acquisition
pricing ratios of this group were: (i) price/earnings ratios ranging from __.__
to __.__ times, with a median of __.__ times; (ii) price/tangible book ratios
ranging from _____ to _____ percent, with a median of _____ percent; (iii)
price/assets ratios ranging from __.__ to __.__ percent, with a median of __.__
percent; and (iv) core deposit premiums of __.__ to __.__ percent, with a median
of __.__ percent.
The MidAtlantic Regional acquisitions pending or completed from 1997 to
date included _____ institutions with assets up to $____ billion. The
acquisition pricing ratios of this group were: (i) price/earnings ratios ranging
from _____ to ______ times, with a median of ______ times; (ii) price/tangible
book ratios ranging from _____ to _______ percent, with a median of ______
percent; (iii) price/assets ratios ranging from ______ to _______ percent, with
a median of ______ percent; and (iv) core deposit premiums of ______ to _______
percent, with a median of _____ percent.
In comparison to both groups, Columbian was generally smaller and
maintained lower levels of capitalization and profitability, both in terms of
average assets and average equity. The common stock of Columbian maintained a
lower level of liquidity to these groups on average. Additionally, Columbian
operates a single office operation with limited products and services, compared
to multi-branch operations and broader products and services of the two groups,
on average. Columbian's acquisition pricing ratios for price/earnings,
price/tangible book, price/assets and core deposit premium falls within the
range of these two groups assuming the Merger Consideration was equivalent to
the average of the closing price on the five most recent days that Cecil Bancorp
stock traded through August __, 1998 ($_______). Specifically, the Merger
Consideration of $_______, based on this average closing price indicated the
following pricing ratios for shares of Columbian Common Stock, based on
financial statements as of or for the 12 months ended March 31, 1998: _______
times core earnings; ____ percent of reported tangible book value; _____ percent
of assets; and _______ percent premium on core deposits.
No company or transaction used in this composite is identical to
Columbian or the Merger. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies involved and other factors that could affect the public trading
values of the securities of the company or companies to which they are being
compared.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis,
RP Financial estimated the present value of future dividends based on
Columbian's current payout ratio and potential growth in the payout ratio and
the present value of the terminal value at the end of the fifth year under
alternative strategies, reflecting a combination of a multiple to tangible book
value and a multiple to earnings. Alternative strategies analyzed included a
base case scenario, an increasing dividend scenario, a special dividend
scenario, and increased earnings scenario and an aggressive
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growth scenario. The price/tangible book value and price/earnings multiples were
derived from the comparable transaction analysis discussed above. The cash flows
were then discounted to present values based on a discount rate selected after
examining the earnings capitalization rate of publicly-traded banks, the
Treasury yield curve (i.e. the risk-fee rate) and perceived investment risks in
the Columbian Common Stock. The Merger Consideration exceeds the upper end of
the range of discounted cash flows. For example, the present values derived from
the alternative strategies incorporating a 10 percent discount rate and a
terminal value based on the average of a price/tangible book value multiple of
1.70 times and an earnings multiple of 20 times, range from $______ to $______.
Pro Forma Impact Analysis. RP Financial's analysis considered the pro
forma impact of the Merger on Cecil Bancorp, including financial condition,
operations, size, market area served, market capitalization of the stock and
liquidity. The increased size, market capitalization and market area served is
expected to position Cecil Bancorp as a more competitive institution. The
increased number of shares as a result of the Merger is expected to favorably
influence the liquidity of Company Common Stock. The Merger is estimated to be
dilutive to Cecil Bancorp's pro forma tangible book value per share and dilutive
to reported earnings per share before incorporating anticipated merger synergies
and leveraging pro forma tangible capital.
As described above, RP Financial's opinion and presentation to the
Columbian Board was one of many factors taken into consideration by the
Columbian Board in making its determination to approve the Merger Agreement.
Although the foregoing summary describes the material components of the analyses
provided by RP Financial as of May 27, 1998 and updated on August __, 1998, in
connection with its opinion as of those dates, it does not purport to be a
complete description of all the analyses performed by RP Financial and is
qualified by reference to the written opinion of RP Financial set forth as Annex
E hereto, which Columbian's stockholders are urged to read in its entirety.
CONVERSION OF COLUMBIAN COMMON STOCK
Exchange Ratio. Each share of Columbian Common Stock issued and
outstanding at the Effective Date (other than shares owned or held by Columbian
or the Company (other than in a fiduciary capacity or in any 401(k) plan of
Columbian or Dissenting Shares)) will be converted into and represent solely the
right to receive a number of shares of Company Common Stock determined pursuant
to the Exchange Ratio based upon the Cecil Trading Price. The Cecil Trading
Price will be determined by the average of the closing price of a share of
Company Common Stock (as reported by "Bloomberg Business News") for the last
five days in which Company Common Stock was traded prior to OTS approval of the
Merger, and the Exchange Ratio will therefore be set as follows: (i) if the
Cecil Trading Price is more than $29.375, the Exchange Ratio will be 1.5645;
(ii) if the Cecil Trading Price is more than $27.00 and equal to or less than
$29.375, the Exchange Ratio will be determined by dividing $45.96 by the Cecil
Trading Price, and will be between 1.5645 and 1.7021; (iii) if the Cecil Trading
Price is equal to or more than $20.00 and equal to or less than $27.00, the
Exchange Ratio will be 1.7021; and (iv) if the Cecil Trading Price is less than
$20.00, the Exchange Ratio will be determined by dividing $34.04 by the Cecil
Trading Price. It is currently anticipated that a maximum of _______ shares of
Columbian Common Stock will be outstanding at the Effective Date. Based on the
closing price per share of Company Common Stock on _________, 1998, of $______,
each share of Columbian Common Stock would be exchanged for _______ shares of
Company Common Stock. The actual number of shares to be received for each share
of Columbian Common Stock at the Effective Date may be different from this
amount depending on the Cecil Trading Price of Company Common Stock, as
described above. In all cases, cash will be paid in lieu of fractional shares.
No Fractional Shares. No fractional shares of Company Common Stock will
be issued in the Merger. Instead, cash will be paid in lieu of any fractional
share interests of Company Common Stock resulting from the Merger. No dividend
or distribution with respect to Company Common Stock will be payable on or with
respect to any fractional share interests, and no fractional share interest will
entitle the owner thereof to vote or to any other rights of a stockholder of the
Company. The applicable cash value of each fractional share interest will be
equal to the product of such fraction multiplied by the Cecil Trading Price.
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Exchange of Columbian Stock Certificates. Prior to the Effective Date,
the Company will appoint the Exchange Agent to effect the exchange of stock
certificates in connection with the Merger. As soon as practicable after the
Effective Date, the Exchange Agent will send a notice and transmittal form to
each Columbian stockholder of record at the Effective Date whose Columbian
Common Stock has been converted into Company Common Stock, advising such
stockholder of the effectiveness of the Merger and the procedure for
surrendering to the Exchange Agent outstanding certificates formerly evidencing
Columbian Common Stock in exchange for new certificates of Company Common Stock
and for cash in lieu of any fractional interest. Promptly following receipt of
such notice and transmittal form, holders of Columbian Common Stock certificates
should surrender their certificates in accordance with the specified procedures.
Upon surrender, each Columbian Common Stock certificate will be canceled.
Until surrendered, certificates that, prior to the Effective Date,
represented outstanding shares of Columbian Common Stock will be deemed for all
corporate purposes to evidence the right to receive cash in lieu of any
fractional interest and the ownership of the number of whole shares of Company
Common Stock into which such shares of Columbian Common Stock have been
converted. Until such certificates are so surrendered, no dividend or
distribution payable to holders of Company Common Stock as of any record date
subsequent to the Effective Date will be paid to the holders of such
certificates. However, upon surrender of such certificates, there will be paid
to the record holder of the certificates of Company Common Stock issued in
exchange therefor the amount of dividends or distribution that theretofore have
become payable with respect to such shares of Company Common Stock along with
the amount of cash, if any, payable to the holder in lieu of fractional shares.
No interest will be payable with respect to such dividends or distribution or
cash paid in lieu of fractional shares.
If any certificate for shares of Company Common Stock is to be issued
in a name other than the name in which the surrendered certificate is
registered, it will be a condition of issuance that the certificate so
surrendered is properly endorsed and otherwise in proper form for transfer and
that the person requesting the transfer of such certificate either pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance of
the certificate in a name other than the registered holder of the certificate
surrendered, or establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not payable.
HOLDERS OF COLUMBIAN COMMON STOCK SHOULD NOT SURRENDER THEIR
CERTIFICATES UNTIL THEY RECEIVE WRITTEN INSTRUCTIONS FROM THE EXCHANGE AGENT.
Any shares of Columbian Common Stock owned or held by Columbian or the
Company or any of its subsidiaries (other than in a fiduciary capacity or in any
401(k) plan of Columbian) at the Effective Date will cease to exist, and the
certificates for such shares will be canceled.
TREATMENT OF COLUMBIAN STOCK OPTIONS
After the Effective Date, each option outstanding under Columbian's
option plan shall continue outstanding as an option to purchase, in place of the
purchase of each share of Columbian Common Stock, the number of shares of
Company Common Stock that would have been received by the optionee in the Merger
had the option been exercised in full (without regard to any limitations
contained therein on exercise) for shares of Columbian Common Stock immediately
prior to the Merger upon the same terms and conditions under the relevant option
as were applicable immediately prior to the Effective Date, except that the
exercise price of each such option shall be adjusted to equal the exercise price
which existed under the terms of such option prior to the Effective Date divided
by the Exchange Ratio.
DISSENTERS' RIGHTS OF APPRAISAL
Federal regulations entitle a stockholder who does not vote for the
Merger to demand payment by Columbian of the fair or appraised value for his
shares. A dissenting stockholder must deliver to Donald F. Angert, President,
Columbian Bank, a Federal Savings Bank, 303-307 St. John Street, Havre de Grace,
Maryland 21078, before voting on the Merger, written notice identifying himself
and stating his intention thereby to demand appraisal of and payment
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for his shares. Such written notice must be separate from and in addition to any
proxy or vote against the Merger. A proxy or vote against the Merger does not by
itself constitute a demand for appraisal. In addition to making written notice
of their demand appraisal, the stockholder must not vote in favor of the Merger.
Stockholders who return executed but unmarked proxies will be deemed to have
voted in favor of the Merger. Stockholders who abstain from voting on the Merger
will not be deemed to have voted in favor of the Merger.
Provided that such stockholder does not vote in favor of the Merger (or
return an executed but unmarked proxy), and assuming the holders of the
requisite number of shares approve the Merger and, then, within 10 days after
the Effective Date, the Company shall (i) notify each stockholder entitled to
such notice of the Effective Date, (ii) offer to pay to each such stockholder a
specified price deemed by the Company to be the fair value for his shares, and
(iii) remind each dissenting stockholder that, within 60 days after the
Effective Date, the stockholder must either agree with the Company on the fair
value of his shares or file a petition with the OTS demanding determination of
the fair market value of the shares, or the stockholder shall be deemed to have
accepted the terms of the Merger. If within 60 days of the Effective Date, the
fair value is agreed upon between the Company and a stockholder who is entitled
to payment, such payment shall be made within 90 days of the Effective Date.
Within 60 days of the Effective Date, each stockholder demanding appraisal and
payment must, as a condition to exercise of his appraisal rights, submit to the
Company his certificates of stock for placement of a notation thereon regarding
the stockholder's demand of appraisal and payment. At any time within 60 days
after the Effective Date, any stockholder shall have the right to withdraw his
demand for appraisal and to accept the terms of the Merger.
In the event that a fair value cannot be determined by the Company and
a stockholder demanding appraisal and payment, an appraisal will be determined
by the OTS, which shall direct payment by the Company in accordance with such
appraised value upon surrender of the stockholder's stock certificate. The
appraised value determined by the OTS may be more or less than the appraised
value determined by the Company.
The OTS has the right to apportion among all or some of the parties any
expenses of any proceeding to demand the fair or appraised value of shares as it
deems equitable. A copy of the governing federal regulation is attached hereto
as Annex B and incorporated herein by reference.
FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE PROCEDURES SPECIFIED
WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS UNDER FEDERAL REGULATIONS. All
written demands for appraisal should be sent or delivered to Secretary,
Columbian Bank, a Federal Savings Bank, 303-307 St. John Street, Havre de Grace,
Maryland 21078, so as to be received prior to the vote at the Special Meeting.
FAILURE TO COMPLY STRICTLY WITH THESE PROCEDURES WILL CAUSE THE
STOCKHOLDER TO LOSE HIS DISSENTER'S RIGHTS. CONSEQUENTLY ANY STOCKHOLDER WHO
DESIRES TO EXERCISE HIS DISSENTER'S RIGHTS IS URGED TO CONSULT A LEGAL ADVISOR
BEFORE ATTEMPTING TO EXERCISES SUCH RIGHTS.
VOTING AGREEMENT
As a condition to the Company entering into the Merger Agreement, each
of the Directors of Columbian has entered into a Voting Agreement with the
Company. The Voting Agreement provides that each of the Directors will vote all
of their shares of Columbian Common Stock beneficially owned in favor of the
Merger. The Voting Agreement prohibits each of the Directors from voting their
shares in favor of any other merger or sale of all or substantially all of the
assets of Columbian to any person other than the Company. The Voting Agreement
prohibits the sale, assignment, or transfer of shares subject to the Voting
Agreement. The Voting Agreement provides that it will terminate upon the earlier
of (i) the Effective Date, (ii) the termination of the Merger Agreement or (iii)
the abandonment of the Merger by mutual agreement of the Company and Columbian.
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THE SURVIVING INSTITUTION
In the Merger, Interim will merge into Columbian, as a result of which
Columbian will be the surviving savings institution, and together with Cecil
Federal, will be a subsidiary of Cecil Bancorp. The Merger will be undertaken
subject to and upon the terms and conditions contained in the Merger Agreement
dated May 29, 1998, and in the related Plan of Merger between Columbian and
Interim. The charter and bylaws of Columbian in effect immediately before the
Merger will be the charter and bylaws of Columbian immediately after the Merger
and the current office of Columbian will continue to be the office of Columbian.
Following the Merger, Columbian will operate as a subsidiary of Cecil Bancorp,
under the name "Columbian Bank, a Federal Savings Bank." For additional
information, see " --Management after the Merger," " -- Employee Benefit Plans
after the Merger" and " -- Interests of Certain Persons in the Merger."
MANAGEMENT AFTER THE MERGER
The directors of Columbian after the Merger will be the same as the
directors of Columbian prior to the Merger, with the addition of Cecil Bancorp
President Mary B. Halsey as an eighth director. The directors of Cecil Bancorp
after the Merger will be the same as the directors of Cecil Bancorp prior to the
Merger, with the addition of Columbian President Donald F. Angert and Director
Robert L. Johnson to the Cecil Bancorp Board. Mr. Angert will also be added to
the Cecil Federal Board of Directors. The officers of Columbian, Cecil Bancorp
and Cecil Federal will not be affected by the Merger. Biographical and other
information regarding the current Cecil Bancorp Directors is included in Cecil
Bancorp's Form 10-KSB for the year ended December 31, 1998. Set forth below is
biographical information for Mr. Angert and Mr. Johnson, each of whom has no
prior relationship with Cecil Bancorp.
Donald F. Angert was formerly the President and majority stockholder of
Angert, Inc., for 21 years, a retail business with stores located in Harford
County, Maryland. He has served as a director of the Columbian since 1968. He
became President of Columbian in January 1989, and has been Chairman since 1994
in which capacity he presides at all meetings of the Board of Directors,
appoints the Board Committees, and serves on an as-needed basis for the
management of Columbian.
Robert L. Johnson is currently employed by an agency of the United
States Government located in Harford County, Maryland, and has been so employed
since 1953. Since January 1989, he has served as Secretary/Treasurer of
Columbian.
REPRESENTATIONS AND WARRANTIES
Cecil Bancorp and Columbian have given certain representations and
warranties to each other in the Merger Agreement relating to, among other
things, the following: the validity of their organization; authorized capital;
the accuracy and completeness of their financial statements, reports and
material relating to them; the absence of any undisclosed liabilities, or
material adverse changes in their business, financial conditions or results of
operations or assets; the accuracy and completeness of information contained in
this Prospectus/Proxy Statement; the quality of their respective loan
portfolios; environmental hazards and claims; disclosure of financial advisory,
broker, finders and similar fees; the existence of certain contracts; the
absence of undisclosed material pending or threatened litigation; dividends paid
and stock purchases and sales; ownership of their real property and assets;
their standing under and compliance with applicable local, state and federal law
and regulations; tax matters; the due authorization of the Merger Agreement;
their authority to enter into the Merger Agreement and to undertake the
transactions contemplated by it; eligibility for pooling of interests accounting
treatment and a tax free reorganization; and the accuracy of all information
provided to each other in connection with the Merger. Columbian has made
additional representations as to its material contracts; labor relations,
employment agreements or arrangements; and the quality of Columbian's loan
portfolio. The Company has made additional representations as to the ownership,
organization and status of its subsidiaries and Year 2000 status.
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COVENANTS PENDING THE MERGER
Columbian has agreed to give to the Company and its respective
representatives and agents and the Company has agreed to give Columbian and its
respective representatives and agents, full access (to the extent lawful) to all
of the premises, books, records and employees of Columbian or Cecil,
respectively, at all reasonable times, and to furnish to the other party, its
agents or representatives access to and true and complete copies of such
financial and operating data, all documents with respect to matters to which
reference is made in the Merger Agreement or on any list, schedules or
certificates, to be delivered pursuant to the Merger Agreement, and such other
documents, records, or information with respect to the business and properties
of Columbian or Cecil upon request; provided, however, that any such inspection
-------- -------
is conducted in such manner as not to interfere unreasonably with the operation
of the business of the entity inspected and does not affect any of the
representations and warranties under the Merger Agreement. Cecil and Columbian
will give prompt written notice to the other party of any event or development
which, had it existed or been known on the date of the Merger Agreement, would
have been required to be disclosed under the Merger Agreement, that would cause
any of its representations and warranties contained therein to be inaccurate or
otherwise materially misleading, or which materially relate to the satisfaction
of conditions set forth in the Merger Agreement.
Pursuant to the Merger Agreement, and except as consented to by Cecil
Bancorp in writing or as specifically allowed in the Merger Agreement, Columbian
has agreed (i) to conduct its business only in the ordinary course, and maintain
its books and records in accordance with past practices and not take any action
that would (A) adversely affect or delay, the ability to obtain any governmental
approvals of the Merger; (B) adversely affect Columbian's ability to perform its
obligations under the Merger Agreement, or (C) adversely affect the Merger from
being accounted for as a pooling of interests or constituting a tax-free
reorganization. Further, Columbian has agreed that it will not, without the
prior written consent of the Company: (i) declare, set aside or pay any dividend
or make any other distribution with respect to Columbian's capital stock, or
reacquire any of Columbian's outstanding shares, except that up to the Effective
Date Columbian may pay its regular semi-annual cash dividend totaling not more
than $16,000 through the remainder of 1998; (ii) issue or sell or buy any shares
of capital stock of Columbian, except shares of Columbian common stock issued
pursuant to exercise of options outstanding as of the date of the Merger
Agreement or pursuant to the terms of the Stock Option Agreement; (iii) effect
any stock split, stock dividend or other reclassification of Columbian's Common
Stock; or (iv) grant any options or issue any warrants exercisable for or
securities convertible or exchangeable into capital stock of Columbian or grant
any stock appreciation or other rights with respect to shares of capital stock
of Columbian.
In addition, pursuant to the Merger Agreement, Columbian shall not,
without the prior written consent of the Company: (i) sell or dispose of any
assets of Columbian other than in the sale of single-family residential mortgage
loans in the ordinary course of business; (ii) change or waive any provision of
its charter or bylaws, except as provided in the Merger Agreement; (iii) grant
to any employee of Columbian an increase in compensation, bonus or benefits
except increases in compensation, bonus or benefits in the ordinary course of
business to non-officer employees consistent with their past practice; (iv)
adopt any new or amend or terminate any existing employment obligation, employee
plans or benefit arrangements of any type; (v) authorize severance pay or other
benefits for any employee of Columbian; (vi) incur any material obligation or
enter into, amend or extend any material contract, except as may be necessary
for Columbian to invest in government-backed securities, in accordance with past
practice; (vii) engage in any lending activities not in the ordinary course
consistent with past practice; (viii) form any new subsidiary; (ix) purchase any
equity securities other than FHLB stock; (x) make any investment which would
cause Columbian to not be a qualified thrift lender under the Home Owners' Loan
Act ("HOLA"); (xi) borrow or agree to borrow any amount of funds; (xii) hire any
new permanent employees except as may be consistent with past practice; (xiii)
make any capital expenditures exceeding $20,000 in the aggregate except that
Columbian shall be permitted to apply for and establish a branch office at Route
40 in Havre de Grace, Maryland; (xiv) establish interest and fee schedules
related to Columbian's deposit products or lending products which materially
differ from Columbian's past practice; (xv) merge into, consolidate with,
affiliate with, or be purchased or acquired by, any other person or entity, or
permit any other person or entity to be merged, consolidated or affiliated with
it or be purchased or acquired by it; (xvi) make any material change in its
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accounting methods or practices, except changes as may be required by generally
accepted accounting principles or by regulatory requirements; or (xvii) take or
cause to be taken any action which would disqualify the Merger as a pooling of
interests for accounting purposes or as a tax free reorganization under Section
368 of the Code.
NO SOLICITATION
Columbian has agreed that it will not authorize or permit any officer,
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Columbian, directly or indirectly, to
initiate contact with any person or entity in an effort to solicit, initiate or
encourage, or otherwise initiate, encourage or solicit any "Takeover Proposal"
(as defined below). Except as Columbian's Board of Directors' fiduciary duties
may otherwise require, Columbian will not authorize or permit any officer,
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Columbian, directly or indirectly, to
cooperate with, or furnish or cause to be furnished any non-public information
concerning its business, properties or assets to, any person or entity in
connection with any Takeover Proposal or to negotiate any Takeover Proposal with
any person or entity, or to enter into any agreement, letter of intent or
agreement in principle as to any Takeover Proposal. Further, Columbian has
agreed to give prompt notice to the Company upon becoming aware of any Takeover
Proposal. As defined in the Merger Agreement, a "Takeover Proposal" means any
proposal, other than as contemplated by the Merger Agreement, for a merger or
other business combination involving Columbian or for the acquisition of a ten
percent (10%) or greater equity interest in Columbian, or for the acquisition of
ten percent (10%) or more of the assets of Columbian)
STOCKHOLDER APPROVAL AND ADDITIONAL COVENANTS OF COLUMBIAN
Columbian has further undertaken (i) to call, as soon as practicable, a
meeting of its stockholders for the purpose of voting upon the Merger and
related matters and in connection with such meeting, Columbian's Board of
Directors shall recommend approval of the Merger, subject to their fiduciary
duties, with such recommendation to be included in this Prospectus/Proxy
Statement; (ii) to take all reasonable action to solicit from its stockholders
proxies in favor of approval; (iii) to refrain from, without the prior approval
of the Company, issuing or making, or permitting any of its directors,
employees, officers or agents to issue or make, any press release, disclosure or
statement to the press or any third party with respect to the Merger or the
other transactions contemplated thereby, except as required by law; (iv) to
cooperate when issuing or making any press release, disclosure or statement with
respect to the Merger or the other transactions contemplated by the Merger
Agreement; (v) for its officers and directors (in their respective corporate
capacities) to grant to the Company and the Resulting Association an irrevocable
power of attorney to execute and deliver deeds, assignments or assurances and to
do all acts necessary or desirable to vest, perfect or confirm title and
possession to such rights, properties or assets and otherwise to carry out the
purposes of the Merger Agreement; (vi) to furnish the Company, as soon as
reasonably practicable after they become publicly available, its financial
statements as contemplated in the Merger Agreement, to be prepared in conformity
with generally accepted accounting principles ("GAAP"); (vii) to use all
reasonable efforts to obtain as soon as practicable all consents and approvals
of any third parties necessary or desirable for consummation of the Merger and
other transactions contemplated by the Merger Agreement; (viii) to use all
reasonable efforts to cause each affiliated person of Columbian for purposes of
Commission Rule 145 and for purposes of qualifying the Merger for "pooling of
interests" accounting treatment to deliver to the Company a written agreement
which states that such person will not sell, pledge, transfer or otherwise
dispose of any shares of the Company Common Stock or Columbian Common Stock now
or hereafter held by such affiliated person, including, without limitation, the
shares of the Company Common Stock to be received by such affiliated person, in
the Merger: (A) otherwise than in compliance with the applicable provisions of
the Securities Act and the rules and regulations thereunder or (B) during the
period commencing 30 days prior to the consummation of the Merger and ending at
the time of the publication of financial results covering at least 30 days of
combined operations of Cecil and Columbian; (ix) to update its disclosure
schedule called for by the Merger Agreement five business days prior to the
Effective Date, to reflect any matters which have occurred from and after the
date the Merger Agreement was executed which would have been required to be
described in the disclosure schedule provided at the time the Merger Agreement
was executed; provided however, that no such update shall affect the conditions
to the obligations of Columbian and
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Cecil to consummate the transactions contemplated by the Merger Agreement and
any and all changes reflected in any such update shall be considered in
determining whether such conditions have been satisfied.
ADDITIONAL COVENANTS BY CECIL BANCORP
The Company has undertaken (i) to prepare and file as soon as
practicable after the date of the Merger Agreement all required applications for
regulatory approval of the Merger and the other transactions contemplated by the
Merger Agreement; (ii) to provide copies of each required application for
regulatory approval to Columbian for review by Columbian and its counsel; (iii)
to use all reasonable efforts to obtain prompt approval of each required
application; (iv) to refrain from, without the prior approval of Columbian,
issuing or making, or permitting any of its directors, employees, officers or
agents to issue or make, any press release, disclosure or statement to the press
or any third party with respect to the Merger or the other transactions
contemplated thereby, except as required by law; (v) to cooperate when issuing
or making any press release, disclosure or statement with respect to the Merger
or the other transactions contemplated by the Merger Agreement; (vi) to furnish
to Columbian, as soon as reasonably practicable after they become publicly
available, its financial statements for all periods prior to the Effective Date,
and that such financial statements will be prepared in conformity with GAAP;
(vii) to use all reasonable efforts to obtain as soon as practicable all
consents and approvals of any third parties necessary or desirable for
consummation of the Merger and other transactions contemplated by the Merger
Agreement; (viii) to take such necessary action, prior to the Effective Date, to
cause (A) Interim to be organized as an interim Federal savings institution
under the laws and regulations of the United States of America, and to ensure
that Interim, after its organization and prior to the Effective Date has not,
and will not engage in any activities other than in connection with, or as
contemplated by the Merger Agreement, (B) Interim to become a wholly-owned
subsidiary of the Company, (C) the directors and stockholder of Interim to
approve the transactions contemplated by the Merger Agreement; (D) Interim to
become a party to the Plan of Merger; and (E) Interim to have all corporate
power and authority to consummate the transactions contemplated hereunder and to
carry out all of its obligations with respect to such transactions; (ix) to use
all reasonable efforts to cause each affiliated person of the Company for
purposes of Commission Rule 145 and for purposes of qualifying the Merger for
"pooling of interests" accounting treatment to deliver to the Company, a written
agreement which states that such person will not sell, pledge, transfer or
otherwise dispose of any shares of the Company Common Stock or Columbian Common
Stock now or hereafter held by such affiliated person: (1) otherwise than in
compliance with the applicable provisions of the 1933 Act and the rules and
regulations thereunder or (2) during the period commencing 30 days prior to the
consummation of the Merger and ending at the time of the publication of
financial results covering at least 30 days of combined operations of the
Company and Columbian; (x) to refrain from taking any action between the date of
the Merger Agreement and the Effective Date, that would (A) adversely affect or
delay the ability to obtain the governmental approvals, (B) adversely affect the
Company's ability to perform its obligations hereunder or (C) adversely affect
the Merger from being accounted for as a pooling of interests or constituting a
tax-free reorganization under Section 368 of the Code; (xi) to update its
disclosure schedule called for by the Merger Agreement five days prior to the
Effective Date, to reflect any matters which have occurred from and after the
date which would have been required to be described in the disclosure schedule
provided by the Company to Columbian at the time the Merger Agreement was
executed; provided, however, that no such update shall affect the conditions to
the obligations of Columbian and Cecil to consummate the transactions
contemplated by the Merger Agreement and any and all changes reflected in any
such update shall be considered in determining whether such conditions have been
satisfied.
CONDITIONS TO THE MERGER
The respective obligations of the Company and Columbian to effect the
Merger are subject to the following conditions: (i) approval of the Merger
Agreement and the Merger by the vote of at least two-thirds of the outstanding
shares of Columbian Common Stock; (ii) the absence of any order which restrains
or prohibits the Merger in any legal, administrative, arbitration, investigatory
or other proceeding by any governmental or judicial or other authority; (iii)
the satisfaction of all statutory and regulatory requirements for the valid
consummation of the Merger and the receipt of all approvals of or the making of
all filings with any governmental authority, including without limitation those
of the OTS, the Federal Trade Commission, the U.S. Department of Justice, the
Commission, and any state securities or
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blue sky authorities, and any waiting periods shall have expired; (iv) the
Registration Statement shall have been declared effective and is not subject to
a stop order of the Commission and, if the offer and sale of Company Common
Stock is subject to the Blue Sky laws of any state, the registration with these
states is not subject to a stop order of any state securities commissioner; (v)
receipt of an opinion from Housley Kantarian & Bronstein, P.C. to both the
Company and Columbian, in a form and content reasonably satisfactory to Cecil
and Columbian, to the effect that (A) the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, (B) the
exchange in the Merger of Columbian Common Stock for Company Common Stock will
not give rise to gain or loss to stockholders of Columbian with respect to such
exchange (except to the extent of any cash received for fractional shares
redeemed, or Dissenting Shares), and (C) neither Columbian nor the Company will
recognize gain or loss as a consequence of the Merger; (vi) the Company and
Columbian shall have received a letter, dated as of the Closing, from their
respective independent auditors to the effect that the Merger will qualify for
pooling-of-interests accounting treatment under the Accounting Principles Board
Opinion No. 16 and Commission Accounting Series Releases No. 130 and No. 135, as
amended, if consummated in accordance with the Merger Agreement.
The obligations of the Company to effect the Merger and the other
transactions contemplated by the Merger Agreement are subject to the following
additional conditions: (i) there shall not have occurred any material adverse
change in the financial condition, business or results of operations of
Columbian other than any such change attributable to or resulting from changes
in law, regulation or GAAP or interpretations thereof of general application to
the banking and thrift industries; (ii) the representations and warranties of
Columbian contained in the Merger Agreement shall be true and correct in all
material respects at the Effective Date with the same effect as though made at
the Effective Date (or on the date when made in the case of any representation
or warranty which specifically relates to an earlier date) except (A) as
contemplated by the Merger Agreement, (B) as consented to in writing by the
Company, or (C) for breaches of representations and warranties that would not
have or reasonably be expected to have, a material adverse effect on the
financial condition, business or operations of Columbian; (iii) Columbian shall
have performed all obligations and complied with each covenant, in all material
respects, under the Merger Agreement, on its part to be performed or complied
with prior to the Effective Date, except for failures to perform or comply with
such obligations and covenants which would not have or would not reasonably be
expected to have, any material adverse effect on the financial condition,
business or operations of Columbian and Columbian shall have delivered to Cecil
Bancorp a certificate to that effect; (iv) the form and substance of all legal
matters and papers delivered under the Merger Agreement shall be reasonably
acceptable to the Company; (v) Columbian shall have obtained the consent or
approval of each person, other than the governmental approvals, whose consent or
approval shall be required in order to permit consummation of the Merger under
any loan or credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument, except those for which failure to obtain such consents
and approvals would not, individually or in the aggregate, have a material
adverse effect on Columbian or upon the consummation of the transactions
contemplated by the Merger Agreement; (vi) no greater than six percent (6.0%) of
the outstanding shares of Columbian Common Stock entitled to vote at the meeting
of Columbian's stockholders to be held for the purpose of voting upon the Merger
and related matters, shall have delivered the written notice of intent to demand
payment and become Dissenting Shares pursuant to the applicable provisions of
the OTS rules and regulations; (vii) Columbian shall not be a party to any
pending litigation reasonably probable of being determined adversely to
Columbian which would have a material adverse effect on the business, financial
condition or results of operations of Columbian; (viii) all governmental
approvals required hereunder to consummate the transactions contemplated hereby
shall have been obtained without the imposition of any conditions which the
Company reasonably and in good faith determines to be unduly burdensome upon the
conduct of the business of the Company; (ix) the Company shall have received the
letter agreements from all affiliated parties of Columbian; and (x) the Company
shall have received from counsel to Columbian an opinion dated as of the
Effective Date as specified in the Merger Agreement.
The obligations of Columbian to effect the Merger and the other
transactions contemplated by the Merger Agreement are further subject to the
following additional conditions: (i) there shall not have occurred any material
adverse change in the financial condition, business or results of operations of
the Company and its subsidiaries, taken as a whole, other than any such change
attributable to or resulting form changes in law, regulation or GAAP or
interpretations thereof of general application to the banking and thrift
industries; (ii) the representations and warranties
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of the Company contained in the Merger Agreement shall be true and correct in
all material respects at the Effective Date with the same effect as though made
at the Effective Date (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date) except
(A) as contemplated by the Merger Agreement, (B) as consented to in writing by
Columbian, or (C) for breaches of representations and warranties that would not
have or reasonably be expected to have, a material adverse effect on the
financial condition, business or operations of the Company; (iii) the Company
shall have performed all obligations and complied with each covenant, in all
material respects, under the Merger Agreement, on its part to be performed or
complied with prior to the Effective Date, except for failures to perform or
comply with such obligations and covenants which would not have or would not
reasonably be expected to have, any material adverse effect on the financial
condition, business or operations of the Company and its subsidiaries, taken as
a whole and the Company shall have delivered to Columbian a certificate to that
effect; (iv) the form and substance of all legal matters contemplated by the
Merger Agreement and all related papers shall be reasonably acceptable to
Columbian's counsel; (v) the Company shall not be a party to any pending
litigation reasonably probable of being determined adversely to the Company
which would have a material adverse effect on the business, financial condition
or results of operations of the Company and its subsidiaries, taken as a whole;
(vi) the Company shall have obtained from its affiliates the letter agreements
from all affiliated parties of the Company (vii) the Exchange Agent shall have
acknowledged in writing to Columbian receipt of the aggregate Merger
Consideration (including a reasonable estimate of the amount of cash required to
pay for fractional shares) for all shares of Columbian Common Stock to be
acquired pursuant to the Merger Agreement; and (viii) Columbian shall have
received from counsel to the Company, an opinion dated as of Effective Date as
specified in the Merger Agreement.
STOCK OPTION AGREEMENT
The summary information below concerning the material terms of the
Stock Option Agreement is qualified in its entirety by reference to the full
text of such agreement, attached in its entirety hereto as Exhibit B to the
Merger Agreement attached hereto as Annex A.
Under the Stock Option Agreement, Columbian has granted the Option to
Cecil Bancorp to purchase up to 14,993 authorized but unissued shares of
Columbian Common stock (constituting up to 19.9% of the outstanding Columbian
Common stock on the date of grant of the Option and 16.7% of the shares of
Columbian Common Stock that would be outstanding following the exercise of the
Option) at a price of $29.50 per share. In the event of any change in Columbian
Common Stock by reason of stock dividends, split-ups, recapitalizations,
combinations, exchanges of shares or the like, the type and number of shares
subject to the Option and the purchase price therefor will be adjusted
appropriately. If any additional shares of Columbian Common Stock are issued or
otherwise become outstanding after the date of the Stock Option Agreement (other
than as contemplated in the Stock Option Agreement), the number of shares of
Columbian Common Stock subject to the Option shall be adjusted so that, after
such issuance, it does not exceed 19.9% percent of the number of shares of
Columbian Common Stock then issued and outstanding without giving effect to any
shares subject to or issued pursuant to the Option. The $29.50 exercise price
was agreed to in negotiations between the parties.
The Option is exercisable in whole or in part upon the occurrence of
both a "Preliminary Purchase Event" and a "Purchase Event" (as such terms are
defined below) and prior to an event which results in the termination of the
Option. The Option shall terminate and be of no further force and effect upon
the earliest to occur of: (i) the Effective Date of the Merger; (ii) termination
of the Merger Agreement in accordance with the terms thereof prior to the
occurrence of a Purchase Event or a Preliminary Purchase Event, other than a
termination of the Merger Agreement by Cecil Bancorp based upon a willful breach
by Columbian of any of its representations, warranties, covenants or agreements
set forth in the Merger Agreement (a "Default Termination"); (iii) 12 months
after the termination of the Merger Agreement by Cecil Bancorp pursuant to a
Default Termination; and (iv) 12 months after termination of the Merger
Agreement (other than pursuant to a Default Termination) following the
occurrence of a Purchase Event or a Preliminary Purchase Event.
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A "Purchase Event" would be any of the following events: (i) any person
(other than Cecil Bancorp or any subsidiary of Cecil Bancorp) shall have
acquired beneficial ownership of or the right to acquire beneficial ownership
of, or any "group" (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act) shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 25% or more of the then outstanding shares of
Columbian Common Stock; or (ii) without the Company's prior written consent,
Columbian shall have authorized, recommended or publicly proposed, or publicly
announced the intention to authorize, recommend or propose, or entered into an
agreement with any person (other than the Company or any of its subsidiaries) to
effect (A) a merger, consolidation or similar transaction involving Columbian or
any of its subsidiaries, (B) the disposition by sale, lease, exchange or
otherwise, of assets of Columbian or any of its subsidiaries representing in
either case 15% or more of the consolidated assets of Columbian and its
subsidiaries, or (C) the issuance, sale or other disposition of (including by
way of merger, consolidation, share exchange or any similar transaction)
securities representing 15% or more of the voting power of Columbian or any of
its subsidiaries (any of the foregoing, an "Acquisition Transaction")
A "Preliminary Purchase Event" would be any of the following events:
(i) without Cecil Bancorp's prior written consent, Columbian shall have
authorized, recommended or publicly proposed, or publicly announced an intention
to authorize, recommend or propose, or entered into an agreement with any person
(other than Cecil Bancorp or any subsidiary of Cecil Bancorp) to effect (A) a
merger, consolidation or similar transaction involving Columbian or any of its
subsidiaries, (B) the disposition, by sale, lease, exchange or otherwise, of
assets of Columbian or any of its subsidiaries representing in either case 10%
or more of the assets of Columbian or any of its subsidiaries, or (C) the
issuance, sale or other disposition of (including by way of merger,
consolidation, share exchange or any similar transaction) securities
representing 10% or more of the voting power of Columbian or any of its
subsidiaries; (ii) any person (other than Cecil Bancorp or a Cecil Bancorp
Subsidiary) shall have acquired beneficial ownership of, or the right to acquire
beneficial ownership of, or any "group" shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of 10% or
more of the then-outstanding shares of Columbian Common Stock; (iii) any person
(other than Cecil Bancorp or any subsidiary of Cecil Bancorp) shall have
commenced, or shall have filed a registration statement under the Securities Act
with respect to, a tender offer or exchange offer to purchase any shares of
Columbian Common Stock such that, upon consummation of such offer, such person
would own or control 10% or more of the then outstanding shares of Columbian
Common Stock (such an offer being referred to herein as a "Tender Offer" and an
"Exchange Offer," respectively); (iv) (A) the holders of Columbian Common Stock
shall not have approved the Merger Agreement at the meeting of such stockholders
held for the purpose of voting on the Merger Agreement, (B) such meeting shall
not have been held or shall have been canceled prior to termination of the
Merger Agreement or (C) Columbian's Board of Directors shall have withdrawn or
modified in a manner adverse to Cecil Bancorp the recommendation of Columbian's
Board of Directors with respect to the Merger Agreement, in each case after it
shall have been publicly announced that any person (other than Cecil Bancorp or
any subsidiary of Cecil Bancorp) shall have (x) made, or disclosed an intention
to make, a proposal to engage in an Acquisition Transaction, (y) commenced a
Tender Offer or filed a registration statement under the Securities Act with
respect to an Exchange Offer, or (z) filed an application (or given notice),
whether in draft or final form, under the HOLA, the Bank Merger Act or the
Change in Bank Control Act of 1978, as amended, for approval to engage in an
Acquisition Transaction; or (v) Columbian shall have intentionally and knowingly
breached any representation, warranty, covenant or agreement contained in the
Merger Agreement and such breach would entitle Cecil Bancorp to terminate the
Merger Agreement, after (x) a bona fide proposal is made by any person (other
than Cecil Bancorp or any subsidiary of Cecil Bancorp) to Columbian or its
stockholders to engage in an Acquisition Transaction, (y) any person (other than
Cecil Bancorp or any Subsidiary of Cecil Bancorp) states its intention to
Columbian or its stockholders to make a proposal to engage in an Acquisition
Transaction if the Merger Agreement terminates or (z) any person (other than
Cecil Bancorp or any subsidiary of Cecil Bancorp) shall have filed an
application or notice with any governmental entity to engage in an Acquisition
Transaction.
Columbian is required to notify Cecil Bancorp promptly in writing of
the occurrence of any Preliminary Purchase Event or Purchase Event, it being
understood that the giving of such notice by Columbian shall not be a condition
to the right of the holders of the Option to exercise the Option.
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In the event the holder of the Option wishes to exercise the Option, it
shall send to Columbian a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of Option
Shares it intends to purchase pursuant to such exercise; and (ii) a place and
date not earlier than three business days nor later than 15 business days from
the Notice Date for the closing (the "Closing") of such purchase (the "Closing
Date"). If prior notification to or approval of the OTS, the FDIC, or any other
governmental entity is required in connection with such purchase, Columbian
shall cooperate with Cecil Bancorp in the filing of the required notice of
application for approval and the obtaining of such approval and the Closing
shall occur immediately following such regulatory approvals (and any mandatory
waiting periods).
The Stock Option Agreement also provides that Columbian may be required
to repurchase the Option from Cecil Bancorp, together with any shares of
Columbian Common Stock purchased by Cecil Bancorp pursuant thereto, at the
election of Cecil Bancorp during the twelve months immediately following (i) the
acquisition by one or more third parties of 50% or more of the outstanding
shares of Columbian Common Stock (or the right to acquire 50% or more of such
outstanding shares) or (ii) consummation of a transaction pursuant to an
agreement under which Columbian had agreed to merge into or consolidate with a
third party following which transaction Columbian will not be the continuing or
surviving corporation or to sell 50% or more of the voting power of Columbian to
a third party or to sell or otherwise transfer all or substantially all of
Columbian's assets to a third party. The price of such repurchase is specified
in the Stock Option Agreement. The Company's right to require Columbian to
repurchase the Option terminates upon an event which results in termination of
the Option.
REQUIRED REGULATORY APPROVALS
The Merger is subject to the approval of the OTS. The Company has filed
an application with the OTS for approval of the Merger. As of the date of this
Prospectus/Proxy Statement, the approval of the OTS has not been received. There
can be no assurance as to the timing of such approval, if given, or as to the
conditions, if any, on which approval will be given. In addition, the approval,
if and when granted, may contain conditions which the Company may find unduly
burdensome. It is a condition to the Company's obligations to effect the Merger
that such approval does not contain any conditions which the Company reasonably
and in good faith determine to be unduly burdensome upon the conduct of the
business of the Company. When such approval is received, material changes to the
Merger Agreement, material conditions, or other changes of a material nature may
be imposed by regulatory authorities in connection therewith which could require
a resolicitation of Columbian's stockholders for approval. Following OTS
approval of the Merger, the U.S. Department of Justice may review the Merger and
raise objections on antitrust grounds. If the required regulatory approvals are
not obtained, the Merger Agreement will be terminated, and the Merger will not
occur.
EXPENSES
Pursuant to the Merger Agreement, each of the parties shall bear and
pay all costs and expenses incurred by it or on its behalf in connection with
the transactions contemplated thereunder.
CLOSING; EFFECTIVE DATE
As promptly as practicable following the approval of the Merger
Agreement by Columbian's stockholders and the satisfaction or waiver of all
conditions of the Merger Agreement, the closing shall take place at which the
parties thereto will exchange documents required by the Merger Agreement.
Immediately following the Closing, and on the same day if practicable, the
Merger shall become effective at the time the articles of combination for the
merger of Interim into Columbian are endorsed by the OTS, and this shall be the
Effective Date of the Merger.
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EMPLOYEE BENEFIT PLANS AFTER THE MERGER
Cecil Bancorp will on and after the Effective Date, subject to the
exercise of its business judgment in its sole discretion, use reasonable efforts
to continue the employment of the employees of Columbian as of the Effective
Date. No later than one year after the Effective Date, the continuing employees
of Columbian will be eligible to receive medical, group hospitalization, dental,
life and disability insurance benefits, as well as other employee benefits,
under Cecil Bancorp's employee benefit plans. Except with respect to the
Employee Stock Ownership Plan of Cecil Bancorp (the "ESOP") no later than one
year after the Effective Date, the continuing employees of Columbian shall be
entitled to participate in all employee benefit plans sponsored by Cecil Bancorp
or any of the Cecil Bancorp subsidiaries to the same extent as other employees
of Cecil Bancorp holding comparable positions and such employees will receive
credit for their prior period of service to Columbian for purposes of
determining eligibility, participation and vesting in all Cecil Bancorp or Cecil
Bancorp subsidiaries employee benefit plans and for receiving other employee
benefits. Until continuing employees of Columbian become participants in the
Cecil Bancorp employee benefit plans, as described above, Columbian's medical,
group hospitalization, dental, life and disability insurance and other employee
benefit plans shall remain in effect.
For a period of one year after the Effective Date, the continuing
employees of Columbian shall be entitled to participate in Columbian's profit
sharing plan, which Plan (and the benefits or assets held thereby), upon its
termination, shall be for the benefit of the continuing employees of Columbian.
Such Columbian profit sharing plan shall terminate upon the participation of the
continuing employees of Columbian in Cecil Bancorp's retirement plan. Upon the
Effective Date, the continuing employees of Columbian shall be entitled to
participate in the ESOP as employees of Columbian as a subsidiary of Cecil
Bancorp, provided however, that for purposes of determining eligibility for, and
vesting of benefits under the ESOP, service with Columbian prior to the
Effective Date shall not be treated as service with Cecil Bancorp as employer.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Columbian's management and its Board of Directors
may be deemed to have certain interests in the Merger in addition to their
interests as stockholders of Columbian generally. Columbian's Board of Directors
was aware of these interests and considered them, among other matters, in
unanimously approving the Merger Agreement. See "-- Reasons for the Merger and
Recommendation of the Columbian Board of Directors."
Boards of Directors. Two persons presently serving on the Board of
Directors of Columbian, Donald F. Angert and Robert L. Johnson, will be
appointed to the Board of Directors of Cecil Bancorp, and be compensated for
serving as directors of Cecil Bancorp in accordance with compensation
arrangements for all other Cecil Bancorp directors.
Donald F. Angert, President of Columbian, will be appointed to the
Board of Directors of Cecil Federal and he will be compensated for service as a
director of Cecil Federal in accordance with the compensation arrangements for
all other Cecil Federal directors. Ms. Mary Beyer Halsey, President of Cecil
Bancorp and Cecil Federal, will be appointed to the Board of Directors of
Columbian and will be compensated for service as a Director of Columbian in
accordance with the compensation for all other Columbian directors.
Employment Agreement and Rabbi Trust Arrangements. In addition, the
Company will enter into an employment agreement with Ms. Kathleen Guzzo,
commencing at the Effective Date and continuing for a period of one year. Under
this agreement, Ms. Guzzo will be employed as a Vice President of Columbian for
a salary of $49,000 per annum. In addition, Rabbi Trusts previously established
for the benefit of Donald F. Angert and former Columbian employee Margaret
Waldron will be maintained for the benefit of such individuals.
Indemnification; Director and Officer Insurance. Pursuant to the Merger
Agreement, from and after the Effective Date, Columbian (including any
successor) shall indemnify, defend and hold harmless each person who is, or who
becomes prior to the Effective Date, an officer or director of Columbian against
all losses, claims, damages,
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costs, expenses (including attorney's fees), liabilities, judgments or amounts
that are paid in settlement of (which settlement shall require the prior written
consent of Cecil Bancorp and Columbian, which consent shall not be unreasonably
withheld) or in connection with any claim, action, suit, proceeding or
investigation whether criminal, civil or administrative (each a "Claim") in
which the indemnified party is, or is threatened to be made, a party or a
witness based in whole or in part on or arising in whole or in part out of the
fact that such person is or was a director or officer of Columbian if such Claim
pertains to any matter or fact arising, existing or occurring prior to the
Effective Date (including, without limitation, the Merger and other transactions
contemplated by this Merger Agreement), regardless of whether such Claim is
asserted or claimed prior to, or at or after, the Effective Date to the full
extent permitted under applicable federal law or under Columbian's Charter and
Bylaws. Columbian shall pay expenses in advance of the final disposition of any
such action or proceeding to each indemnified party to the full extent permitted
by federal law.
From and after the Effective Date, the continuing directors and
officers of Columbian, shall also have indemnification rights having prospective
application in accordance with applicable Federal law and be covered by the
directors and officers liability insurance policy of Cecil Bancorp and its
subsidiaries on a basis at least equal to the coverage provided to persons in
similar positions with Cecil Bancorp or any of the Cecil Bancorp Subsidiaries.
Subject to availability and a cost of no greater than $20,000, Cecil Bancorp
shall permit Columbian to purchase and keep in force for a period of at least
three years following the Effective Date, directors' and officers' liability
insurance to provide coverage for acts or omissions of the type and in the
amount currently covered by Columbian's existing directors' and officers'
liability insurance for acts or omissions occurring on or prior to the Effective
Date or Cecil Bancorp, at its sole election, will procure such coverage pursuant
to the existing liability insurance policy of Cecil Bancorp subject to the cost
limitation set forth herein.
FEDERAL INCOME TAX CONSEQUENCES
The Company and Columbian will rely upon an opinion of Housley
Kantarian & Bronstein, P.C., to the following effect (i) the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code;
(ii) no gain or loss will be recognized by Columbian or Cecil Bancorp as a
result of the Merger, (iii) no gain or loss will be recognized by a stockholder
of Columbian who exchanges all of such stockholder's Columbian Common Stock
solely for shares of Company Common Stock; (iv) the basis of shares of Company
Common Stock to be received (not including any cash received for fractional
shares which are deemed received for tax purposes) by a stockholder of Columbian
will be the same as the basis of the Columbian Common Stock surrendered in
exchange therefor; and (v) the holding period of the shares of Company Common
Stock to be received by a stockholder of Columbian will include the period
during which the stockholder held the shares of Columbian Common Stock
surrendered in exchange therefor, provided that such Columbian Common Stock is
held as a capital asset by such stockholder at the Effective Date.
Cash payments made to the holders of Columbian Common Stock upon the
exchange thereof in connection with the Merger either for fractional shares or
Dissenting Shares (other than certain exempt entities and persons) will be
subject to a 31.0% backup withholding tax under federal income tax law unless
certain requirements are met. Generally, the Company will be required to deduct
and withhold the tax if (i) the stockholder fails to furnish a taxpayer
identification number ("TIN") or fails to certify under penalty of perjury that
such TIN is correct, (ii) the Internal Revenue Service ("IRS") notifies the
Company that the TIN furnished by the stockholder is incorrect, (iii) the IRS
notifies the Company that the stockholder has failed to report interest,
dividends or original issue discount in the past, or (iv) there has been a
failure by the stockholder to certify under penalty of perjury that such
stockholder is not subject to the 31.0% backup withholding tax. Any amounts
withheld in collection of the 31.0% backup withholding tax will reduce the
federal income tax liability of the stockholders from whom such tax was
withheld. The TIN of an individual stockholder is that stockholder's Social
Security number.
THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF THE FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER, WITHOUT CONSIDERATION OF THE PARTICULAR
FACTS AND CIRCUMSTANCES OF EACH STOCKHOLDER'S SITUATION. EACH STOCKHOLDER IS
ENCOURAGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISORS AS TO PARTICULAR
FACTS AND
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CIRCUMSTANCES WHICH MAY BE UNIQUE TO SUCH STOCKHOLDER AND NOT COMMON TO
STOCKHOLDERS AS A WHOLE AND ALSO AS TO ANY ESTATE, GIFT, STATE, LOCAL OR FOREIGN
TAX CONSEQUENCES ARISING OUT OF THE MERGER AND/OR ANY SALE THEREAFTER OF THE
COMPANY COMMON STOCK RECEIVED IN THE MERGER.
ACCOUNTING TREATMENT
Cecil Bancorp and Columbian expect to account for the Merger under the
pooling-of-interests method of accounting under GAAP, and the availability of
this accounting method is a condition to Cecil Bancorp's and Columbian's
respective obligation to consummate the Merger. Assuming pooling-of-interests
accounting treatment, the historical basis of the assets and liabilities of
Columbian and Cecil Bancorp will be combined at the Effective Date and carried
forward at their previously recorded amounts, and the stockholders' equity
accounts of Columbian and Cecil Bancorp will also be combined. The consolidated
income and other financial statements of Cecil Bancorp issued after consummation
of the Merger will be restated retroactively to reflect the consolidated
operations of Cecil Bancorp and Columbian as if the Merger had taken place prior
to the periods covered by such financial statements. See "Pro Forma Unaudited
Financial Information."
RESALE OF COMPANY COMMON STOCK; RESTRICTIONS ON TRANSFER
The shares of Company Common Stock to be issued in the Merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act, except for shares issued to any stockholder who may be deemed to
be an "affiliate" of Columbian or the Company for purposes of Rule 145 under the
Securities Act (generally, individuals or entities that control, are controlled
by or are under common control with Columbian or the Company). Affiliates may
not sell their shares of Company Common Stock acquired in connection with the
Merger except pursuant to an effective registration statement under the
Securities Act covering such shares or in compliance with Rule 145 or another
applicable exemption from the registration requirements of the Securities Act.
Columbian and Cecil Bancorp have agreed in the Merger Agreement to use
their best efforts to cause each director, executive officer and other person
who is an affiliate (for purposes of Rule 145) of Columbian and Cecil Bancorp to
deliver to Cecil Bancorp a written agreement intended to ensure compliance with
the Securities Act.
VOTE REQUIRED
The affirmative vote of at least a two-thirds of the outstanding
Columbian Common Stock is required for Columbian's stockholders to approve the
Merger Agreement and the Merger. Each share of Columbian Common Stock
outstanding at the close of business on the record date for the Special Meeting,
___________, 1998, is entitled to one vote on each matter to be considered at
such meeting. Each of the Directors of Columbian has entered into a Voting
Agreement with the Company in which they have agreed to vote all of the
__________ shares of outstanding Columbian Common Stock beneficially owned by
them as of the Record Date "FOR" approval of the Merger and the Merger
Agreement.
CECIL BANCORP, INC.
Cecil Bancorp was incorporated under the laws of the State of Maryland
in July 1994. On November 10, 1994, Cecil Federal converted from mutual to stock
form and reorganized into the holding company form of ownership as a wholly
owned subsidiary of the Company. The Company is primarily engaged in the
business of directing, planning and coordinating the business activities of
Cecil Federal. The Company Common Stock is registered with the Commission under
the Exchange Act. The Company is classified as a unitary savings institution
holding company subject to regulation by the OTS. At March 31, 1998, the Company
had total assets of $67.1 million and stockholders' equity of $7.6 million, on a
consolidated basis.
20
<PAGE>
Cecil Federal is a community-oriented financial institution which
commenced operations in 1959 as a Federal mutual savings and loan association.
It converted to a Federal mutual savings bank in January 1993 and, effective
November 10, 1994, Cecil Federal converted from mutual to stock form. Its
deposits have been federally insured up to applicable limits, and it has been a
member of the FHLB system since 1959. Cecil Federal's deposits are currently
insured by the SAIF of the FDIC and it is a member of the FHLB of Atlanta.
Cecil Federal's primary business, as conducted through its two offices
located in Elkton and North East, Maryland, is the origination of mortgage loans
secured by single-family residential real estate located primarily in Cecil
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less, savings accounts
and transaction accounts. To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to
four-family residences, home equity loans and land loans. Cecil Federal also
makes consumer loans including education loans, personal and commercial lines of
credit, automobile loans and loans secured by deposit accounts. Cecil Federal
purchases mortgage-backed securities and invests in other liquid investment
securities when warranted by the level of excess funds.
Cecil Federal has two wholly owned subsidiaries, Cecil Service
Corporation and Northeastern Service Corporation. Cecil Service Corporation's
primary business is leasing agent for the North East Plaza Branch and
Northeastern Service Corporation's primary business is insurance agent for
mortgage life and disability insurance for Cecil Federal's mortgage loan
customers.
The Company's executive offices are located at 127 North Street,
Elkton, Maryland 21921. The telephone number is (410) 398-1650.
For additional information regarding Cecil Bancorp's business and
operations, reference is made to Cecil Bancorp's Form 10-KSB for the year ended
December 31, 1997 and Cecil Bancorp's 10-Q for the quarter ended March 31, 1998,
attached hereto as Annex C and D, respectively.
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
Columbian was originally chartered by the State of Maryland in 1893.
Columbian became a member of the FHLB System and obtained federal deposit
insurance in October 1985. In January 1989, Columbian converted to a federal
stock institution and on September 26, 1990, Columbian changed its name to
Columbian Bank, a Federal Savings Bank and became a federally chartered stock
savings bank.
Columbian's principal business consists of accepting deposits from the
general public and investing those funds in mortgage loans and other investments
permitted to federal savings banks. Columbian's principal market area is Harford
County, Maryland. Harford County is located approximately 25 miles from
Baltimore, Maryland and 20 miles from Wilmington, Delaware. Although Harford
County is primarily rural, it has experienced significant population growth in
recent years due to its proximity to these metropolitan areas. In terms of
assets and deposits, Columbian is the smallest depository institution currently
serving Harford County. Columbian is the only locally owned and operated savings
bank in Havre de Grace.
At March 31, 1998, Columbian had total assets of $30.2 million,
deposits of $27.6 million and stockholders' equity of $2.1 million.
Columbian's executive offices are located at 303-307 St. John Street,
Havre de Grace, Maryland 21078, and its main telephone number is (410) 939-2313.
21
<PAGE>
BUSINESS OF COLUMBIAN BANK, A FEDERAL SAVINGS BANK
LENDING ACTIVITIES
General. The principal lending activity of Columbian is the origination
of conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential properties in its primary market
area. At March 31, 1998, one- to four-family mortgage loans comprised $14.3
million, or 73.32%, of Columbian's gross loan portfolio. Columbian also
originates or participates in loans for the construction or renovation of
commercial property and residential housing developments and occasionally
originates permanent financing upon completion. In addition, Columbian
originates consumer loans secured by deposits, second mortgages on residential
property, or automobiles, as well as unsecured personal loans and occasionally
originates loans secured by commercial and nonresidential real estate.
22
<PAGE>
Loan Portfolio Composition. Set forth below is selected data relating
to the composition of Columbian's loan portfolio by type of loan at the dates
indicated. At March 31, 1998, Columbian had no concentrations of loans exceeding
10% of total loans other than as disclosed below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ----------------------------------------------
1998 1997 1996
------------------ -------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
--------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
- ------------
Real estate - mortgage:
Single-family residential......... $ 14,340 73.32% $ 14,137 72.02% $ 12,993 66.83%
Construction...................... 1,184 6.05 1,655 8.43 1,562 8.03
Home equity and second mortgages 1,447 7.40 1,583 8.06 1,584 8.15
Commercial........................ 2,422 12.38 2,067 10.53 3,058 15.73
Consumer loans:
Installment....................... 17 0.09 19 0.10 32 0.16
Savings account................... 148 0.76 169 0.86 214 1.10
--------- ------- ---------- ------- ---------- -------
19,558 100.00% 19,630 100.00% 19,443 100.00%
====== ====== ======
Less:
Allowance for loan losses........... (180) (180) (180)
Loans in process.................... (618) (501) (605)
Deferred loan origination fees...... (145) (144) (145)
--------- --------- ---------
Total............................ $ 18,615 $ 18,805 $ 18,513
========= ========= =========
</TABLE>
23
<PAGE>
Loan Maturity Schedule. The following table sets forth the estimated
maturity of Columbian's loan portfolio at December 31, 1997 based on their
contractual terms to maturity. The table does not include any estimate of
prepayments or scheduled principal repayments which significantly shorten the
average life of all mortgage loans and may cause Columbian's repayment
experience to differ from that shown below. Demand loans, loans having no stated
maturity, and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
DUE AFTER DUE AFTER DUE AFTER
DUE DURING THE YEARS ENDING 3 THROUGH 5 THROUGH 10 THROUGH DUE AFTER
DECEMBER 31, 5 YEARS 10 YEARS 15 YEARS 15 YEARS
----------------------------- AFTER AFTER AFTER AFTER
1998 1999 2000 12/31/97 12/31/97 12/31/97 12/31/97 TOTAL
------ ------ ------ -------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Single-family residential... $1,435 $ 116 $ 346 $ 879 $ 2,547 $ 2,939 $ 5,875 $ 14,137
Construction................ 1,421 234 -- -- -- -- -- 1,655
Home equity and second
mortgages................. 613 -- 137 200 278 355 -- 1,583
Commercial.................. 867 208 19 224 60 689 -- 2,067
Consumer.................... 173 -- -- 15 -- -- -- 188
------ ------ ------- -------- ------- -------- -------- --------
Total.................. $4,509 $ 558 $ 502 $ 1,318 $ 2,885 $ 3,983 $ 5,875 $ 19,630
====== ====== ======= ======== ======= ======== ======== ========
</TABLE>
The following table sets forth at December 31, 1997, the dollar amount
of all loans due one year after December 31, 1997 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATE ADJUSTABLE RATES
---------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Real estate - mortgage:
Single family residential....................... $ 12,252 $ 450
Construction.................................... -- 234
Home equity and second mortgages................ 970 --
Commercial...................................... 1,173 27
Consumer........................................... 15 --
---------- ----------
Total....................................... $ 14,410 $ 711
========== ==========
</TABLE>
24
<PAGE>
One- to Four-Family Residential Lending. Columbian's principal lending
activity has been the origination of loans secured by first mortgages on
existing one- to four-family residences in Columbian's market area. Columbian
also originates a limited number of second mortgages and home equity loans
secured by one- to four-family residences. The average mortgage loan amount has
been between $100,000 and $150,000. At March 31, 1998, $14.3 million, or 73.32%,
of Columbian's total loans were secured by first liens on one- to four-family
residences, a substantial majority of which were existing, owner-occupied,
single-family residences in Columbian's market area. At March 31, 1998, $1.5
million, or 10.49%, of Columbian's one- to four-family residential loans were
adjustable rate mortgages ("ARMs"), and $12.8 million, or 89.51%, carried fixed
rates.
Columbian's one- to four-family residential mortgage loans generally
are for terms of 15 to 30 years, amortized on a monthly basis, with principal
and interest due each month. Columbian also originates mortgages with a balloon
feature which allows Columbian to elect to renegotiate the loan after fifteen
years at then-prevailing interest rates. Residential real estate loans often
remain outstanding for significantly shorter periods than their contractual
terms. Borrowers may refinance or prepay loans at their option without penalty.
These loans customarily contain "due-on-sale" clauses which permit Columbian to
accelerate repayment of a loan upon transfer of ownership of the mortgaged
property.
Columbian's lending policies generally limit the maximum loan-to-value
ratio on one- to four-family residential mortgage loans secured by
owner-occupied properties to 95% of the appraised value, with private mortgage
insurance required on loans with loan-to-value ratios in excess of 80%. The
maximum loan-to-value ratio on mortgage loans secured by non-owner-occupied
properties is also limited to 80%.
Columbian's fixed-rate, one- to four-family residential mortgage loans
are underwritten in accordance with applicable guidelines and requirements for
sale to the Federal National Mortgage Association ("FNMA") in the secondary
market. Columbian also invests, to a limited extent, in loans underwritten
according to Federal Home Loan Mortgage Corporation ("FHLMC") standards.
Columbian offers one- and three-year ARMs, one- to four-family
residential mortgage loans. These loans are indexed to the 52-week rate on the
one-year and three-year U.S. Treasury securities, respectively, plus a margin of
200 basis points. The rates at which interest accrues on these loans are
adjustable every one or three years, generally with limitations on adjustments
of two percentage points per adjustment period and six percentage points over
the life of the mortgage.
The retention of ARMs in Columbian's portfolio helps reduce Columbian's
exposure to increases in prevailing market interest rates. However, there are
unquantifiable credit risks resulting from potential increases in costs to
borrowers in the event of upward repricing of ARMs. It is possible that during
periods of rising interest rates, the risk of default on ARMs may increase due
to increases in interest costs to borrowers. Further, ARMs which provide for
initial rates of interest below the fully indexed rates may be subject to
increased risk of delinquency or default as the higher, fully indexed rate of
interest subsequently replaces the lower, initial rate. In order to mitigate
such risk, Columbian qualifies borrowers at a rate equal to two percentage
points above any discounted introductory rate. In addition, although ARMs allow
Columbian to increase the sensitivity of its interest-earning assets to changes
in interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limitations and the ability of
borrowers to convert the loans to fixed-rates. Accordingly, there can be no
assurance that yields on Columbian's ARMs will fully adjust to compensate for
increases in Columbian's cost of funds. Finally, ARMs increase Columbian's
exposure to decreases in prevailing market interest rates, although decreases in
Columbian's cost of funds would tend to offset this effect.
Construction Lending. Columbian also offers construction loans to
qualified developers for construction of one-to four-family residences in
Columbian's market area and has purchased participation interests in
construction loans from other institutions. Typically, Columbian has emphasized
lending to individuals to refurnish or rehabilitate multi-family dwellings or
church buildings and construction of planned residential developments. Columbian
lends on a limited basis to private developers for speculative single-family
housing construction. These loans generally have adjustable interest
25
<PAGE>
rates and are underwritten in accordance with the same standards as Columbian's
mortgages on existing properties, except the loans generally provide for
disbursement in stages during a construction period from six to 12 months,
during which period the borrower is required to make monthly payments of accrued
interest on the outstanding loan balance. Construction loans generally have a
maximum loan-to-value ratio of 80%. Borrowers must satisfy all credit
requirements which would apply to Columbian's permanent mortgage loan financing
for the subject property. While Columbian's construction loans generally require
repayment in full upon the completion of construction, Columbian occasionally
makes construction loans that convert to permanent loans following construction.
At March 31, 1998, Columbian had $1.2 million in construction loans
outstanding, comprising 6.05% of Columbian's gross loan portfolio. Columbian's
largest construction loan at March 31, 1998 was a $500,000 participation (of
which $333,000 was outstanding at March 31, 1998) in a $3.4 million commitment
to fund construction of a residential condominium project of which $2.0 million
is revolving.
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, Columbian may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, Columbian may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment. The ability of a developer to sell developed lots or
completed dwelling units will depend on, among other things, demand, pricing,
availability of comparable properties and economic conditions. Columbian has
sought to minimize this risk by limiting construction lending to qualified
borrowers in Columbian's market area, limiting the aggregate amount of
outstanding construction loans and imposing a stricter loan-to-value ratio
requirement than required for one- to four-family mortgage loans.
Multi-Family and Commercial Real Estate Lending. Columbian engages in
the origination of multi-family and commercial real estate loans in order to
benefit from the higher origination fees and interest rates, as well as shorter
terms to maturity and repricing, than could be obtained from one- to four-family
mortgage loans. Multi-family and commercial property lending, however, entails
significant additional risks compared with one- to four-family residential
lending. For example, such loans typically involve large loan balances to single
borrowers or groups of related borrowers, the payment experience on such loans
typically is dependent on the successful operation of the real estate project,
and these risks can be significantly impacted by supply and demand conditions in
the market for multi-family residential units.
Columbian's multi-family residential loans are primarily secured by
small apartment projects within Columbian's market area. The maximum loan
amounts for such loans are $500,000 and may not exceed 80% of the lesser of cost
or appraised value or purchase price whichever is less. Such loans generally
amortize on the basis of a 30-year period and generally require a balloon
payment after three years. Columbian also makes a limited number of commercial
real estate loans for terms of up to 15 years with payments of principal and
interest sufficient to fully repay the loan by maturity and may also underwrite
certain commercial real estate loans for a shorter term with a balloon feature.
The interest rates on commercial real estate loans are negotiated on a
loan-by-loan basis. At March 31, 1998, Columbian's largest commercial real
estate loan was to two individuals secured by industrial warehouse units. At
March 31, 1998, multi-family and commercial loans totaled $2.4 million and
comprised 12.38% of Columbian's gross loan portfolio.
Home Equity and Second Mortgage Lending. Columbian also offers home
equity lines of credit and second mortgage loans. Home equity lines of credit
carry a variable rate, indexed to the Prime Rate as published in the Wall Street
Journal plus 2.0%, adjusted monthly or may be originated on a fixed rate basis.
Second mortgage loans are offered on a fixed rate basis and require payments of
principal and interest monthly. The maximum term for a home equity line of
credit or second mortgage loan is 15 years. Columbian will lend up to 80% of the
appraised value of the underlying property less the amount outstanding on the
first mortgage. At March 31, 1998, home equity and second mortgage loans totaled
$1.4 million and comprised 7.40% of Columbian's gross loans outstanding.
26
<PAGE>
Consumer Lending. Columbian's consumer loans primarily consist of loans
secured by deposit accounts at Columbian, automobile loans and personal loans.
At March 31, 1998, Columbian had approximately $165,000 in consumer loans, or
0.85%, of Columbian's gross loan portfolio.
Columbian makes loans secured by deposit accounts for up to 90% of the
amount of the deposit. The interest rate on these loans generally is two
percentage points above the rate paid on the deposit account, and interest is
billed on a monthly basis. These loans are payable on demand, and the deposit
account must be pledged as collateral to secure the loan. Columbian offers both
new and used automobile loans. Columbian's automobile loans are generally
underwritten in amounts not to exceed the loan value of the automobile, as
published by the National Automobile Dealers Association for used vehicles or
the Black Invoicing Book for new automobiles. A minimum down payment of 20% is
required. The terms of such loans vary based on the age of the car and the
amount financed up to a maximum of 60 months.
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against Columbian, and a borrower may be able to assert against
Columbian claims and defenses which it has against the seller of the underlying
collateral. In underwriting consumer loans, Columbian considers the borrower's
credit history, an analysis of the borrower's income, expenses and ability to
repay the loan and the value of the collateral. Columbian's risks associated
with consumer loans are further minimized by the modest amount of consumer loans
made by Columbian that are not secured by certificates of deposit or otherwise
guaranteed as to repayment. At March 31, 1998 Columbian had only $3,000 in
unsecured personal loans.
Loan Solicitation and Processing. Columbian's loan originations are
derived from a number of sources, including referrals by realtors, builders,
depositors, borrowers and mortgage brokers, as well as walk in customers. Loans
are originated by Columbian's personnel who receive a salary. Applications for
all fixed-rate one- to four-family real estate loans are underwritten in
accordance with FNMA guidelines, and all of the loan applications for other
types of loans are underwritten in accordance with Columbian's own comparable
guidelines.
Upon receipt of a completed loan application from a prospective
borrower, a credit report and verifications are ordered to verify specific
information relating to the loan applicant's employment, income and credit
standing. It is Columbian's policy to obtain an appraisal of the real estate
intended to secure a proposed mortgage loan from a fee appraiser approved by
Columbian. It is Columbian's policy to record a lien on the real estate securing
the loan and to obtain a title insurance policy which insures that the property
is free of prior encumbrances. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a flood plain as
designated by the Department of Housing and Urban Development, paid flood
insurance policies. Most borrowers are also required to advance funds on a
monthly basis together with each payment of principal and interest to a mortgage
escrow account from which Columbian makes disbursements for items such as real
estate taxes.
The Board of Directors has the overall responsibility and authority for
general supervision of Columbian's loan policies. The Board has established
written lending policies for Columbian. Columbian's President and chief lending
officer have authority to approve all consumer loans below $25,000, and the
executive committee of the Board of Directors must approve loans at or above
$25,000. All mortgage loans must be approved by the full Board of Directors.
Loan applicants are promptly notified of the decision of Columbian. It
has been management's experience that substantially all approved loans are
funded.
27
<PAGE>
Interest Rates and Loan Fees. Interest rates charged by Columbian on
mortgage loans are primarily determined by competitive loan rates offered in its
market area and minimum yield requirements for loans purchased by the FNMA.
Mortgage loan rates reflect factors such as prevailing market interest rate
levels, the supply of money available to the savings industry and the demand for
such loans. These factors are in turn affected by general economic conditions,
the monetary policies of the federal government, including the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
Columbian charges fees in connection with loan commitments and
originations, rate lock-ins, loan modifications, late payments and changes of
property ownership and for miscellaneous services related to its loans. Loan
origination fees are calculated as a percentage of the loan principal. Columbian
typically receives fees of between zero and three points (one point being
equivalent to 1% of the principal amount of the loan) in connection with the
origination of fixed-rate and adjustable-rate residential mortgage loans. The
loan origination fee, net of certain direct loan origination expenses, is
deferred and accreted into income over the contractual life of the loan using
the interest method. If a loan is prepaid, refinanced or sold, all remaining
deferred fees with respect to such loan are taken into income at such time.
Nonperforming Assets. When a borrower fails to make a payment on a
loan, immediate steps are taken to have the delinquency cured and the loan
restored to current status. Once the payment grace period has expired (in most
instances 15 days after the due date), a late notice is mailed to the borrower
within five business days, and a late charge of five percent of the payment is
imposed, if applicable. If payment is not promptly received, the borrower is
contacted by telephone, and efforts are made to formulate an affirmative plan to
cure the delinquency. If a loan becomes 30 days in default, a letter is mailed
to the borrower requesting payment by a specified date. If a loan becomes 60
days past due, Columbian seeks to make personal contact with the borrower and
also has the collateral property inspected. If a mortgage becomes 90 days past
due, a letter is sent to the borrower demanding payment by a certain date and
indicating that a foreclosure suit will be filed if the deadline is not met. If
payment is still not made, management may pursue foreclosure or other
appropriate action.
28
<PAGE>
The following table sets forth information with respect to Columbian's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
MARCH 31, --------------------
1998 1997 1996
---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real estate - mortgage:
Single-family residential...................................... $ -- $ 49 $ 99
Construction................................................... -- 90 --
Home equity and second mortgages............................... -- -- --
Commercial..................................................... -- -- 118
Consumer.......................................................... 3 6 1
------- ------- -------
Total.......................................................... $ 3 $ 145 $ 218
======= ======= =======
Accruing loans which are contractually past due 90 days or more:
Real estate - mortgage:
Single-family residential...................................... $ -- $ -- $ --
Construction................................................... -- -- --
Home equity and second mortgages............................... -- -- --
Commercial..................................................... -- -- --
Consumer.......................................................... -- -- --
------- ------- -------
Total.......................................................... $ -- $ -- $ --
======= ======= =======
Total nonperforming loans...................................... $ 3 $ 145 $ 218
======= ======= =======
Percentage of total loans............................................ 0.02% 0.74% 1.18%
======= ======= =======
Other nonperforming assets (2)....................................... $ 374 $ 284 $ 483
======= ======= =======
Loans modified in troubled debt restructurings....................... $ -- $ -- $ --
======= ======= =======
</TABLE>
- ----------
(1) Non-accrual status denotes loans on which, in the opinion of management, the
collection of additional interest is unlikely. Payments received on a
nonaccrual loan are allocated to principal and interest in accordance with
the contractual terms of the loan.
(2) Other nonperforming assets represents property acquired by Columbian through
foreclosure or repossession or accounted for as a foreclosure in-substance.
This property is carried at the lower of its fair market value or the
principal balance of the related loan, whichever is lower.
During the three months ended March 31, 1998, gross interest income of
$120 would have been recorded on loans accounted for on a nonaccrual basis if
the loans had been current throughout the respective periods. Interest on such
loans included in income as of March 31, 1998 amounted to $120.
At March 31, 1998, Columbian did not have any loans not currently
classified as nonaccrual, 90 days past due or restructured but where known
information about possible credit problems of borrowers causes management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as nonaccrual, 90 days past
due or restructured.
Other nonperforming assets of $374,000 consisted of four properties
acquired through foreclosure. Such properties consisted of one small
multi-family and three single-family dwellings, which were carried at $299,824
at March 31, 1998 and Columbian's participation in a townhouse project, which
was carried at $74,514 at March 31, 1998.
29
<PAGE>
Asset Classification and Allowances for Losses. Federal regulations
require savings institutions to classify their assets on the basis of quality on
a regular basis. On a monthly basis, Columbian reviews its assets to determine
whether any assets require classification or re-classification. An asset is
classified as "substandard" if it is determined to be inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. An asset is classified as "doubtful" if full collection is
highly questionable or improbable. An asset is classified as "loss" if it is
considered uncollectible, even if a partial recovery could be expected in the
future. The regulations also provide for a "special mention" designation,
described as assets which do not currently expose a savings institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require a savings institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified loss, a savings institution must either establish specific allowances
for loan losses in the amount of the portion of the asset classified loss, or
charge off such amount. Federal examiners may disagree with a savings
institution's classifications. If a savings institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS Regional Director. At March 31, 1998, Columbian had $2,479 of assets
classified as substandard and no assets classified as doubtful or loss. The
aggregate of the aforementioned classifications represented 0.12% of Columbian's
total assets and 0.008% of Columbian's tangible regulatory capital, at March 31,
1998.
In originating loans, Columbian recognizes that credit losses will
occur and that the risk of loss will vary with, among other things, the type of
loan being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain a general
allowance for loan losses based on, among other things, regular reviews of
delinquencies and loan portfolio quality, character and size, Columbian's and
the industry's historical and projected loss experience and current and
forecasted economic conditions. Columbian increases its allowance for loan
losses by charging provisions for possible losses against Columbian's income.
Federal examiners may disagree with the savings institution as to the
appropriate level of the institution's allowance for loan losses.
The OTS, along with the other federal banking regulators, adopted a
joint policy statement on the adequacy of general valuation allowances
applicable to all federally insured depository institutions. The policy
statement provides that the primary responsibility for judging the adequacy of
general valuation allowances lies with management. Examiners will evaluate the
methodology and process used by management to establish such allowances. In
addition, examiners will judge the adequacy of the allowance by calculating
whether the allowance is at least equal to the following percentages of assets:
(i) the amount of estimated credit losses estimated to result over the next
twelve months from unclassified and special mention assets based on annual net
charge-offs experienced during the previous two or three years; (ii) 15% of
substandard assets; and (iii) 50% of doubtful assets.
Management actively monitors Columbian's asset quality and charges off
loans and properties acquired in settlement of loans against the allowances for
losses on loans and such properties when appropriate and provides specific loss
reserves when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
Columbian's methodology for establishing the allowance for loan losses
takes into consideration probable losses that have been identified in connection
with specific loans as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of Columbian's loans and
evaluates the need to establish general and specific allowances on the basis of
this review. General allowances are established by the Board of Directors on at
least a quarterly basis based on an assessment of risk in Columbian's loans
taking into consideration the composition and quality of the portfolio,
delinquency trends, current charge-off and loss experience, the state of the
real estate market and economic conditions generally. Specific allowances are
provided for individual loans, or portions of loans, when ultimate collection is
considered improbable by management based on the current payment status of the
loan and the fair value or net realizable value of the security for the loan. At
the date of foreclosure or other repossession or at the date Columbian
determines a property is an "in-substance foreclosed" property, Columbian
transfers the property to real estate
30
<PAGE>
acquired in settlement of loans at the lower of cost or fair value, less
estimated selling costs. Fair value is defined as the amount in cash or
cash-equivalent value of other consideration that a real estate parcel would
yield in a current sale between a willing buyer and a willing seller. At March
31, 1998, Columbian held $374,000 in real estate acquired in settlement of
loans. Any amount of cost in excess of fair value is charged-off against the
allowance for loan losses. Columbian records an allowance for estimated selling
costs of the property immediately after foreclosure. Subsequent to acquisition,
the property is periodically evaluated by management and an allowance is
established if the estimated fair value of the property, less estimated costs to
sell, declines. If, upon ultimate disposition of the property, net sales
proceeds exceed the net carrying value of the property, a gain on sale of real
estate is recorded.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------- ---------------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period................. $ 180 $ 180 $ 180 $ 156
Total charge offs.............................. -- -- -- --
---------- ---------- ---------- ----------
Total recoveries............................... -- -- -- --
---------- ---------- ---------- ----------
Net loans charged off.......................... -- -- -- --
---------- ---------- ---------- ----------
Provision for loan losses...................... -- -- -- 24
---------- ---------- ---------- ----------
Balance at end of period....................... $ 180 $ 180 $ 180 $ 180
========== ========== ========== ==========
Ratio of net charge-offs to average
loans outstanding during the period......... -- % -- % --% --%
========== ========== ========== ==========
</TABLE>
31
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
AT MARCH 31, 1998 1997 1996
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- -------- ------------- ------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential........... $ 37 73.32% $ 37 72.02% $ 37 66.83%
Construction........................ 105 6.05 105 8.43 105 8.03
Home equity and second mortgages.... 8 7.40 8 8.06 8 8.15
Commercial.......................... 25 12.38 25 10.53 25 15.73
Consumer............................... 5 .85 5 0.96 5 1.26
-------- ------- -------- -------- ------- -------
Total allowance for loan losses... $ 180 100.00% $ 180 100.00% $ 180 100.00%
======== ====== ======== ====== ======= ======
</TABLE>
MORTGAGE-BACKED AND RELATED SECURITIES
Columbian maintains a significant portfolio of mortgage-backed securities
in the form of Government National Mortgage Association ("GNMA") pass-through
certificates, FNMA and FHLMC participation certificates. GNMA pass-through
certificates are guaranteed as to the payment of principal and interest by the
full faith and credit of the U.S. Government, while FNMA and FHLMC certificates
are each guaranteed by their respective agencies as to principal and interest.
Mortgage-backed securities generally entitle Columbian to receive a pro rata
portion of the cash flows from an identified pool of mortgages.
Although mortgage-backed and related securities generally yield from 60 to
100 basis points less than whole loans, they present substantially lower credit
risk and are more liquid than individual mortgage loans and may be used to
collateralize obligations of the Bank. Because the Bank receives regular
payments of principal and interest from its mortgage-backed securities, these
investments provide more consistent cash-flows than investments in other debt
securities which generally only pay principal at maturity. Mortgage-backed
securities also help the Bank meet certain definitional tests for favorable
treatment under federal banking and tax laws. See "Regulation -- Qualified
Thrift Lender Test" and "Taxation."
Mortgage-backed and related securities, however, expose the Bank to
certain unique risks. In a declining rate environment, accelerated prepayments
of loans underlying these securities expose the Bank to the risk that it will be
unable to obtain comparable yields upon reinvestment of the proceeds. In the
event the mortgage-backed security has been funded with an interest-bearing
liability with a maturity comparable to the original estimated life of the
mortgage-backed security, the Bank's interest rate spread could be adversely
affected. Conversely, in a rising interest rate environment, the Bank may
experience a lower than estimated rate of repayment on the underlying mortgages,
effectively extending the estimated life of the mortgage-backed security and
exposing the Bank to the risk that it may be required to fund the asset with a
liability bearing a higher rate of interest. Columbian seeks to avoid interest
rate risk by investing in adjustable-rate mortgage-backed securities, which
constitute 42% of the mortgage-backed securities portfolio.
32
<PAGE>
INVESTMENT ACTIVITIES
Columbian is permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB of Atlanta, certificates of
deposits in federally insured institutions, certain bankers' acceptances and
federal funds. Columbian may also invest, subject to certain limitations, in
commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds. Federal regulations require the Bank to
maintain an investment in FHLB of Atlanta stock and a minimum amount of liquid
assets which may be invested in cash and specified securities. From time to
time, the OTS adjusts the percentage of liquid assets which savings are required
to maintain.
Columbian invests in investment securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. Such investments generally include
sales of federal funds, and purchases of federal government and agency
securities and qualified deposits in other financial institutions. Investment
decisions generally are made by the Chief Financial Officer in accordance with
investment strategies approved by the Investment Committee of the Board of
Directors.
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT
MARCH 31, AT DECEMBER 31,
1998 1997 1996
-------------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment securities available for sale:
Brokerage houses' promises to pay
(secured by U.S. Treasury securities)........................... $ -- $ -- $ 465
U.S. government and agency securities.............................. 2,039 2,035 1,528
Cash funds held in money market accounts
with broker..................................................... 477 350 142
Securities held to maturity (1):
U.S. government and agency securities............................. 2,500 2,845 4,099
Mortgage-backed securities........................................ 2,254 2,348 3,140
-------- --------- ---------
Total investment securities.................................... 7,270 7,578 9,374
Cash and cash equivalents............................................ 3,091 2,686 1,605
FHLB stock........................................................... 215 215 215
-------- --------- ---------
Total investments.............................................. $ 10,576 $ 10,479 $ 11,194
======== ========= =========
</TABLE>
33
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment portfolio at
March 31, 1998.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
-------------------- --------------------- ----------------------- -------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
------- ------- ------- ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities.................. $ -- -- % $ -- -- % $ 2,039 7.64% $ -- -- %
Cash funds held in money
market accounts with
broker...................... 477 5.12 -- -- -- -- -- --
Securities held to maturity:
U.S. government and agency
securities.................. -- -- -- -- 1,500 6.95 1,000 7.10
Mortgage-backed securities..... -- 702 6.13 609 5.91 943 7.30
-------- -------- -------- -------
Total....................... $ 477 $ 702 $ 4,148 $ 1,943
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
TOTAL INVESTMENT PORTFOLIO
-------------------------------
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
------- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities.................. $ 2,039 $ 2,039 7.64%
Cash funds held in money
market accounts with
broker...................... 477 477 5.12
Securities held to maturity:
U.S. government and agency
securities.................. 2,500 2,500 7.01
Mortgage-backed securities..... 2,254 2,264 6.56
-------- --------
Total....................... $ 7,270 $ 7,280
======== ========
</TABLE>
34
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of Columbian's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, interest payments and maturing
investments. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by prevailing market interest rates and money market conditions. Borrowings from
the FHLB of Atlanta may be used to supplement the Bank's available funds.
Deposits. Columbian attracts deposits principally from within its
market area by offering a variety of deposit instruments, including passbook and
statement accounts and certificates of deposit which range in term from 91 days
to ten years. Deposit terms vary, principally on the basis of the minimum
balance required, the length of time the funds must remain on deposit and the
interest rate. Columbian also offers Individual Retirement Accounts ("IRAs").
Columbian's policies are designed primarily to attract deposits from local
residents through the Bank's branch network rather than from outside the Bank's
market area. Columbian also holds deposits from various municipal and other
governmental agencies. Columbian does not accept deposits from brokers due to
their rate sensitivity. Columbian's interest rates, maturities, service fees and
withdrawal penalties on deposits are established by management on a periodic
basis. Management determines deposit interest rates and maturities based on the
Bank's funds acquisition and liquidity requirements, the rates paid by the
Bank's competitors, the Bank's growth goals and applicable regulatory
restrictions and requirements.
Savings deposits in the Bank at March 31, 1998 were represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
INTEREST MINIMUM MINIMUM BALANCES PERCENTAGE OF
RATE TERM CATEGORY AMOUNT IN THOUSANDS TOTAL SAVINGS
- ------- ------- -------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
3.56% None Regular passbook $ 25 $ 1,962 7.10%
4.09 None Money market passbook 5,000 1,023 3.70
4.52 None Statement savings 10,000 3,997 14.47
2.76 None NOW accounts 500 961 3.48
Term Certificates
-----------------
4.19 6 months Fixed rate, Fixed term 500 62 0.22
5.35 12 months Fixed rate, Fixed term 500 576 2.09
5.50 13 months Fixed rate, Fixed term 500 3,513 12.71
5.60 18 months Fixed rate, Fixed term 500 3,010 10.89
5.84 19 months Fixed rate, Fixed term 500 826 2.99
5.96 25 months Fixed rate, Fixed term 500 1,529 5.53
5.44 30 months Fixed rate, Fixed term 500 138 0.50
6.20 37 months Fixed rate, Fixed term 500 788 2.85
6.44 42 months Fixed rate, Fixed term 500 491 1.78
6.30 49 months Fixed rate, Fixed term 500 334 1.21
6.89 60 months Fixed rate, Fixed term 500 7,348 26.59
6.78 61 months Fixed rate, Fixed term 500 1,065 3.86
5.97 1 year IRA, Fixed rate, Fixed term 500 7 0.03
--------- -------
$ 27,630 100.00%
========= ======
</TABLE>
35
<PAGE>
The following table sets forth the term certificates in the Bank
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
MARCH 31, -----------------------------
RATE 1998 1997 1996
---- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
4.00 - 5.99%............................. $ 10,953 $ 10,943 $ 10,978
6.00 - 7.99%............................. 8,734 8,995 9,799
---------- ---------- ----------
$ 19,687 $ 19,938 $ 20,777
========== ========== ==========
</TABLE>
The following table sets forth the amount and maturities of term
certificates at March 31, 1998.
<TABLE>
<CAPTION>
AMOUNT DUE
-------------------------------------------------------------------------
LESS THAN AFTER
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
- ---- -------- --------- --------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
4.00 - 5.99%.................. $ 7,120 $ 2,875 $ 429 $ 529 $ 10,953
6.00 - 7.99%.................. 4,349 2,847 938 600 8,734
--------- ---------- ---------- ---------- ----------
$ 11,469 $ 5,722 $ 1,367 $ 1,129 $ 19,687
========= ========== ========== ========== ==========
</TABLE>
The following table indicates the amount of the Bank's term
certificates of $100,000 or more by time remaining until maturity as of March
31, 1998.
<TABLE>
<CAPTION>
TERM
MATURITY PERIOD CERTIFICATES
--------------- ------------
(IN THOUSANDS)
<S> <C>
Three months or less....................... $ --
Over three through six months.............. --
Over six through 12 months................. 990
Over 12 months............................. 1,703
-----------
Total.................................. $ 2,693
===========
</TABLE>
Borrowings. Savings deposits historically have been the primary source
of funds for Columbian's lending, investment and general operating activities.
Columbian is authorized, however, to use advances from the FHLB of Atlanta to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB system, the Bank is required to own stock in the FHLB of
Atlanta and is authorized to apply for advances. Advances are made pursuant to
several different programs, each of which has its own interest rate and range of
maturities. Advances from the FHLB of Atlanta are secured by the Bank's stock in
the FHLB and a blanket pledge of the Bank's mortgage loan and mortgage-backed
securities portfolios. At March 31, 1998, the Bank had no advances outstanding
from the FHLB of Atlanta.
36
<PAGE>
TAXATION
Federal Income Taxation. Savings institutions are subject to the
provisions of the Code in the same general manner as other corporations.
However, prior to recent legislation, institutions such as Columbian which meet
certain definitional tests and other conditions prescribed by the Code,
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans may be based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method").
Columbian generally elected to use the method which has resulted in the
greatest deductions for federal income tax purposes. Under the experience
method, the bad debt deduction for an addition to the reserve for qualifying
real property loans is an amount determined under a formula based generally on
the bad debts actually sustained by a savings institution over a period of
years. Under the percentage of taxable income method, the bad debt reserve
deduction for qualifying real property loans is computed as a percentage, which
Congress has reduced from as much as 60% in prior years to 8% of taxable income,
with certain adjustments, effective for taxable years beginning after 1986. The
allowable deduction under the percentage of taxable income method (the
"percentage bad debt deduction") for taxable years beginning before 1987 was
scaled downward in the event that less than 82% of the total dollar amount of
the assets of an institution were within certain designated categories. When the
percentage method bad debt deduction was lowered to 8%, the 82% qualifying
assets requirement was lowered to 60%. For all taxable years, there is no
deduction in the event that less than 60% of the total dollar amount of the
assets of an institution falls within such categories.
Earnings appropriated to Columbian's bad debt reserve and claimed as a
tax deduction are not available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation), unless the Bank includes the amount in taxable income, along with
the amount deemed necessary to pay the resulting federal income tax.
Legislation enacted in 1996 repealed the percentage of taxable income
method of calculating the bad debt reserve. Savings associations, like the Bank,
which have previously used that method are required to recapture into taxable
income post-1987 reserves in excess of the reserves calculated under the
experience method over a six-year period beginning with the first taxable year
beginning after December 31, 1995. The start of such recapture may be delayed
until the third taxable year beginning after December 31, 1995 if the dollar
amount of the institution's residential loan originations in each year is not
less than the average dollar amount of residential loan originated in each of
the six most recent years disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans. Columbian has
provided deferred taxes for the amount of the recapture.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, will be treated the same as
commercial banks. Institutions with $500 million or more in assets will only be
able to take a tax deduction when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
For taxable years beginning after June 30, 1986, the Code imposes an
alternative minimum tax at a rate of 20%. The alternative minimum tax generally
applies to a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI") and is payable to the extent
such AMTI exceeds an exemption amount. The Code provides that an item of tax
preference is the excess of the bad debt deduction allowable for a taxable year
pursuant to the percentage of taxable income method over the amount allowable
under the experience method. The other items of tax preference that constitute
AMTI include (a) tax-exempt interest on newly-issued (generally, issued on or
after August 8, 1986) private activity bonds other than certain qualified bonds
and (b) for taxable years including
37
<PAGE>
1987 through 1989, 50% of the excess of (i) the taxpayer's pre-tax adjusted net
book income over (ii) AMTI (determined without regard to this latter preference
and prior to reduction by net operating losses). For taxable years beginning
after 1989, this latter preference has been replaced by 75% of the excess (if
any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI
(determined without regard to this preference and prior to reduction by net
operating losses). For any taxable year beginning after 1986, net operating
losses can offset no more than 90% of AMTI. Certain payments of alternative
minimum taxes may be used as credits against regular tax liabilities in future
years. In addition, for taxable years after 1986, corporations, including
savings institutions, are also subject to an environmental tax equal to 0.12% of
the excess of AMTI for the taxable year (determined without regard to net
operating losses and the deduction for the environmental tax) over $2.0 million.
Columbian is not currently paying any amount of alternative minimum tax but may,
depending on future results of operations, be subject to this tax.
Columbian's income tax returns have not been audited by the IRS for the
past five years.
State and Local Income Taxation. The State of Maryland imposes an
income tax of approximately 7% on income measured substantially the same as
federally taxable income. In addition, Maryland imposes a franchise tax at a
rate of 0.013% of the withdrawable value of the deposits that a savings
institution holds in Maryland as of December 31 each year.
COMPETITION
Columbian faces strong competition both in originating real estate,
consumer and other loans and in attracting deposits. Columbian competes for real
estate and other loans principally on the basis of interest rates, the types of
loans it originates and the quality of service it provides to borrowers. Its
competition in originating loans comes primarily from other savings
institutions, commercial banks and mortgage bankers making loans secured by real
estate located in the Bank's market area. Commercial banks, credit unions and
finance companies provide vigorous competition in consumer lending. Competition
may increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
PERSONNEL
As of March 31, 1998, Columbian had eight full-time employees and one
part-time employee, none of whom was represented by a collective bargaining
agreement. Management believes its relations with its employees are good.
PROPERTIES
The following table sets forth certain additional information regarding
the Bank's office facilities as of March 31, 1998.
<TABLE>
<CAPTION>
YEAR OPENED SQUARE FOOTAGE NET BOOK VALUE
----------- -------------- --------------
<S> <C> <C> <C>
MAIN OFFICE:
303-307 St. John Street
Havre de Grace, Maryland 21078 1970 3,355 $ 127,539
</TABLE>
Columbian also owns a parcel of land on Route 40 near Havre de Grace
which it acquired in fiscal year 1995 for approximately $200,000. Such land is
being held for a possible future branch location.
The net book value of Columbian's office furniture, fixtures and
equipment was $14,901 at March 31, 1998.
LEGAL PROCEEDINGS
Although the Bank from time to time is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Bank is a party or to which its property is subject.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Columbian's results of operations are primarily dependent on the amount
of its net interest income, which is the difference between the interest income
from its earning assets, primarily loans and investments, and the interest
expense on its deposits. Net income is affected significantly by general
economic and competitive conditions, policies of federal regulators and by the
level of non-interest expenses, such as employee salaries and benefits, and
other income, such as loan related fees and fees on deposit related services.
ASSET/LIABILITY MANAGEMENT
Columbian's net interest income is sensitive to changes in interest
rates, as the rates paid on its interest-bearing liabilities generally change
faster than the rates earned on interest-earning assets. As a result, net
interest income will frequently decline in periods of rising interest rates and
increase in periods of falling interest rates.
To mitigate the impact of changing interest rates on its net interest
income, Columbian manages its interest sensitivity and asset/liability products
through a committee which consists of the President and two members of the Board
of Directors (the "Financial and Operational Policies and Procedures
Committee"). The Financial and Operational Policies and Procedures Committee
reports to the Board of Directors of the Bank.
One objective of the Financial and Operational Policies and Procedures
Committee is to manage the interest rate sensitivity of the Bank through the
determination and adjustment of the asset/liability composition and pricing
strategies. The Committee then monitors the impact of the interest rate risk and
earnings consequences of such strategies for consistency with the Bank's
liquidity needs, growth and capital adequacy. Columbian's principal strategies
to reduce its interest rate risks are (i) the origination of adjustable-rate
loans, (ii) the maintenance of liquidity in excess of regulatory requirements
and (iii) competitive pricing of deposit products for longer term funds and
reasonable pricing compared to alternative sources of funds.
Since 1984, Columbian has had a policy of originating fixed rate loans,
adjustable rate loans or loans with a balloon feature. In 1993 and 1995, the
Bank originated Acquisition, Development and Construction loans for the
construction of residential housing. A portion of these loans were participated
to other institutions. Columbian has also purchased participating interest in
construction of residential housing from other institutions. Adjustable rate
mortgage loans have interest rates that adjust every one or three years at the
option of the Bank with a cap limited to 2% per year with a life cap of 6%.
Residential ARMs have rates based on the 52 week Treasury Bill rates, whereas
commercial loans are based on prime rate plus one to three percentage points.
Balloon mortgages granted by the Bank contain an optional call provision at the
end of three years on commercial loans and fifteen years on residential mortgage
loans, at which time the Bank may elect to renegotiate the term of the loan at
then current interest rates. Because interest rates on ARMs adjust at specified
intervals in accordance with their contractual terms and market interest rates
frequently change, the interest rates on ARMs do not always directly correspond
with market interest rates.
Although Columbian continues to be vulnerable to rising interest rates,
management believes that its policies on asset/liability and interest rate risk
have tended to mitigate vulnerability.
NET PORTFOLIO VALUE
In order to encourage savings associations to reduce their interest
rate risk, the OTS adopted a rule incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its net portfolio value ("NPV") to changes in interest rates.
39
<PAGE>
NPV is the difference between incoming and outgoing discounted cash flows from
assets, liabilities, and off-balance sheet contracts. An institution's IRR is
measured as the change to its NPV as a result of a hypothetical 200 basis point
("bp") change in market interest rates. A resulting change in NPV of more than
2% of the estimated market value of its assets will require the institution to
deduct from its capital 50% of that excess change. The rules provide that the
OTS will calculate the IRR component quarterly for each institution. Columbian,
based on asset size and risk-based capital, has been informed by the OTS that it
is exempt from this rule. Nevertheless, the following table presents the Bank's
NPV at March 31, 1998, as calculated by the OTS, based on information provided
to the OTS by the Bank.
<TABLE>
<CAPTION>
NPV AS % OF PV
NET PORTFOLIO VALUE OF ASSETS
------------------------- --------------------------
CHANGE (DOLLARS IN THOUSANDS) NPV
IN RATES $AMOUNT $CHANGE(1) %CHANGE(2) RATIO(3) CHANGE(4)
-------- --------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
+400 bp $ 1,184 $ (1,789) (60.17)% $ 3.93 $ (593) bp
+300 bp 1,685 (1,288) (43.82) 5.59 (427) bp
+200 bp 2,186 (787) (26.47) 7.25 (261) bp
+100 bp 2,579 (394) (13.23) 8.56 (130) bp
0 bp 2,973 -- -- 9.86 --
-100 bp 3,154 181 6.08 10.46 60 bp
-200 bp 3,335 362 12.16 11.06 120 bp
-300 bp 3,418 445 14.99 11.34 148 bp
-400 bp 3,502 529 17.81 11.62 176 bp
</TABLE>
- ----------
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
<TABLE>
<CAPTION>
AT
MARCH 31,
1998
---------
<S> <C>
***Risk Measures: 200 bp rate shock***
Pre-Shock NPV Ratio: NPV as % of PV of Assets 9.86%
Exposure Measure: Post-Shock NPV Ratio 7.25%
Sensitivity Measure: Change in NPV Ratio 2.61 bp
</TABLE>
Columbian is subject to interest rate risk and, as can be seen above,
changes in interest rates may reduce the Bank's NPV. The OTS has the authority
to require otherwise exempt institutions to comply with the rule concerning
interest rate risk.
40
<PAGE>
Certain shortcomings are inherent in the preceding NPV tables since the
data reflect hypothetical changes in NPV based upon assumptions used by the OTS
to evaluate the Bank as well as other institutions. Based on the tables, net
interest income should increase with an instantaneous 100 basis point increase
in interest rates while net interest income should decline with instantaneous
declines in interest rates.
In times of decreasing interest rates, fixed rate assets could increase
in value and the lag in repricing of interest rate sensitive assets could be
expected to have a positive effect on the Bank.
41
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid at the date and for the periods indicated. Such yields and
costs are derived by dividing income or expense by the average monthly balance
of assets or liabilities, respectively, for the periods presented. Average
balances are derived from month-end balances. Management does not believe that
the use of month-end balances instead of daily balances has caused any material
difference in the information presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
AT MARCH 31, 1998 1997
1998 ---------------------------- ------------------------------
----------------- AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
------- ------ ------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)..................... $ 18,615 8.39% $ 18,768 $ 400 8.53% $ 18,442 $ 394 8.55%
Investment securities available for sale 2,516 7.04 2,501 40 6.40 2,123 39 7.35
Investment securities - held to
maturity (2)......................... 2,715 7.03 3,144 54 6.87 3,645 56 6.15
Mortgage-backed securities............... 2,254 6.39 2,293 37 6.45 2,921 47 6.44
Other interest-earning assets (3)........ 2,660 5.73 2,148 33 6.15 2,333 30 5.14
---------- --------- ------- --------- --------
Total interest-earning assets .. 28,760 7.74 28,854 564 7.82 29,464 566 7.68
------- --------
Non-interest-earning assets................ 1,445 1,318 1,511
---------- --------- ---------
Total assets.................... $ 30,205 $ 30,172 $ 30,975
========== ========= =========
Interest-bearing liabilities:
Deposits:
NOW accounts......................... $ 961 2.76% $ 936 6 2.56 $ 793 5 2.52
Savings deposits..................... 6,982 4.06 7,041 68 3.86 7,286 72 3.95
Certificates of deposit.............. 19,687 5.88 19,947 298 5.98 20,934 311 5.94
---------- --------- ------- --------- --------
Total interest-bearing liabilities 27,630 5.33 27,924 372 5.33 29,013 388 5.34
------- --------
Non-interest-bearing liabilities........... 498 188 74
---------- --------- ---------
Total liabilities............... 28,128 28,112 29,087
Stockholders' equity....................... 2,077 2,060 1,888
---------- --------- ---------
Total liabilities and stockholders'
equity....................... $ 30,205 $ 30,172 $ 30,975
========== ========= =========
Net interest income........................ $ 192 $ 178
======= ========
Interest rate spread (4)................... 2.41% 2.49% 2.34%
===== ======= ========
Net yield on interest-earning assets (5)... 0.66% 0.60%
======= ========
Ratio of average interest-earning assets
to average interest-bearing liabilities.. 103.33% 101.55%
====== ======
</TABLE>
- ---------
(1) Includes nonaccrual loans.
(2) Includes investment securities and FHLB stock.
(3) Includes Federal Funds and interest-bearing deposits in other banks.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
42
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------- --------- ------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)............................ $ 18,829 $ 1,654 8.78% $ 18,622 $ 1,651 8.87%
Investment securities available for sale........ 2,100 156 7.43 2,555 187 7.32
Investment securities - held to maturity (2).... 3,371 243 7.21 3,800 231 6.08
Mortgage-backed securities...................... 2,674 158 5.91 3,558 228 6.41
Other interest-earning assets (3)............... 2,333 123 5.27 1,857 105 5.65
---------- ---------- ---------- ----------
Total interest-earning assets.............. 29,307 2,334 7.96 30,392 2,402 7.90
Non-interest-earning assets........................ 1,350 1,150
---------- ----------
Total assets............................... $ 30,657 $ 31,542
========== ==========
Interest-bearing liabilities:
Deposits:
NOW accounts................................... $ 934 $ 25 2.68% $ 743 $ 20 2.69%
Savings deposits............................... 7,110 288 4.05 7,249 292 4.03
Certificates of deposit......................... 20,489 1,234 6.02 21,606 1,320 6.11
---------- ---------- ---------- ----------
Total interest-bearing liabilities......... 28,533 1,547 5.42 29,598 1,632 5.51
---------- ----------
Non-interest-bearing liabilities................... 192 48
---------- ----------
Total liabilities.......................... 28,725 29,646
Stockholders' equity............................... 1,932 1,896
---------- ----------
Total liabilities and stockholders' equity. $ 30,657 $ 31,542
========== ==========
Net interest income................................ $ 787 $ 770
========== ==========
Interest rate spread (4)........................... 2.54% 2.39%
======= ======
Net yield on interest-earning assets (5)........... 2.69% 2.53%
======= =======
Ratio of average interest-earning assets to
average interest-bearing liabilities............ 102.71% 102.68%
====== ======
</TABLE>
- -----------
(1) Includes non-accrual loans.
(2) Includes investment securities and FHLB stock.
(3) Includes Federal Funds and interest-bearing deposits in other banks.
(4) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
43
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate); (ii) changes in rates (change in rate multiplied by old
volume).
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996 1996 VS. 1995
---------------------------- ------------------------------- -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
---------------------------- ------------------------------- -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- ----- ------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............. $ 7 $ (1) $ 6 $ 17 $ (14) $ 3 $ 130 $ 7 $ 137
Investment securities -
available for sale (1)..... 2 (1) 1 (34) 3 (31) 12 (9) 3
Investment securities - held
to maturity................. (11) 9 (2) (19) 31 12 17 (46) (29)
Mortgage-backed securities... (10) -- (10) (53) (17) (70) (50) 16 (34)
Other interest-earning assets -- 3 3 24 (6) 18 (2) (2) (4)
-------- -------- ------- ------- -------- ------- ------- ------- -------
Total interest-earning
assets............... (12) 10 (2) (65) (3) (68) 107 (34) 73
-------- -------- ------- ------- -------- ------- ------- ------- -------
Interest expense:
Deposits...................... (15) (1) (16) (68) (17) (85) 35 16 51
-------- -------- ------- ------- -------- ------- ------- ------- -------
Total interest-bearing
liabilities.......... (15) (1) (16) (68) (17) (85) 35 16 51
-------- -------- ------- ------- -------- ------- ------- ------- -------
Change in net interest income.... $ 3 $ 11 $ 14 $ 3 $ 14 $ 17 $ 72 $ (50) $ 22
======== ======== ======= ======= ======== ======= ======= ======= =======
</TABLE>
- ------------
(1) Investment securities - available for sale were transferred from investment
securities - held to maturity at December 31, 1995.
44
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997
AND 1996
Total assets of the Bank were $30,204,681 as of March 31, 1998,
compared to $30,233,114 at December 31, 1997, a decrease of $28,433 or .09%. The
decrease was primarily attributable to decreases in investments held to maturity
of $345,416 or 12.14%, loans receivable of $189,175 or 1.01% and mortgage-backed
securities of $94,302 or 4.02%. The decreases in total assets were partially
offset by increases in federal funds sold of $437,775 or 76.57%, investments
available for sale of $130,000 or 5.46% and foreclosed real estate of $90,000 or
31.65%.
Total liabilities of the Bank at March 31, 1998 were $28,127,617,
compared to $28,204,362 at December 31, 1997, a decrease of $76,745 or 0.27%.
The decrease in total liabilities was primarily attributable to a decrease in
checks outstanding in excess of bank balance of $130,861 or 62.09%. The decrease
was partially offset by an increase in the balance of advance payment by
borrowers for taxes and insurance of $84,640 or 47.92%. Increases in advance
payment by borrowers for taxes and insurance can be expected to continue until
July when property taxes become due and funds are disbursed.
Stockholders' equity was $2,077,064 as of March 31, 1998, compared to
$2,028,752, an increase of $48,312 or 2.38%. The increase was the result of net
income of $43,279 for the three-month period ended March 31, 1998 and the
proceeds from stock options exercised of $10,800, partially offset by the
payment of a cash dividend of $7,782. An increase to unrealized gains on
investment securities of $2,015 also increased stockholders' equity.
Total assets at December 31, 1997 decreased by $755,119 or 2.44% to
$30,233,114 from $30,988,233 at December 31, 1996. The decrease was primarily
the result of a decrease in investments held to maturity of $1,253,865 and
mortgage backed securities of $792,520 partially off-set by an increase in
interest-bearing deposits in other banks of $541,079 and the loan portfolio of
$291,797. Liabilities decreased by $919,583 or 3.16% to $28,204,362 at December
31, 1997 from $29,123,945 at December 31, 1996. The decrease was primarily the
result of a decline in deposits of $1,129,937 partially off-set by an increase
in checks outstanding in excess of bank balance of $210,759. Stockholders'
equity increased $164,464 as the result of net income and an increase in net
unrealized gains on available for sale investments, in excess of cash dividends
paid.
The changes in the statement of financial condition were the result of
using a portion of the proceeds from the Bank's maturing investments and
repayments on mortgage backed securities to fund deposit outflows.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
1998 AND 1997
General. Net income for the three month period ended March 31, 1998 was
$43,279 or $0.58 per share, compared to $35,860 or $0.49 per share for the same
period in 1997, an increase of $7,419 or 20.69%. The increase was the result of
a decrease in interest expense. A decrease in interest income and an increase in
non-interest expenses partially offset the items that increased net income.
Net interest income increased $13,863 or 7.79% to $191,762 for the
three-month period ended March 31, 1998, from $177,899 for the same period in
1997.
Columbian's net interest income is sensitive to changes in interest
rates, as the rates paid on its interest-bearing liabilities generally change
faster than the rates earned on interest-earning assets. Accordingly, an
increase in interest rates could adversely affect net interest income and net
income.
Interest Income. Total interest income decreased insignificantly for
the three month period ended March 31, 1998 to $563,983, compared to $565,895
for the same period in 1997. Interest on mortgage backed securities decreased by
$9,340 or 20.06% to $37,224 for the three months ended March 31, 1998 from
$46,564 during the same period in 1997. The decrease is attributable to a
decline in the average balance of mortgage backed securities of $628,150 or
21.51% and a 12 basis point drop in the weighted average rate, for the three
month period ended March 31, 1998,
45
<PAGE>
compared to the same period in 1997. A slight decrease in interest on
investments held to maturity also contributed to the decline. Such decreases
were partially off-set by a slight increase in interest on loans, investments
available for sale and other interest-earning assets for the three month period
ended March 31, 1998, compared to the same period in 1997.
Interest Expense. Total interest expense for the three months ended
March 31, 1998 declined by $15,775 or 4.07% to $372,221, compared to $387,996
for the same period in 1997. The average balance of deposits held during the
first three months of 1998 decreased by $1,102,528 or 3.82%, compared to the
same period in 1997, resulting in a decline in interest paid to depositors.
Provision for Loan Losses. Columbian's management continually monitors
and adjusts its loan loss reserve based upon its analysis of the loan portfolio.
Reserves are increased by a charge to income, the amount of which depends upon
the analysis of the portfolio and management's estimate of the changing risks
inherent in its portfolio and the conditions in the real estate market and the
economy, generally. No provision for loan losses was made for either the three
months ended March 31, 1998 or 1997, respectively. No charges were made against
the Bank's reserves during the three months ended March 31, 1998 or 1997.
Other Income. Other income consists of service charges, late charges
and other miscellaneous operating income. Other income increased insignificantly
to $15,389 for the three months ended March 31, 1998, compared to $13,029 for
the three months ended March 31, 1997.
Non-interest Expense. Non-interest expense for the three months ended
March 31, 1998 increased $10,369 or 7.82% to $146,737 compared to $136,098 for
the same period in 1997. The increase was primarily the result of an increase in
salaries and other related expenses, data processing and legal expenses.
Salaries and other related expenses increased due to general salary increases
and an increase in health insurance premiums. Legal expenses increased as a
result of the additional costs associated with the public filing now required
since the Bank has reregistered its stock.
Income Taxes. Columbian's income tax expense for the three months ended
March 31, 1998 was $17,135 compared to $18,970 for the same period in 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996
General. Columbian's net income increased by $135,258 to $162,862, or
$2.29 per share, in 1997 from $27,604, or $0.39 per share, in 1996. Net income
was significantly impacted in 1996 by nonrecurring events. All financial
institutions whose deposits are insured by the SAIF incurred a one-time special
assessment to recapitalize the SAIF. Columbian's special assessment was $186,000
which reduced net income on an after tax basis by $116,000 in 1996. Had this
event not occurred net income for 1996 would have been $143,604. Net income also
increased in 1997 because the Bank experienced a decline in interest expense,
increasing net interest income, a reduction in the provision for losses on loans
and gain on the sale of a building, all of which are more fully described below.
Net Interest Income. Net interest income increased by $17,163 or 2.23%
to $787,469 in 1997 from $770,306 in 1996. The increase was primarily
attributable to a decline in interest-bearing liabilities and the rate paid on
them. Average interest-bearing liabilities decreased by $1,064,892 in 1997 from
1996. The resultant increase in net interest income was also enhanced by a
decrease of 9 basis points in the average cost of interest-bearing liabilities.
The increase in net interest income was reduced by a decrease in average
interest-earning assets balances by $1,086,068 in 1997, compared to 1996.
As previously indicated, if interest rates increase generally, it could
be expected that the Bank's interest rate spread will narrow, and net interest
income would be adversely affected.
Interest Income. Interest on loans increased insignificantly in 1997,
as compared to 1996. An increase in the average balances of loans receivable of
approximately $207,000 was off-set by a decrease in the yield of 9 basis points.
46
<PAGE>
Interest on available for sale investments declined $30,839 or 16.53%
to $155,686 in 1997 from $186,525 in 1996. The decrease was the result of a
decline in the average balance of available for sale investments of
approximately $455,000. This was slightly off-set by an increase of 11 basis
points in the yield.
Interest earned on investments held to maturity increased by $12,002 or
5.19% to $243,279 in 1997 from $231,277 in 1996. An increase in the yield of 113
basis points to 7.22% in 1997 from 6.08% in 1996 was the primary reason for the
increase. The increase was somewhat mitigated by a decline in the average volume
of held to maturity investments. Columbian held an average of $3.4 million of
investments in 1997, compared to $3.8 million in 1996.
Interest on mortgage backed securities decreased by $70,083 or 30.76%
to $157,782 in 1997 from $227,865 in 1996. The decrease was primarily due to a
drop in the average balance of approximately $884,000 in 1997 compared to 1996,
coupled with a decrease of 50 basis points in the average yield on such
securities.
Interest earned on other interest-earning assets, including federal
funds sold and interest-bearing deposits in other banks, increased by $17,507 or
16.60% to $122,979 in 1997 from $105,472 in 1996. This increase was due to an
increase in the average balance of other interest-earning assets of
approximately $476,000, off-set slightly by a decrease of 38 basis points in
yield.
Interest Expense. Interest on deposits decreased by $85,481 or 5.24% to
$1,546,456 in 1997 from $1,631,937 in 1996. The decline in the interest expense
was attributable to a decrease in the average balance of deposits held of
approximately $1,065,000 in 1997, compared to 1996. Columbian also reduced
interest rates slightly. The weighted average rate paid to depositors was 5.42%
in 1997 compared to 5.51% in 1996, a decrease of 9 basis points.
Provision for Loan Losses. Columbian's management continually monitors
and adjusts its loan loss reserve based upon its analysis of the loan portfolio.
Reserves are increased by a charge to income, the amount of which depends upon
the analysis of the portfolio and management's estimate of the changing risks
inherent in its portfolio and the relative softness in the real estate market
and the economy, generally. No provision was made in 1997 and a provision of
$24,000 was established for 1996. No loans were charged against reserves in
either 1997 or 1996.
Gain on Sale of Premises and Equipment. During 1997, the Bank sold a
building attached to its main office that it had been renting. The building was
sold for $129,295 and had a book value of $84,526, resulting in a gain of
$44,769. Rental income on this building for 1996 was approximately $9,200.
Other Income. Other income represents service charges, late charges and
other miscellaneous operating income. Other income decreased insignificantly in
1997, as compared to 1996.
Non-interest Expenses. Non-interest expenses decreased by $161,790 or
20.34% to $633,636 in 1997 from $795,426 in 1996. The decrease was primarily
attributable to a special one-time deposit insurance premium assessment of
$186,000, which was imposed on all institutions with SAIF-insured deposits to
help recapitalize the SAIF in 1996. Deposit insurance premiums have also been
reduced as a result of the recapitalization of the deposit insurance fund.
Professional fees decreased by $12,348 or 21.43% to $45,262 in 1997 from $57,610
in 1996. The decrease in professional fees was attributable to certain expenses
incurred by the Bank in responding to an unsolicited takeover bid and in
re-registering the Columbian Common Stock under the Exchange Act in
1996. Decreases in non-interest expense were partially off-set by an increase in
salaries and other related expenses of $43,784 or 17.67% and other expenses of
$23,308 or 19.74%. The increase in salaries and other related expenses was due
to general salary increases and an increase in the cost of employee benefits
such as health insurance. The increase in other expenses was due to an increase
in outside services and office supplies.
47
<PAGE>
Provision for Income Taxes. The provision for income taxes increased by
$104,901 to $87,448 in 1997, compared to a benefit of $17,453 in 1996. The
provision increase was attributable to an increase in net income earned in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As a member of the FHLB System, the Bank is required by regulation to
maintain, for each calendar month, a daily average balance of cash and eligible
liquid investments of not less than 5% of the average daily balance of its net
withdrawable savings and borrowings (due in one year or less) during the
preceding calendar month. This liquidity requirement may be changed from time to
time by the OTS to any amount within the range of 4% to 10%. Columbian's
liquidity ratio was 23.32% at March 31, 1998 compared to 22.37% at December 31,
1997 and 18.40% at December 31, 1996.
Columbian's sources of liquidity have included principal and interest
payments on loans and mortgage backed securities, interest payments and
maturities of investment securities, and deposit inflows. Columbian uses funds
to originate loans, purchase mortgage backed securities and investments and pay
deposit withdrawals and operating expenses. Liquidity management in financial
institutions may be difficult at times because loans and other investments are
made for long term purposes and are funded by deposits which are withdrawable on
demand or short and intermediate term borrowings. Deposit outflows could occur
or growth may be restricted by such factors as excessive interest rates paid by
competitors, as well as investors seeking higher rates of returns through equity
investments. During 1997, deposits fell $1,129,937 or 3.93% to $27,642,195 from
$28,772,132 in 1996. Deposits declined an additional $12,000 during the three
months ended March 31, 1998. The decline in the Bank's deposit base may be
attributable to investors seeking higher returns through other investment
vehicles. Columbian's deposits decreased during 1996 in the amount of $943,100.
Columbian has the ability to reduce its commitment for new loan originations or
borrow significantly should the need arise.
Columbian provided cash from operating activities in the amount of
$159,802 in 1997, compared to cash used in operating activities in the amount of
$248,165 in 1996. The increase in cash flows from operating activities was
attributable to an increase in net income. During the three months ended March
31, 1998, operating activities provided $45,366 compared to using $127,837 in
cash during the three months ended March 31, 1997.
Columbian's cash flows from loan repayments and prepayments were
approximately $2.9 million in 1997 and $2.3 million in 1996. Repayments on
mortgage backed securities decreased to $782,000 in 1997, as compared to
$920,000 in 1996, as the portfolio balance is decreasing. Investments held to
maturity of $3.2 million matured and $2.0 million were purchased. New loan
originations were approximately $3.2 million in 1997 and $3.7 million in 1996
and were the Bank's most significant cash outflow. During the three months ended
March 31, 1998, investing activities provided $415,319 in cash flows compared to
$311,773 during the three months ended March 31, 1997.
Management monitors projected liquidity needs and determines the level
desirable, based in part on Columbian commitments to make loans and management's
assessments of Columbian's ability to generate funds. Liquidity may be adversely
affected by unexpected deposit outflows, excessive interest rates paid by
competitors, as well as adverse publicity relating to the savings and loan
industry and similar matters. Columbian is currently able to fund its operation
internally. Additional sources of liquidity are available to the Bank which
include the ability to utilize FHLB of Atlanta advances and the ability borrow
against mortgage backed and investment securities. Management believes it has
ample cash flows and liquidity to meet its loan commitments in the amount of
$800,000 as of March 31, 1998. At March 31, 1998, Columbian had sufficient
liquidity to meet mortgage loan commitments of $775,000 and home equity lines of
$25,000.
48
<PAGE>
YEAR 2000 COMPLIANCE
A great deal of information has been disseminated about the global
computer problem that may occur in the year 2000 which would affect the speed
and accuracy of the data processing that is essential to the Bank's operations.
Columbian is conducting a thorough review of its internal systems as well as the
efforts of outside data processing service providers. The progress of the plan
is monitored by the board of directors. Columbian began testing internal PC
based applications beginning in February 1998. Columbian will need to replace
several outdated teller terminal units and other computers at a cost of
approximately $50,000 of which a significant portion will be capitalized. The
greatest potential for problems, however, concerns the data processing provided
by the Bank's third party service bureau. The service bureau is providing
quarterly updates of its compliance progress and has advised the Bank that it
expects to resolve this problem before the year 2000. Columbian is in the
process of developing a contingency plan to deal with the potential that the
service bureau is unable to bring its systems into compliance by September 30,
1998. Columbian believes that it would be able to engage another service
provider if necessary if the current provider is unable to resolve this problem
in time. There can be no assurance in this regard, however, and it is possible
that as a result the Bank could experience data processing delays, errors or
failures, all of which could have a material adverse impact on its financial
condition and results of operations.
In February 1998, the OTS performed an on-site examination of the
Bank's year 2000 compliance efforts and has indicated that the Bank has achieved
moderate progress toward achieving year 2000 compliance and that its management
and board have placed adequate emphasis on this issue.
REGULATION
REGULATION OF COLUMBIAN AND CECIL FEDERAL
As federally chartered savings institutions, Cecil Federal and Columbian are
subject to extensive regulation by the OTS. Their lending activities and other
investments must comply with various federal regulatory requirements. The OTS
periodically examines both institutions for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations of
both institutions because their deposits are insured by the SAIF. Cecil Federal
and Columbian must file reports with OTS describing their activities and
financial condition. They are also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. In addition, as a savings
institution holding company, the Company is also subject to OTS regulation,
examination, supervision and reporting requirements. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.
Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets. Regulatory tangible, core and total capital are not calculated in
accordance with generally accepted accounting principles. The OTS regulation
defines core capital as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill," less intangible assets other than certain qualifying supervisory
goodwill and certain mortgage servicing rights. At March 31, 1998, neither
Columbian nor Cecil Federal had any qualifying supervisory goodwill or mortgage
servicing rights. Tangible capital is the same as core capital, except it
excludes qualifying supervisory goodwill and other intangible assets other than
certain mortgage servicing rights.
The OTS capital rule requires that core and tangible capital be further
reduced by an amount equal to a savings institution's debt and equity
investments in any subsidiary engaged in activities not permissible for national
banks, other
49
<PAGE>
than a subsidiary engaged in activities undertaken as agent for customers or in
mortgage banking activities and certain subsidiary depository institutions or
their holding companies ("nonincludable subsidiary"). At March 31, 1998, neither
Columbian nor Cecil Federal had any investments in or extensions of credit to
subsidiaries engaged in activities not permissible for national banks.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require
deduction of its debt and equity investments. Adjusted total assets are reduced
by the amount of assets that have been deducted from capital, the portion of the
savings association's investments in subsidiaries that must be deducted from
capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the amount of the savings association's high
loan-to-value ratio land loans and non-residential construction loans and equity
investments other than those deducted from core and tangible capital. At March
31, 1998, neither Columbian nor Cecil Federal had any high ratio land or
nonresidential construction loans and had no equity investments for which OTS
regulations require deduction from total capital.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. Government are given
a 0% risk weight. Mortgage-backed securities issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC are assigned a 20% risk weight.
One- to four-family first mortgages not more than 90 days past due with
loan-to-value ratios under 80%, multi-family mortgages (maximum 36 dwelling
units) with loan-to-value ratios under 80% and average annual occupancy rates
over 80%, and certain qualifying loans for the construction of one- to
four-family residences pre-sold to home purchasers are assigned a risk weight of
50%. Consumer loans, commercial loans, non-qualifying mortgage loans, most
commercial real estate loans, repossessed assets and assets more than 90 days
past due, as well as all other assets not specifically categorized, are assigned
a risk weight of 100%. The portion of equity investments not deducted from core
or supplementary capital is assigned a 100% risk-weight. OTS capital regulations
require savings institutions to maintain minimum total capital, consisting of
core capital plus supplemental capital, equal to 8.0% of risk-weighted assets.
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<PAGE>
<TABLE>
<CAPTION>
The table below presents Columbian's capital position relative to its
various regulatory capital requirements at March 31, 1998.
PERCENT OF
AMOUNT ASSETS(1)
------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible capital............................................................ $2,053 6.80%
Tangible capital requirement................................................ 453 1.50
------ -----
Excess..................................................................... $1,600 5.30%
====== =====
Core capital................................................................ $2,053 6.80%
Core capital requirement.................................................... 905 3.00
------ -----
Excess..................................................................... $1,148 3.80%
====== =====
Total capital (i.e., core and supplementary capital)........................ $2,156 15.30%
Risk-based capital requirement.............................................. 1,125 8.00
------ -----
Excess..................................................................... $1,031 7.30%
====== =====
</TABLE>
- --------------
(1) Based upon adjusted total assets for purposes of the tangible core
capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirements.
The table presents Cecil Federal's capital position relative to its
various regulatory capital requirements at March 31, 1998.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT ASSETS(1)
------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible capital............................................................ $7,324 10.91%
Tangible capital requirement................................................ 1,006 1.50
------ -----
Excess..................................................................... $6,315 9.40%
====== =====
Core capital................................................................ $7,324 10.91%
Core capital requirement.................................................... 2,684 3.00
------ -----
Excess..................................................................... $4,640 7.91%
====== =====
Total capital (i.e., core and supplementary capital)........................ $7,522 18.56%
Risk-based capital requirement.............................................. 3,243 8.00
------ -----
Excess..................................................................... $4,279 10.56%
====== =====
</TABLE>
- --------------
(1) Based upon adjusted total assets for purposes of the tangible core
capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirements.
OTS risk-based capital rules require savings institutions with more
than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings institution
is considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to
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<PAGE>
one-half the difference between the institution's measured interest rate risk
and the normal level of interest rate risk, multiplied by the economic value of
its total assets.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Institutions
with less than $300 million in assets and a risk-based capital ratio above 12%,
like Columbian and Cecil Federal, generally are exempt from filing the interest
rate risk schedule with their Thrift Financial Reports. However, the OTS will
require any exempt institution that it determines may have a high level of
interest rate risk exposure to file such schedule on a quarterly basis and may
be subject to an additional capital requirement based upon its level of interest
rate risk as compared to its peers. Based upon calculations as of March 31,
1998, neither Columbian nor Cecil Federal was required to deduct an
interest-rate risk capital component from total capital.
In addition to requiring generally applicable capital standards for
savings associations, the Director of OTS is authorized to establish the minimum
level of capital for a savings association at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such association in light of the particular circumstances of the association.
Such circumstances would include a high degree of exposure to interest rate
risk, prepayment risk, credit risk, concentration of credit risk and certain
risks arising from non-traditional activities. The Director of OTS may treat the
failure of any savings association to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
association which fails to maintain capital at or above the minimum level
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized" institution) may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
52
<PAGE>
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
The federal banking regulators, including the OTS, have adopted uniform
regulations implementing the prompt corrective action provisions of FDICIA.
Under such regulations, the federal banking regulators measure a depository
institution's capital adequacy on the basis of the institution's total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). Under the regulations, a savings institution that is not
subject to an order or written directive to meet or maintain a specific capital
level is deemed "well capitalized" if it also has: (i) a total risk-based
capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0%
or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings institution is an institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the institution
has a composite 1 CAMELS rating). An "undercapitalized" savings institution is
an institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMELS
rating). A "significantly undercapitalized" savings institution is defined as an
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as an institution that has a ratio of "tangible equity" to total assets
of less than 2.0%. Tangible equity is defined as core capital plus cumulative
perpetual preferred stock (and related surplus) less all intangibles other than
qualifying supervisory goodwill and certain purchased mortgage servicing rights.
The OTS may reclassify a well capitalized savings institution as adequately
capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower capital category if the OTS determines, after notice and an
opportunity for a hearing, that the institution is in an unsafe or unsound
condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category. Both Columbian and
Cecil Federal are classified as well capitalized under the prompt corrective
action regulations.
The table below presents Columbian's capital position at March 31, 1998
corrective action regulations.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT ASSETS (1)
------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible equity......................... $2,053 6.80%
Tangible equity requirement............. 453 1.50
------ -----
Excess................................. $1,600 5.30%
====== =====
Tier 1 or leverage capital.............. $2,053 6.80%
Tier 1 or leverage capital requirement.. 905 3.00
------ -----
Excess................................. $1,148 3.80%
====== =====
Tier 1 risk-based capital............... $2,053 14.60%
Tier 1 risk-based capital requirement... 844 4.00
------ -----
Excess................................. $1,209 10.60%
====== =====
Risk-based capital...................... $2,156 15.30%
Risk-based capital requirement.......... 1,125 8.00
------ -----
Excess................................. $1,031 7.30%
====== =====
</TABLE>
- ----------------
(1) Based upon adjusted total assets for purposes of the tangible equity
and Tier 1 or leverage capital requirements, and risk-weighted assets
for purposes of the Tier 1 risk-based and risk-based capital
requirements.
53
<PAGE>
The table below presents Cecil Federal's capital position at March 31,
1998 relative to its various minimum regulatory capital requirements under the
prompt corrective action regulations.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT ASSETS(1)
------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible equity......................... $7,324 10.91%
Tangible equity requirement............. 1,006 1.50
------ -----
Excess................................. $6,318 9.40%
====== =====
Tier 1 or leverage capital.............. $7,324 10.91%
Tier 1 or leverage capital requirement.. 2,684 3.00
------ -----
Excess................................. $4,640 7.91%
====== =====
Tier 1 risk-based capital............... $7,324 10.91%
Tier 1 risk-based capital requirement... 2,684 4.00
------ -----
Excess................................. $4,640 6.91%
====== =====
Risk-based capital...................... $7,522 18.56%
Risk-based capital requirement.......... 3,243 8.00
------ -----
Excess................................. $4,279 10.56%
====== =====
</TABLE>
- -----------------
(1) Based upon adjusted total assets for purposes of the tangible equity
and Tier 1 or leverage capital requirements, and risk-weighted assets
for purposes of the Tier 1 risk-based and risk-based capital
requirements.
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. The final rule and the
guidelines went into effect on August 9, 1995. The guidelines require depository
institutions to maintain internal controls and information systems and internal
audit systems that are appropriate for the size, nature and scope of the
institution's business. The guidelines also establish certain basic standards
for loan documentation, credit underwriting, interest rate risk exposure, and
asset growth. The guidelines further provide that depository institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the appropriate federal banking agency determines
that a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A depository institution must submit an
acceptable compliance plan to its primary federal regulator within 30 days of
receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
of each of Columbian and Cecil Federal believes that their respective
institution already meets substantially all the standards adopted in the
interagency guidelines, and therefore does not believe that implementation of
these regulatory standards has materially affected its operations.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS and the Federal Reserve Board,
issued proposed guidelines relating to asset quality and earnings. Under the
proposed guidelines, an FDIC insured depository institution should maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient
54
<PAGE>
to maintain adequate capital and reserves. Management of each of Columbian and
Cecil Federal believes that the asset quality and earnings standards, in the
form proposed by the banking agencies, would not have a material effect on the
operations of their respective institutions.
Liquidity Requirements. Federal thrifts are required to maintain average
daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, securities of
certain mutual funds, and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable savings deposits plus short-
term borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity and short-term liquidity ratios of
Columbian at March 31, 1998 were 23.32% and 22.37%, respectively, substantially
all of which qualified as short-term liquidity and the average daily liquidity
and short-term liquidity ratios of Cecil Federal at March 31, 1998 were 14.96%
and 15.08%, respectively. A substantial sustained decline in savings deposits
could adversely affect either institution's liquidity which could result in
restricted operations and additional borrowings from the FHLB.
Deposit Insurance. Columbian and Cecil Federal are required to pay
assessments based on a percent of its insured deposits to the FDIC for insurance
of its deposits by the SAIF. Under the Federal Deposit Insurance Act, the FDIC
is required to set semi-annual assessments for SAIF-insured institutions at a
level necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
amounts that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, 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 -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
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.
The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings have been reduced to zero and institutions in the
lowest risk assessment classification are assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be assessed
for these obligations at the rate of 1.3 basis points. After December 31, 1999,
both BIF and SAIF members will be assessed at the same rate for FICO payments.
Qualified Thrift Lender Test. A savings institution that does not meet
the Qualified Thrift Lender ("QTL") test must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the institution ceases to be a QTL,
it must cease any activity and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
55
<PAGE>
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Code or maintain at least 65%
of its "portfolio assets" in Qualified Thrift Investments. Portfolio assets are
defined as total assets less intangibles, property used by a savings institution
in its business and liquidity investments in an amount not exceeding 20% of
assets. Qualified Thrift Investments consist of (i) loans, equity positions or
securities related to domestic, residential real estate or manufactured housing
and educational, small business and credit card loans; and (ii) subject to an
aggregate 20% of portfolio assets limit, shares of stock in the FHLMC and the
FNMA, loans for personal, family, household purposes, 50% of the dollar amount
of residential mortgage loans originated and sold within 90 days of origination,
and 200% of an institution's investments in loans to finance "starter homes" and
loans for construction, development or improvement of housing and community
service facilities or for financing small businesses in "credit-needy" areas. In
order to maintain QTL status, the savings institution must maintain a weekly
average percentage of Qualified Thrift Investments to portfolio assets equal to
65% on a monthly average basis in nine out of 12 months. A savings institution
that fails to maintain QTL status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired. Failure to
qualifying as a QTL results in a number of sanctions, including the imposition
of certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the FHLB system. Upon failure to qualify as a
QTL for two years, a savings institution must convert to a commercial bank.
At March 31, 1998, approximately 67% and 93.83% of Columbian's and Cecil
Federal's assets, respectively, were invested in Qualified Thrift Investments,
which was in excess of the percentage required to qualify the Bank under the QTL
test .
Limits on Loans to One Borrower. Savings institutions generally are subject
to the lending limits applicable to national banks. With certain limited
exceptions, a savings institution's loans and extensions of credit outstanding
to any borrower (including certain related entities of the borrower) at any one
time shall not exceed 15% of the unimpaired capital and surplus of the
institution. A savings institution may lend an additional amount, equal to 10%
of unimpaired capital and surplus, if such loan is fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 150% of unimpaired capital and
surplus. The lending limits generally do not apply to purchase money mortgage
notes taken from the purchaser of real property acquired by the savings
institution in satisfaction of debts previously contracted if no new funds are
advanced to the borrower and the institution is not placed in a more detrimental
position as a result of the sale. Certain types of loans are excepted from the
lending limits, including loans secured by savings deposits. The loans-to-one
borrower limits have not had a significant impact on the operations of either
institution. At March 31, 1998, regulatory loan-to-one-borrower limits of
Columbian and Cecil Federal were $500,000 and $1.1 million, respectively.
Neither institution had any lending relationships in excess of their respective
limit.
Dividend Restrictions. Under regulations of the OTS, neither institution may
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors at the time of its conversion to stock
form. In addition, savings institution subsidiaries of savings and loan holding
companies are required to give the OTS 30 days' prior notice of any proposed
declaration of dividends to the holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by savings institutions. Under these regulations, a savings institution
that, immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Institution") is generally permitted without OTS
approval, after notice, to make capital distributions during a
56
<PAGE>
calendar year in the amount of up to the greater of (i) 100% of its net income
to date during the calendar year plus an amount that would reduce by one-half
the amount by which its capital-to-assets ratio exceeded its fully phased-in
capital requirement to assets ratio at the beginning of the calendar year, or
(ii) 75% of its net income for the previous four quarters. A savings institution
with total capital in excess of current minimum capital requirements but not in
excess of the fully phased-in requirements (a "Tier 2 Institution") is permitted
to make capital distributions without OTS approval of between up to 75% of its
net income for the previous four quarters, less dividends already paid for such
period. A savings institution that fails to meet current minimum capital
requirements (a "Tier 3 Institution") is prohibited from making any capital
distributions without the prior approval of the OTS. Tier 1 Institutions that
have been notified by the OTS that they are in need of more than normal
supervision will be treated as either a Tier 2 or Tier 3 Institution. Unless the
OTS determines that Cecil Federal is an institution requiring more than normal
supervision, Cecil Federal expects to be authorized to pay dividends in
accordance with the provisions of the OTS regulations discussed above as a Tier
1 Institution.
Under the OTS' prompt corrective action regulations, both institutions are
also prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%.
In addition to the foregoing, earnings of Columbian and Cecil Federal
appropriated to bad debt reserves and deducted for federal income tax purposes
are not available for payment of cash dividends or other distributions to their
respective stockholders without payment of taxes at the then current tax rate on
the amount of earnings removed from the reserves for such distributions. See
"Taxation."
Federal Home Loan Bank System. The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs provide a central credit facility primarily for member
institutions. Both Columbian and Cecil Federal are members of the FHLB of
Atlanta. As such, they are required to acquire and hold shares of capital stock
in the FHLB of Atlanta in an amount at least equal to 1% of the aggregate unpaid
principal of their home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB of Atlanta, whichever is greater. Both Columbian and Cecil Federal
were in compliance with this requirement with investments in FHLB of Atlanta
stock at March 31, 1998, of $214,600 and $457,700, respectively. The FHLB of
Atlanta serves as a reserve or central bank for its member institutions within
its assigned district. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It offers advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Atlanta. Long-term advances may only be
made for the purpose of providing funds for residential housing finance. Cecil
Federal utilized short term advances from the FHLB of Atlanta during the year.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves equal to 3% on the first $47.8 million of transaction accounts, plus
10% on all remaining transaction accounts. This percentage is subject to
adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. At March 31, 1998, both
Columbian and Cecil Federal met their reserve requirements.
REGULATION OF THE COMPANY
The Company is registered as a savings and loan holding company with
the OTS and subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, Cecil
Federal is subject to certain restrictions in its dealings with the Company and
affiliates thereof. Upon consummation of the Merger, Columbian will become
subject to these restrictions.
57
<PAGE>
Activities Restrictions. The Board of Directors of the Company presently
operates the Company as a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
holding company. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk and
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a Qualified Thrift Lender within one year
thereafter, register as, and become subject to, the restrictions applicable to a
bank holding company.
Upon consummation of the Merger, the Company will become a multiple savings
and loan holding company. The activities of the Company will thereupon be
subject to further restrictions. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings association is
permitted to commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, any business
activity, upon prior notice to, and no objection by the OTS, other than (i)
furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the FSLIC by regulation as of
March 5, 1987 to be engaged in by multiple holding companies or (vii) those
activities authorized by the Federal Reserve Board as permissible for bank
holding companies, unless the Director of OTS by regulation prohibits or limits
such activities for savings and loan holding companies. Those activities
described in (vii) above must also be approved by the Director of OTS prior to
being engaged in by a multiple holding company. The activities authorized by OTS
regulation for multiple savings and loan holding companies as of March 5, 1987
include a variety of activities including, among other things, the origination,
purchasing, sale and servicing of various loans, the provision of clerical
services primarily for affiliates, the provision of certain other management
services to affiliates and other multiple holding companies, and underwriting or
reinsuring credit life insurance in connection with extensions of credit by a
savings association subsidiary or another savings and loan holding company or
subsidiary thereof. The OTS has also approved various real estate-related
activities for multiple holding companies, including the acquisition of
unimproved lots or the acquisition of unimproved real estate for prompt
development and subdivision, the development, subdivision and construction of
improvement of acquired real estate for sale or rental, the acquisition of
improved real estate and mobile homes to be held for rental or sale, the
acquisition of improved real estate for remodeling, rehabilitation,
modernization, renovation, or demolition or rebuilding for sale or rental, and
the maintenance and management of improved real estate. In the event any savings
association subsidiary of a multiple savings and loan holding company fails to
satisfy the QTL Test and does not requalify within one year, however, the
holding company will be required to register as a bank holding company and
become subject to the more stringent activity limitations applicable to bank
holding companies.
Transactions with Affiliates. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings association.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a
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<PAGE>
guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings association may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings association. Upon consummation of the Merger, as long as the Company
owns more than 80% of the voting stock of both Columbian and Cecil Federal, the
institutions will not be subject to the restrictions on transactions with
affiliates in dealing with each other. Section 106 of the Bank Holding Company
Act of 1956, as amended, (the "BHCA") which also applies to the Bank prohibits
the Bank 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 exceptions.
Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an executive
officer and to a greater than 10% stockholder of a savings association and
certain affiliated entities of either, may not exceed, together with all other
outstanding loans to such person and affiliated entities the association's loan
to one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus and an additional 10% of such capital and surplus for loans
fully secured by certain readily marketable collateral). Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
savings association, and their respective affiliates, unless such loan is
approved in advance by a majority of the board of directors of the association
with any "interested" director not participating in the voting. The Federal
Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval if required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, the Federal Reserve Board pursuant to Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval for such extensions of
credit by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. In addition, Section 106 of the BHCA prohibits
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
Restrictions on Acquisitions. Savings and loan holding companies are
generally prohibited from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings association or savings and loan holding
company or substantially all the assets thereof or (ii) more than 5% of the
voting shares of a savings association or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings association, other than a subsidiary savings association,
or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or
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<PAGE>
savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions).
The OTS regulations permit federal associations to branch in any state
or states of the United States and its territories. Except in supervisory cases
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal association may only establish an out-of-state
branch under such OTS regulation if (i) the federal association qualifies as a
Qualified Thrift Lender or a "domestic building and loan association" under
(S)7701(a)(19) of the Code and the total assets attributable to all branches of
the association in the state would qualify such branches taken as a whole for
treatment as a Qualified Thrift Lender or for treatment as a domestic building
and loan association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company or (b) a
violation of certain statutory restrictions on branching by savings association
subsidiaries of banking holding companies. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
The BHCA specifically authorizes the Federal Reserve Board to approve an
application by a bank holding company to acquire control of any savings
association. Pursuant to rules promulgated by the Federal Reserve Board, owning,
controlling or operating a savings association is a permissible activity for
bank holding companies, if the savings association engages only in deposit-
taking activities and lending and other activities that are permissible for bank
holding companies.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the BHCA.
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<PAGE>
BENEFICIAL OWNERSHIP OF COLUMBIAN COMMON STOCK
The following tables set forth information with respect to the shares
of Columbian Common Stock beneficially owned by (1) those persons who were
beneficial owners of more than 5.0% of the outstanding shares of Columbian
Common Stock, (2) Columbian's directors and certain executive officers, and (3)
all directors and executive officers of Columbian as a group.
<TABLE>
<CAPTION>
PRINCIPAL STOCKHOLDERS
AMOUNT AND NATURE OF PERCENT OF SHARES
BENEFICIAL OWNERSHIP OF COLUMBIAN
NAME AND ADDRESS OF COLUMBIAN COMMON COMMON STOCK
OF BENEFICIAL OWNER STOCK AT THE RECORD DATE(1) OUTSTANDING(2)
------------------- --------------------------- --------------
<S> <C> <C>
Donald F. Angert 5,352 (3) 7.10%
1 Chesapeake Drive
Havre de Grace, Maryland 21078
Joseph W. Ayres 4,125 5.47%
3824 Deckerts Lane
Baltimore, Maryland 21236
Arthur L. Gilbert 5,352 (3) 7.10%
802 John Smith Street
Havre de Grace, Maryland 21078
Kathleen G. Guzzo 4,291 (3) 5.69%
303-307 St. John Street
Havre de Grace, Maryland 21078
Warren Kantor Profit Sharing Plan 4,243 5.63%
409 South 3rd Street
Philadelphia, Pennsylvania 19147
Albert F. Simpson 4,777 6.33%
716 Revolution Street
Havre de Grace, Maryland 21078
Wilbur B. Pearce 5,351 (3)(4) 7.10%
303-307 St. John Street
Havre de Grace, Maryland 21078
George C. Pensell 4,243 5.63%
217 Congress Road
Havre de Grace, Maryland 21078
Cecil Bancorp, Inc. 14,993 (5) 16.67%
127 North Street
Elkton, Maryland 21921
</TABLE>
(footnotes on following page)
61
<PAGE>
(footnotes for table on previous page)
- -------------
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Columbian Common Stock if he or she has or shares voting or
investment power with respect to such security, or has a right to
acquire beneficial ownership at any time within 60 days from the Record
Date. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or
direct the disposition of shares. Except as otherwise noted, ownership
is direct and the named individuals and group exercise sole voting and
investment power over the shares of Columbian Common Stock.
(2) In calculating the percentage ownership of each named individual and
the group, the number of shares outstanding includes any shares of
Columbian Common Stock which the individual or the group has the right
to acquire within 60 days of the Record Date.
(3) Includes 1,077 shares which the named individual has the right to
acquire pursuant to the exercise of stock options.
(4) Includes 1,030 shares held in trust.
(5) Concurrent with the execution of the Merger Agreement, Cecil Bancorp
received the Option to purchase 14,993 shares of Columbian Common
Stock. The Option is exercisable in limited circumstances. See "The
Merger -- Stock Option Agreement."
<TABLE>
<CAPTION>
MANAGEMENT
SHARES OF COLUMBIAN PERCENT OF SHARES
COMMON STOCK OF COLUMBIAN
BENEFICIALLY OWNED AT COMMON STOCK
NAME THE RECORD DATE(1)(2) OUTSTANDING(3)
- ---- ------------------------- --------------
<S> <C> <C>
Laurie O. Thoner 2,107 (4) 2.92%
Kathleen G. Guzzo 4,167 (4) 5.78
Dr. William Brendle 3,137 (4) 4.35
Donald F. Angert 5,197 (4) 7.21
Arthur L. Gilbert 5,197 (4) 7.21
Robert L. Johnson 2,107 (5) 2.92
Wilbur B. Pierce 5,197 (4)(6) 7.21
All Executive Officers and Directors
as a Group (7 persons) 27,501 (7) 37.61%
</TABLE>
- ---------------
(1) As of the Record Date.
(2) For the definition of "beneficial ownership," see footnote 1 to the
table in the section entitled "Voting Securities and Principal Holders
Thereof." Unless otherwise noted, all shares are owned directly by the
named individuals or by their spouses and minor children, over which
shares the named individuals exercise shared voting and investment
power.
(3) In calculating percentage ownership for a given individual, the number
of shares of Columbian Common Stock outstanding includes unissued
shares subject to options exercisable within 60 days of the Record Date
held by that individual.
(4) Includes 1,077 shares which may be purchased pursuant to the exercise
of stock options within 60 days of the Record Date. (5) Includes 150
shares which may be purchased pursuant to the exercise of stock options
within 60 days of the Record Date.
(6) Includes 1,030 shares held in trust.
(7) Includes 6,612 shares which may be purchased by executive officers and
directors as a group pursuant to the exercise of stock options.
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<PAGE>
COMMON STOCK PRICES AND DIVIDENDS
CECIL BANCORP
Trading in the Common Stock. The Company Common Stock is listed over-the-
counter through the National Daily Quotation System "Pink Sheets" published by
the National Quotation Bureau, Inc. and on the NASDAQ "Bulletin Board" under the
symbol "CECB." There are currently _______ shares of Company Common Stock
outstanding and approximately _________ holders of record of the Company Common
Stock (not including shares held in "street name") as of __________, 1998.
The following table sets forth certain information as to the range of the
high and low bid prices for the Company's common stock for the calendar quarters
indicated and since the common stock's issuance on November 10, 1994.
<TABLE>
<CAPTION>
HIGH BID (1) LOW BID (1) DIVIDENDS PAID
------------ ----------- ---------------
<S> <C> <C> <C>
FISCAL 1996:
First Quarter 15.00 14.50 0.10 (2)
Second Quarter 15.00 15.00 0.08
Third Quarter 15.75 15.00 0.08
Fourth Quarter 15.75 15.00 0.30 (3)
FISCAL 1997:
First Quarter 16.00 16.00 0.10
Second Quarter 18.75 17.00 0.10
Third Quarter 17.75 17.50 0.10
Fourth Quarter 20.00 18.25 0.33 (4)
FISCAL 1998:
First Quarter 23.50 21.00 0.10
Second Quarter 24.625 23.50 0.10
</TABLE>
- -------------
(1) Quotations reflect inter-dealer price, without retail mark-up, mark-
down or commissions, and may not represent actual transactions.
(2) Includes special dividend of $.02 per share.
(3) Includes special dividend of $.20 per share.
(4) Includes special dividend of $.23 per share.
Dividend Restrictions. Under regulations of the OTS, the Bank is not
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below regulatory capital requirements, or the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form. In addition,
savings institution subsidiaries of savings and loan holding companies such as
the Company are required to give the OTS 30 days' prior notice of any proposed
declaration of dividends to the holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Bank. Under these regulations, a savings institution such as the
Bank that, immediately prior to, and on a pro forma basis after giving effect
to, a proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully phased-in
capital requirements (a "Tier 1 Association") is generally permitted without OTS
approval, after notice, to make capital distributions during a calendar year in
the amount of (i) up to 100% of its net earnings to date during the calendar
year
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<PAGE>
plus an amount that would reduce by one-half the amount by which its capital-to-
assets ratio exceeded its fully phased-in capital requirement to assets ratio at
the beginning of the calendar year, or (ii) 75% of its net income for the
previous four quarters. In addition to the foregoing, earnings of the Bank
appropriated to bad debt reserves and deducted for federal income tax purposes
are not available for payment of cash dividends or other distributions to the
Company without payment of taxes at the then current tax rate by the Bank on the
amount of earnings removed from the reserves for such distributions.
Although the Company is not subject to these restrictions, the Company's
primary source of funds for payment of dividends, in addition to the 50% of the
net proceeds retained from the conversion to stock form, are dividends from the
Bank. The Company intends to make full use of this favorable tax treatment
afforded to the Bank and Company and does not contemplate use of any earnings of
the Bank in a manner which would limit the Bank's bad debt deduction or create
federal tax liabilities.
On May 28, 1998, the last trading day preceding the public announcement
of the execution of the Merger Agreement, the reported closing price of Company
Common Stock was $24.62 per share. On _________, 1998, the closing sale price of
Company Common Stock was $______ per share.
COLUMBIAN
Market Information. At the present time, there is no established market
in which shares of Columbian Common Stock are regularly traded, nor are there
any uniformly quoted prices for such shares. The most recent trade in Columbian
Common Stock known to management of Columbian was 128 shares at $12.00 per share
on November 18, 1997.
On May 28, 1998, the last trading day preceding the public announcement
of the execution of the Merger Agreement, the reported closing sale price of
Columbian Common Stock was $_______ per share. On _________, 1998, the closing
sale price for Columbian Common Stock was $______ per share.
Dividends. Cash dividends in the amount of $0.30 and $0.20 per share
were paid to stockholders during the years ended December 31, 1997 and 1996,
respectively. In addition, Columbian paid a 3.0% per share stock dividend during
the year ended December 31, 1997.
The Bank may not declare or pay a cash dividend on any of its stock if
the effect thereof would cause the Bank's regulatory capital to be reduced below
(1) the amount required for the liquidation account established in connection
with its stock conversion; or (2) the regulatory capital requirements imposed by
the OTS. OTS regulations limit the payment of dividends and other capital
distributions by the Bank. The Bank is able to pay dividends during a calendar
year without regulatory approval to the extent of the greater of (i) all its net
income determined on the basis of generally accepted accounting principles for
the calendar year, plus an amount which will reduce by one-half its surplus
capital ratio at the beginning of the year or (ii) 75% of net income for the
last four calendar quarters.
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<PAGE>
DESCRIPTION OF COMPANY CAPITAL STOCK
The Company is authorized to issue 4,000,000 shares of Company Common Stock
and 1,000,000 shares of preferred stock par value $.01 per share (the "Preferred
Stock"). As of _________, 1998, _________ shares of Company Common Stock were
issued and outstanding and an additional ___________ shares of Company Common
Stock were reserved for issuance pursuant to various Company stock benefit
plans. THE COMPANY COMMON STOCK REPRESENTS NONWITHDRAWABLE CAPITAL, IS NOT BE AN
ACCOUNT OF AN INSURABLE TYPE AND IS NOT BE INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY. The discussion below highlights the material rights and
terms with respect to the Company's capital stock.
COMMON STOCK
Voting Rights. Each share of Company Common Stock has the same relative
rights and is identical in all respects with every other share of the Company
Common Stock. The holders of the Company Common Stock possess exclusive voting
rights in the Company, except to the extent that shares of Preferred Stock
issued in the future may have voting rights, if any. Each holder of shares of
Company Common Stock is entitled to one vote for each share held of record on
all matters submitted to a vote of holders of shares of the Company Common
Stock. For information regarding a possible reduction in voting rights, see
"Certain Anti-Takeover Provisions in the Articles of Incorporation and Bylaws --
Restrictions on Acquisitions of Securities."
Dividends. The Company from time to time declares dividends to the holders
of the Company Common Stock, who are entitled to share equally in any such
dividends. For information as to the Company's payment of cash dividends in
prior periods and limitations on the payment of cash dividends, see "Common
Stock Prices and Dividends -- Cecil Bancorp."
Liquidation. In the event of any liquidation, dissolution or winding up
of Cecil Federal, the Company, as holder of all of Cecil Federal's capital
stock, would be entitled to receive all assets of Cecil Federal after payment of
all debts and liabilities of Cecil Federal and after distribution of the balance
in the liquidation account established at the time of Cecil Federal's conversion
from mutual to stock form. In the event of a liquidation, dissolution or winding
up of the Company, each holder of shares of the Company Common Stock would be
entitled to receive, after payment of all debts and liabilities of the Company,
a pro rata portion of all assets of the Company available for distribution to
holders of the Company Common Stock. If any shares of Preferred Stock is issued,
the holders thereof may have a priority in liquidation or dissolution over the
holders of the Company Common Stock.
Restrictions on Acquisition of the Company Common Stock; Anti-takeover
Provisions. For information regarding limitations on acquisition of shares of
the Company Common Stock, see "Comparison of Stockholder Rights -- Certain Anti-
Takeover Provisions in Cecil Bancorp's Articles of Incorporation and Bylaws."
Other Characteristics. Holders of the Company Common Stock do not have
preemptive rights with respect to any additional shares of the Company Common
Stock which may be issued. The Company Common Stock is not subject to call for
redemption, and the outstanding shares of the Company Common Stock, when issued
and upon receipt by the Company of the full purchase price therefor, will be
fully paid and nonassessable.
SERIAL PREFERRED STOCK
None of the 1,000,000 authorized shares of Preferred Stock of the Company
have been issued. The Board of Directors of the Company is authorized to issue
Preferred Stock and to fix and state voting powers, designations, preferences or
other special rights of such shares and the qualifications, limitations and
restrictions thereof. The Preferred Stock may rank prior to the Company Common
Stock as to dividend rights or liquidation preferences, or both, and may have
full or limited voting rights. The Board of Directors has no present intention
to issue any Preferred Stock.
65
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
Introduction. As a result of the Merger, holders of Columbian Common Stock,
whose rights are presently governed by federal law and Columbian's Federal Stock
Charter and Bylaws, will become stockholders of the Cecil, a Maryland
corporation. Accordingly, the rights of Columbian stockholders will be governed
by the Maryland General Corporation Law, and the Articles of Incorporation and
Bylaws of Cecil Bancorp. Certain differences arise from this change of governing
law, as well as from distinctions between the Charter and Bylaws of Columbian
and the Articles of Incorporation and Bylaws of Cecil Bancorp. The following
discussion is not intended to be a complete statement of the differences
affecting the rights of stockholders, but summarizes certain significant
differences.
Issuance of Capital Stock. Columbian's Federal Stock Charter authorizes
the issuance of 2,000,000 shares of capital stock, 1,500,000 shares of which are
Columbian Common Stock and 500,000 shares of serial preferred stock, par value
of $1.00 per share. The Articles of Incorporation of Cecil Bancorp authorize the
issuance of 5,000,000 shares of capital stock, 4,000,000 shares of which are
Company Common Stock and 1,000,000 shares of which are Preferred Stock. At
_________ __, 1998, there were _______ shares of Columbian Common Stock
outstanding and _______ shares of Company Common Stock outstanding. Under
Columbian's Federal Stock Charter, shares of capital stock may not be issued
directly or indirectly to officers, directors or controlling persons of
Columbian (other than as part of a general public offering or as qualifying
shares to a director) unless the issuance or the plan under which they would be
issued is approved by a majority of the votes eligible to be cast. No similar
restriction is contained in Cecil Bancorp's Articles of Incorporation. Cecil
Bancorp's Articles of Incorporation authorize the issuance of additional shares
of stock up to the amount authorized as approved by the board of directors
without the approval of the stockholders.
Under both Columbian's Federal Stock Charter and Cecil Bancorp's Articles of
Incorporation, each may issue additional shares without stockholder approval.
Issuing additional shares of serial preferred stock up to the prescribed amounts
could have a possible anti-takeover effect.
Payment of Dividends. Federal regulations impose certain limitations on the
payment of dividends and other capital distributions (including stock
repurchases and cash mergers) by Columbian. Under these regulations, a savings
institution that, immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distributions, has total capital (as defined by
OTS regulation) that is equal to or greater than the amount of its fully phased-
in capital requirements (a "Tier 1 Association") is generally permitted, after
notice, to make capital distributions during a calendar year in the amount equal
to the greater of: (a) 75% of its net income for the previous four quarters; or
(b) up to 100% of its net income to date during the calendar year plus an amount
that would reduce by one-half the amount by which its ratio of total capital to
assets exceeded the ratio of its fully phased-in capital requirement to its
assets at the beginning of the calendar year. A savings institution with total
capital in excess of current minimum capital ratio requirements but not in
excess of the fully phased-in requirements (a "Tier 2 Association") is
permitted, after notice, to make capital distributions without OTS approval of
up to 75% of its net income for the previous four quarters, less dividends
already paid for such period, depending on the savings institution's level of
risk-based capital. A savings institution that fails to meet current minimum
capital requirements (a "Tier 3 Association") is prohibited from making any
capital distributions without the prior approval of the OTS. Tier 1 Associations
that have been notified by the OTS that they are in need of more than normal
supervision will be treated as either a Tier 2 or Tier 3 Association, unless the
OTS determines that such treatment is not necessary to ensure the associations
safe and sound operation. Columbian is a Tier 1 Association. Columbian also is
prohibited from making any capital distributions, including dividends, if after
making the distribution, Columbian would have: (i) a total risk-based capital
ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0%.
In addition to the foregoing, earnings of Columbian appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to a holding company without
payment of taxes at the then current tax rate by Columbian on the amount of
earnings removed from the reserves for such distributions. Finally, Columbian is
not permitted to pay dividends on its capital stock if its regulatory capital
66
<PAGE>
would thereby reduced below the remaining balance of the liquidation account
which was established for the benefit of certain depositors of Columbian at the
time of its conversion to stock form.
Cecil Bancorp is not subject to regulatory restrictions on the payment
of dividends to stockholders, although Cecil Federal as a federally chartered
thrift is. Generally, under the Maryland General Corporation Law, no dividends
may be paid if, after giving effect to the dividend, (i) Cecil Bancorp would not
be able to pay its indebtedness as it becomes due in the usual course of
business, (ii) Cecil Bancorp's total assets would be less than the sum of its
total liabilities, plus the amount that would be needed, if the corporation were
to be dissolved at the time of the distribution, to satisfy the rights of those
stockholders who have superior preferential rights upon dissolution of Cecil
Bancorp to those receiving the distribution. Although Cecil Bancorp will not be
subject to the restrictions applicable to Columbian regarding dividend payments
to its stockholders, the restrictions on Columbian's and Cecil Federal's ability
to pay dividends to Cecil Bancorp may affect Cecil Bancorp's ability to pay
dividends.
Special Meetings of Stockholders. Special meetings of stockholders of
Columbian generally may be called by the chairman of the board, the president, a
majority of the Board of Directors or upon the written request of the holders of
not less than ten percent (10%) of all the outstanding capital stock entitled to
vote at the meeting. In comparison, Cecil Bancorp's Articles of Incorporation
and Bylaws provide that special meetings of stockholders may only be called by
Cecil Bancorp's Board of Directors, a duly appointed committee of the Board of
Directors, or by the secretary of Cecil Bancorp upon the written request of the
holders of not less than 25% of all the votes entitled to be cast at the
meeting.
Rights of Stockholders to Dissent. Columbian stockholders have dissenters'
appraisal rights in connection with a plan of merger or consolidation to which
Columbian is a party. Stockholders of Cecil Bancorp similarly have dissenters'
appraisal rights in connection with certain business combinations.
Vacancies on the Board of Directors. Any vacancy on the Board of Directors
of Columbian may be filled by the affirmative vote of a majority of the
remaining directors although less than a quorum, and any director so appointed
is to serve until the next election of directors by stockholders. Additionally,
any directorship of Columbian to be filled by reason of an increase in the
number of directors may be filled for a term of office to expire at the next
election of directors by the stockholders. The Articles of Incorporation of
Cecil Bancorp also provide that vacancies on the board and newly created
directorships may be filled by a majority vote of the stockholders or the
directors than in office. A director of Cecil Bancorp so chosen by the
stockholders shall hold office for the balance of the term then remaining and a
director so chosen by the remaining directors shall hold office until the next
annual meeting of stockholders.
Number and Term of Directors. Columbian's Federal Stock Charter provides
that the number of directors, as stated in the Bylaws, shall not be less than
seven nor more than fifteen. Columbian's Bylaws provide that its Board of
Directors shall consist of seven members and shall be divided into three equal
classes which shall each be elected for three-year terms. Cecil Bancorp's
Articles of Incorporation provide that its Board of Directors shall consist of
not less than five nor more than fifteen members, as set forth in its Bylaws.
Cecil Bancorp's Bylaws presently set the number of directors at eight persons.
Cecil Bancorp's Board is also be divided into three classes which are elected
for three-year terms.
Removal of Directors. Columbian's Bylaws and OTS Regulations provide that at
a meeting of stockholders called expressly for that purpose, any director may be
removed for cause by a vote of the holders of a majority of the shares then
entitled to vote at an election of directors, but if less than the entire board
is to be removed, no one of the directors may be removed if the votes cast
against the removal would be sufficient to elect a director if then cumulatively
voted at an election of the class of directors of which such director is a part.
Whenever the holders of the shares of any class are entitled to elect one or
more directors pursuant to the provisions of Columbian's Charter, the provisions
shall apply, with respect to the removal of a director or directors so elected,
by the vote of the holders of the outstanding shares of that class and not to
the vote of the outstanding shares as a whole. The Articles of Incorporation of
Cecil Bancorp provide that any one director or the entire Board of Directors may
be removed with or without cause, at any
67
<PAGE>
time, by the affirmative vote of the holders of at least 80% of the outstanding
shares of capital stock entitled to vote generally in the election of directors.
Consideration of Noneconomic Factors. Cecil Bancorp's Articles of
Incorporation provide that, in determining what is in the best interests of
Cecil Bancorp and of the stockholders, when evaluating a business combination,
or a tender or exchange offer, the board of directors of Cecil Bancorp shall, in
addition to considering the adequacy of the amount to be paid in connection with
any such transaction, consider all of the following factors and any other
factors which it deems relevant; (i) the social and economic effects of the
transaction on Cecil Bancorp and its subsidiaries, employees, depositors, loan
and other customers, creditors and other elements of the communities in which
Cecil Bancorp and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring person or entity,
including, but not limited to, debt service and other existing financial
obligations, financial obligations to be incurred in connection with the
acquisition, and other likely financial obligations of the acquiring person or
entity, and the possible effect of such conditions upon Cecil Bancorp and its
subsidiaries and the other elements of the communities in which Cecil Bancorp
and its subsidiaries operate or are located; and (iii) the competence,
experience, and integrity of the acquiring person or entity and its or their
management. Columbian does not have a similar provision in its Charter.
Approval of Mergers, Consolidations, Sale of Substantially All Assets and
Certain Business Combinations. Under present OTS regulations, the approval of
the holders of at least two-thirds of the outstanding shares of common stock is
required for a merger, consolidation or sale of assets, except that no
stockholder approval is required by the resulting federal stock institution when
the transaction involves, among other things, the issuance of shares of common
stock amounting to 15% or fewer of the shares of the resulting federal stock
institution's common stock outstanding immediately prior to the transaction.
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.
Cecil Bancorp's Articles of Incorporation require the approval of the
holders of (i) at least 80% of Cecil Bancorp's outstanding shares of voting
stock, and (ii) at least a majority of outstanding shares of voting stock, not
including shares held by a "Related Person," (defined below), to approve certain
"Business Combinations" (defined below). The supermajority vote required to
approve a "Business Combination" with a "Related Person" does not apply where
the proposed transaction has been approved in advance by a majority of those
members of Cecil Bancorp's Board of Directors, who are unaffiliated with the
Related Person and who were directors prior to the time when the Related Person
became a Related Person (the "Continuing Directors"), and such approval is
obtained at a meeting with a quorum of Continuing Directors. The term "Related
Person" is defined to include any individual, corporation, partnership or other
person or entity which together with its "affiliates" (as that term is defined
in Rule 12b-2 of the General Rules and Regulations under the Exchange Act),
"beneficially owns" (as that term is defined in Rule 13d-3 of the General Rules
and Regulations under the Exchange Act) in the aggregate 10% or more of the
outstanding shares of Company Common Stock; and any "affiliate" of any such
individual, corporation, partnership or other person or entity. A "Business
Combination" is defined to include (i) any merger or consolidation of Cecil
Bancorp with or into a Related Person; (ii) any sale, lease, exchange, transfer
of other disposition, including without limitation, a mortgage, or any other
capital device of all or any Substantial Part (more than 25 percent of the total
assets of Cecil Bancorp, as of the end of its most recent fiscal year) of the
assets of Cecil Bancorp (including without limitation any voting securities of a
subsidiary) or of a subsidiary, to a Related Person; (iii) any sale, lease,
exchange, transfer or other deposition of all or any Substantial Part of the
assets of a Related Person to Cecil Bancorp or a subsidiary of Cecil Bancorp;
(iv) the issuance of any securities of Cecil Bancorp or a subsidiary of the
Corporation to a Related Person; (v) the acquisition by Cecil Bancorp or a
subsidiary of Cecil Bancorp of any securities of a Related Person; (vi) any
reclassification of the common stock of Cecil Bancorp, or any recapitalization
involving the common stock of Cecil Bancorp; and (vii) any agreement, contract
or other arrangement providing for any of the above transactions.
Maryland's Business Combination Statute restricts certain transactions
between a Maryland corporation (or its majority owned subsidiaries), and a
holder of 10% or more of the corporation's outstanding voting stock, together
with
68
<PAGE>
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 a corporation and an 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,
directly or indirectly, in one transaction a series of transactions, 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. Additionally, 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 votes entitled to be cast by
outstanding shares of voting stock, and (b) two-thirds of votes entitled to be
cast by outstanding shares of voting stock other than the voting stock held by
the Interested Stockholder, 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 itself from the requirements of the statute by adopting an amendment
to its Articles of Incorporation. In this regard, Cecil Bancorp's Articles of
Incorporation provide that Maryland's Business Combination Statute is not
applicable to a business combination which has been approved by a majority of
Continuing Directors obtained at a meeting with a quorum of Continuing Director.
Columbian does not have a similar provision.
Limitations on Voting Rights of Certain Stockholders. Columbian's
Federal Stock Charter does not contain any currently effective limitations on
the acquisition of Columbian Common Stock. Section 8 of Columbian's Federal
Stock Charter provided, that for a period of three years from the date of
consummation of Columbian's conversion from mutual to stock form of ownership
(the "Conversion"), no person was permitted to acquire or offer to acquire the
beneficial ownership of more than 10% of any class of an equity security of
Columbian. However, Columbian completed the Conversion more than three years
ago. Consequently, the 10% ownership limitation in Columbian's Federal Stock
Charter is no longer applicable. Cecil Bancorp's Articles of Incorporation
provide that if any person acquires the "beneficial ownership" of more than 10%
of any class of equity security of Cecil Bancorp, then, with respect to each
vote in excess of 10%, the record holders of voting stock of Cecil Bancorp
beneficially owned by such person shall be entitled to cast only one-hundredth
of one vote with respect to each vote in excess of 10% of the voting power of
the outstanding shares of voting stock of Cecil Bancorp which such record
holders would otherwise be entitled to cast without giving effect to the
provision, and the aggregate voting power of such record holders shall be
allocated proportionately among such record holders. For purposes of this
limitation, beneficial ownership is determined with reference to the regulations
of the Commission which define beneficial ownership generally as the power to
vote or the power to dispose of securities and generally would not include the
power to vote pursuant to revocable proxies solicited in accordance with the
Commission proxy rules. An exception from the restriction is provided if the
acquisition of more than 10% of the securities received the prior approval by a
majority vote of the Company's Continuing Directors. Under Cecil Bancorp's
Articles of Incorporation, the restriction on voting shares beneficially owned
in violation of the foregoing limitations is imposed automatically. In order to
prevent the imposition of such restrictions, the Board of Directors must take
affirmative action approving in advance a particular offer to acquire or
acquisition.
69
<PAGE>
Control Share Acquisitions. The Maryland General Corporation Law provides
that "control shares" of a Maryland corporation acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the shares entitled to be voted on the matter, excluding shares of
stock owned by the acquiror or by officers or directors who are employees of the
corporation. "Control shares" are voting shares of stock which, if aggregated
with all other such shares of stock previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power except solely by virtue of a revocable proxy, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-third;
(ii) one-third or more but less than a majority; or (iii) a majority of all
voting power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions for shares acquired through descent or distribution, in
satisfaction of a pledge or in a merger, consolidation or share exchange to
which the corporation is a party. The control share acquisition statute applies
to any Maryland corporation with 100 or more beneficial owners of its stock
other than a close corporation or an investment company.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses and
delivery of an "acquiring person statement"), may compel the corporation's board
of directors to call a special meeting of stockholders to be held within 50 days
of demand to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any
stockholders' meeting.
Unless the 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.
Advance Notice Requirements for Nominations of Directors and Presentation of
New Business at Meetings of Stockholders. Columbian's Bylaws generally provide
that any stockholder desiring to make a nomination for the election of directors
or a proposal for new business at a meeting of stockholders must submit written
notice with Columbian's secretary at least five days in advance of the meeting.
Failure to comply with these advance notice requirements will preclude such
nominations or new business from being considered at the meeting.
Cecil Bancorp's Articles of Incorporation provide that a stockholder wishing
to make nominations or proposals generally must give written notice to the
secretary of Cecil Bancorp not less than 30 nor more than 60 days before the
meeting, together with certain information relating to the nomination or new
business (except where the notice to stockholders by Cecil Bancorp is less than
40 days, then nominations by stockholders may be sent on the 10 day after the
notice was mailed by Cecil Bancorp).
Amendment of Charter, Articles of Incorporation and Bylaws. Columbian's
Federal Stock Charter provides that it may be amended only if the amendment is
first proposed by Columbian's Board of Directors, then preliminarily approved by
the OTS and thereafter approved by the holders of a majority of the votes
eligible to be cast at a legal meeting. Cecil Bancorp's Articles of
Incorporation may be replaced, altered, removed or amended by the vote of the
holders of a majority of the outstanding shares of Cecil Bancorp Common Stock,
except for Articles IX (Meetings of Stockholders; Cumulative Voting), X (Notice
for Nominations and Proposals), XI (Directors), XII (Removal of Directors), XIII
(Acquisition of Capital Stock), XIV (Approval of Certain Business Combinations),
XV (Evaluation of Business Combinations), XVI (Limitation of Officers' and
Directors' Liability), XVII (Indemnification), XVIII
70
<PAGE>
(Amendment of Bylaws), and XIX (Amendment of Articles of Incorporation), which
require the affirmative vote of 80% of the outstanding shares of Cecil Bancorp
Common Stock, entitled to vote generally in the election of directors cast at a
meeting called for that purpose, in order to be amended, except where a majority
of the Continuing Directors approves such repeal, alteration, recission or
amendment then action may be taken by the holders of two-thirds of the
outstanding shares of Company Common Stock entitled to vote generally in the
election of directors. The Bylaws of Columbian may be amended by the vote of
either a majority of the Board of Directors or the holders of a majority of the
outstanding shares of Columbian Common Stock. The Bylaws of Cecil Bancorp may be
repealed, altered, amended or rescinded by a vote of two-thirds of the Board of
Directors or by the affirmative vote of the holders of at least 80% of the
outstanding shares of capital stock entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or recission is included in the notice of such
meeting).
LEGAL MATTERS
The legality of the Company Common Stock to be issued pursuant to the
Merger Agreement will be passed upon for the Company by Housley Kantarian &
Bronstein, P.C., Washington, D.C.
Certain other legal matters in connection with the Merger will be passed
upon for the Company by Housley Kantarian & Bronstein, P.C., Washington, D.C.,
and for Columbian by Kutak Rock, Washington, DC.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 incorporated in this Prospectus/Proxy Statement by reference from the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997 have been audited by Simon, Master & Sidlow, independent auditors, as
stated in their report, which is incorporated by reference herein and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Columbian as of December 31, 1997 and for
each of the years in the period ended December 31, 1997, included elsewhere in
this Prospectus/Proxy Statement have been audited by Anderson Associates,
independent auditors, as stated in their report appearing herein and elsewhere
in the Registration Statement, and are included in reference upon the report of
such term given upon their authority as experts in accounting and auditing.
INDEPENDENT ACCOUNTANTS
Representatives of Anderson Associates, Columbian's independent certified
public accountants, are expected to be present at the Special Meeting
to respond to stockholder's questions and, as a result, will not have an
opportunity to make a statement at the Special Meeting.
OTHER MATTERS
The Columbian Board of Directors is not aware of any business to come
before the Special Meeting other than those matters described in this
Prospectus/Proxy Statement. However, if any other matter should properly come
before the Special Meeting, it is intended that holders of the proxies will act
in accordance with their best judgment.
71
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
OF COLUMBIAN BANK, A FEDERAL SAVINGS BANK
Page
----
<S> <C>
Independent Auditors' Report......................................................................................
Statement of Financial Condition as of December 31, 1997 and 1996................................................
Statement of Operations for the Years Ended December 31, 1997 and 1996............................................
Statement of Stockholders' Equity for the Years Ended December 31, 1997 and 1996..................................
Statement of Cash Flows for the Years Ended December 31, 1997 and 1996............................................
Notes to Financial Statements.....................................................................................
Statement of Financial Condition as of March 31, 1998 and December 31, 1997.......................................
Statement of Operations for the Three Months Ended March 31, 1998 and 1997........................................
Statement of Cash Flows for the Three Months Ended March 31, 1998 and 1997........................................
Notes to Financial Statements.....................................................................................
</TABLE>
72
<PAGE>
ANDERSON ASSOCIATES, LLP
Certified Public Accountants
7621 Fitch Lane
Baltimore, Maryland 21236
410-882-8050
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Columbian Bank, A Federal Savings Bank
Havre de Grace, Maryland
We have audited the accompanying statements of financial condition of
Columbian Bank, A Federal Savings Bank as of December 31, 1997 and 1996, and the
related statements of operations, stockholders' equity and cash flows for each
of the two years in the two year period ended December 31, 1997. These
financial statements are the responsibility of the Bank'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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Columbian Bank, A Federal
Savings Bank at December 31, 1997 and 1996, and the results of its operations
and cash flows for each of the two years in the two year period ended December
31, 1997 in conformity with generally accepted accounting principles.
/s/ Anderson Associates LLP
March 11, 1998
Baltimore, Maryland
F-1
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
------
Cash $ 476,225 $ 307,495
Interest bearing deposits in other banks 1,638,421 1,097,342
Federal funds sold 571,703 200,000
Investments available for sale (Note 2) 2,385,665 2,134,783
Investments held to maturity (Note 2) 2,845,260 4,099,125
Mortgage backed securities (Note 3) 2,347,893 3,140,413
Loans receivable - net (Note 4) 18,804,532 18,512,735
Foreclosed real estate 284,339 483,188
Accrued interest receivable - loans 112,067 108,208
- investments 71,410 72,295
- mortgage backed
securities 12,905 19,998
Premises and equipment - net (Note 6) 346,510 451,573
Federal Home Loan Bank of Atlanta stock at cost
(Note 7) 214,600 214,600
Prepaid and refundable income taxes 6,921 75,399
Deferred income taxes (Note 12) 72,924 60,933
Other assets 41,739 10,146
----------- -----------
Total assets $30,233,114 $30,988,233
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
- -----------
Checks outstanding in excess of bank balance $ 210,759 $ -
Deposits (Note 8) 27,642,195 28,772,132
Advance payment by borrowers for taxes and
insurance 176,624 169,284
Income taxes payable (Note 12) 12,953 -
Other liabilities 161,831 182,529
----------- -----------
28,204,362 29,123,945
Commitments and contingencies (Notes 4 and 11)
Stockholders' Equity
- --------------------
Common stock par value $1 per share; authorized
80,000 shares: issued and outstanding 72,080
and 69,140 shares, respectively 72,080 69,140
Paid in surplus 490,316 463,856
Retained earnings (substantially restricted)
(Note 11) 1,444,680 1,323,710
Net unrealized gain on investments available for
sale net of taxes 21,676 7,582
----------- -----------
Total stockholders' equity 2,028,752 1,864,288
----------- -----------
Total liabilities and stockholders' equity $30,233,114 $30,988,233
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-2
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
For Years Ended
December 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Interest Income
- ---------------
Interest on loans (Note 4) $1,654,199 $1,651,104
Interest on available for sale investments 155,686 186,525
Interest on held to maturity investments 243,279 231,277
Interest on mortgage backed securities 157,782 227,865
Other interest income 122,979 105,472
---------- ----------
Total interest income 2,333,925 2,402,243
Interest Expense
- ----------------
Interest on deposits (Note 8) 1,546,456 1,631,937
---------- ----------
Net interest income 787,469 770,306
Provision for losses on loans (Note 4) - 24,000
---------- ----------
Net interest income after provision for loan
losses 787,469 746,306
Other Income
- ------------
Gain on sale of premises and equipment 44,769 -
Net gain on sale of investments (Note 2) - 5,573
All other income 51,708 53,698
---------- ----------
96,477 59,271
Non-Interest Expenses
- ---------------------
Salaries and other related expenses 291,539 247,755
Occupancy 33,684 36,650
Deposit insurance premiums (Note 8) 27,039 250,073
Advertising 7,958 6,355
Data processing 37,005 33,507
Legal expenses 49,740 45,375
Professional fees 45,262 57,610
Other expenses 141,409 118,101
---------- ----------
Total non-interest expenses 633,636 795,426
---------- ----------
Income before income tax provision (benefit) 250,310 10,151
Income tax provision (benefit) (Note 12) 87,448 (17,453)
---------- ----------
Net income $ 162,862 $ 27,604
========== ==========
Basic and diluted earnings per share (Note 1) $ 2.29 $ .39
========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-3
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized
Gain on
Common Paid-In Retained Investments Stockholders'
Stock Surplus Earnings Available for Sale Equity
------ -------- --------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
December 31, 1995 $69,140 $463,856 $1,309,934 $ 18,771 $1,861,701
Net income for year ended
December 31, 1996 - - 27,604 - 27,604
Cash dividend - - (13,828) - (13,828)
Change in unrealized gain on
investments available for
sale (net of tax) - - - (11,189) (11,189)
------- -------- ---------- -------- ----------
December 31, 1996 69,140 463,856 1,323,710 7,582 1,864,288
Net income for year ended
December 31, 1997 - - 162,862 - 162,862
Cash dividend - - (21,492) - (21,492)
Stock options exercised 900 8,100 - - 9,000
Stock dividend 2,040 18,360 (20,400) - -
Change in unrealized gain on
investments available for
sale (net of tax) - - - 14,094 14,094
------- -------- ---------- -------- ----------
December 31, 1997 $72,080 $490,316 $1,444,680 $ 21,676 $2,028,752
======= ======== ========== ======== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-4
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
For Years Ended
December 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 162,862 $ 27,604
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
-----------------------------------------
Accretion of discount and amortization
of premiums 10,394 (179,221)
Amortization of deferred loan fees (22,929) (32,194)
Loan fees deferred 21,913 28,194
Provision for losses on loans - 24,000
Net gain on sale of investments - (5,573)
Provision for depreciation 20,537 23,388
Gain on sale of premises and equipment (44,769) -
Decrease (increase) in accrued interest
receivable 4,119 (22,036)
Increase (decrease) in refundable and deferred
income taxes 47,013 (20,087)
Decrease (increase) in other assets (31,593) 287
(Decrease) increase in income taxes payable 12,953 (5,375)
Decrease in other liabilities (20,698) (87,152)
--------- ----------
Net cash provided (used) by operating
activities 159,802 (248,165)
Cash Flows from Investing Activities
- ------------------------------------
Purchase of available for sale securities (868,839) (1,500,000)
Proceeds from sale of available for sale
securities - 1,488,184
Proceeds from maturities of available for sale
securities 641,525 632,000
Purchases of held to maturity investments (1,994,844) (600,000)
Proceeds from maturity of held to maturity
investments 3,249,126 -
Principal collected on mortgage backed securities 781,709 920,025
Longer term loans originated (3,199,409) (3,703,202)
Principal collected on longer term loans 2,935,889 2,342,495
(Increase) decrease in short-term loans 58,297 (37,582)
Proceeds from sales of foreclosed real estate 188,378 -
Funds advanced on foreclosed real estate (75,087) -
Investment in premises and equipment - (2,462)
Proceeds from sale of premises and equipment 129,295 -
----------- -----------
Net cash provided (used) by investing
activities 1,846,040 (460,542)
</TABLE>
F-5
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
For Years Ended
December 31,
--------------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Financing Activities
- ------------------------------------
Increase in checks outstanding in excess of
bank balance $ 210,759 $ -
Net increase (decrease) in demand deposits,
money market and passbook accounts and advances
by borrowers for taxes and insurance (283,252) 719,804
Decrease in certificates of deposit (839,345) (1,665,775)
Proceeds from exercise of stock options 9,000 -
Decrease in dividends payable - (13,828)
Cash dividends paid on common stock (21,492) (13,828)
---------- -----------
Net cash used by financing activities (924,330) (973,627)
---------- -----------
(Decrease) increase in cash and cash equivalents 1,081,512 (1,682,334)
Cash and cash equivalents at beginning of year 1,604,837 3,287,171
---------- -----------
Cash and cash equivalents at end of year $2,686,349 $ 1,604,837
========== ===========
The Following is a Summary of
Cash and Cash Equivalents
-------------------------
Cash $ 476,225 $ 307,495
Interest bearing deposits in other banks 1,638,421 1,097,342
Federal funds 571,703 200,000
---------- -----------
Cash and cash equivalents reflected on the
statement of cash flows $2,686,349 $ 1,604,837
========== ===========
Supplemental Disclosure of Cash Flows Information:
Net Cash Paid During the Year For:
Interest expense $1,546,456 $ 1,631,937
Income taxes $ 76,250 $ 48,750
Transfer from loans to foreclosed
real estate $ - $ 483,188
Transfer from foreclosed real estate to loans $ 85,558 $ -
Stock dividend $ 20,400 $ -
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-6
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1997 AND 1996
--------------------------
Note 1 - Summary of Significant Accounting Policies
------------------------------------------
A. Business - The Bank's primary business activity is the acceptance
of deposits from the general public and the use of the proceeds for
investments and loan originations. The Bank is subject to
competition from other financial institutions. The Bank is subject
to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
B. Basis of Financial Statement Presentation - The financial
statements have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the
date of the statement of financial condition and revenues and
expenses for the period. Actual results could differ significantly
from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses and the valuation of
foreclosed real estate. See Note F & H below for a discussion of
the determination of those estimates.
C. Investments Available for Sale - Available for sale securities
consist of brokerage houses promises to pay, secured by government
treasuries and cash funds held in money market account with broker.
Unrealized holding gains and losses, net of tax, on available for
sale securities are reported as a net amount in a separate
component of shareholders' equity until realized. Premiums and
discounts are recognized in interest income using the interest
method over the period to maturity. The Bank recognizes gains and
losses from sales of securities using the specific identification
method.
D. Investments and Mortgage Backed Securities Held to Maturity -
Investments and mortgage backed securities 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 recogized in
interest income using the interest method over the period to
maturity.
E. Loans Receivable - Net - Loans receivable are stated at unpaid
principal balances, less undisbursed loans in process, deferred
loan origination fees and the allowance for loan losses, since
management has the ability and intention to hold them to maturity.
F-7
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
F. Allowance for Loan Losses - An allowance for loan losses is
provided through charges to income in an amount that management
believes will be adequate to absorb losses on existing loans that
may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. 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
that may affect the borrowers' ability to pay. Determining the
amount of the allowance for loan losses requires the use of
estimates and assumptions, which is permitted under generally
accepted accounting principles. Actual results could differ
significantly from those estimates. Management believes the
allowance for losses on loans is in accordance with generally
accepted accounting principles. While management uses available
information to estimate losses on loans, future additions to the
allowances may be necessary based on changes in economic
conditions, particularly in the State of Maryland. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for
losses on loans. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about
information available to them at the time of their examination.
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such
that collection of interest is doubtful. When a payment is received
on a loan on non-accrual status, the amount received is allocated
to principal and interest in accordance with the contractual terms
of the loan.
G. Loan Origination Fees - Beginning December 1988, loan origination
fees have been reflected in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91 on a prospective basis. This
Statement requires that loan origination fees and certain direct
loan origination costs be deferred and be recognized over the
contractual life of the related loan as an adjustment of yield.
F-8
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
H. Foreclosed Real Estate - Real estate acquired through or in the
process of foreclosure is recorded at the lower of cost or fair
value. Management periodically evaluates the recoverability of the
carrying value of the real estate acquired through foreclosure
using estimates as described under the caption "Allowance for Loan
Losses". In the event of a subsequent decline, management provides
an additional allowance, to reduce real estate acquired through
foreclosure to fair value less estimated disposal cost. Expenses
incurred on foreclosed real estate prior to disposition are charged
to expense.
I. Premises and Equipment - Premises and equipment are recorded at
cost. Depreciation is computed on the straight-line method, based
on the useful lives of the respective assets.
J. Income Taxes - Deferred income taxes are recognized for temporary
differences between the financial reporting basis and income tax
basis of assets and liabilities based on enacted tax rates expected
to be in effect when such amounts are realized or settled. Deferred
tax assets are recognized only to the extent that is more likely
than not that such amounts will be realized based on consideration
of available evidence. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
K. Stock-Based Compensation - The Bank has elected to continued the
use of the "intrinsic value based method" prescribed by Accounting
Principles Board ("APB") Opinion No. 25. Under the intrinsic value
based method, compensation cost is the excess of the market price
of the stock at the grant date over the amount an employee must pay
to acquire the stock.
L. Cash and Cash Equivalents - Cash and cash equivalents in the
statement of cash flows include cash, federal funds sold and
interest-bearing deposits in other banks due in less than ninety
days.
M. Basic and Diluted Earnings Per Common Share - Basic and diluted
earnings per common share for the years ended December 31, 1997 and
1996 are determined by dividing net income by the weighted average
number of shares outstanding of 71,182 and 71,180, respectively, as
retoractively adjusted for a 4% stock dividend. Options to purchase
6,639 and 6,489 shares of common stock at an average cost of $10.07
per share were outstanding at December 31, 1997 and 1996,
respectively, but were not included in the computation because they
had no effect. The basic and dilutive computations were the same.
<TABLE>
<CAPTION>
Shares Fraction Weighted
Dates Outstanding Outstanding of Period Average Shares
----------------- ----------- --------- --------------
<S> <C> <C> <C>
January 1 to December 30 71,180 x 364/365 70,985
Options exercised 900
------
December 31 72,080 x 1/365 197
======
Weighted average shares 72,182
======
</TABLE>
F-9
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
N. Certain prior years' amounts have been reclassified to conform to
the current year's method of presentation.
Note 2 - Investment Securities
---------------------
Investment securities have been classified in the statements of
financial condition according to management's intent. The carrying
amount of securities and their approximate fair values at December 31
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1997:
Available for Sale Investments:
U.S. Government and Federal
Agencies
Due from five to ten years $2,000,000 $ 35,315 $ - $2,035,315
Cash funds held in money market
account with broker 350,350 - - 350,350
---------- -------- --------- ----------
$2,350,350 $ 35,315 $ - $2,385,665
========== ======== ========= ==========
Held to Maturity Investments:
U.S. Government and Federal
- ---------------------------
Agencies
--------
Due beyond five years $2,845,260 $ 1,291 $ 4,286 $2,842,265
========== ======== ======== ==========
</TABLE>
F-10
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 2 - Investment Securities - Continued
---------------------
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ------
<S> <C> <C> <C> <C>
December 31, 1996:
Available for Sale Investments:
Brokerage Houses Promises to Pay
Secured by Government Treasuries
due within 12 months $ 481,511 $ _ $16,371 $ 465,140
U.S. Government and Federal Agencies
Due from five to ten years 1,500,000 28,118 - 1,528,118
Cash funds held in money market
account with broker 141,525 - - 141,525
---------- ------- ------- ----------
$2,123,036 $28,118 $16,371 $2,134,783
========== ======= ======= ==========
Held to Maturity Investments:
U.S. Government and Federal Agencies
- ------------------------------------
Due within 12 months $1,000,000 $ - $ 74 $ 999,926
Due beyond 12 months but within
five years 1,000,000 1,547 - 1,001,547
Due beyond five years 2,099,125 1,574 8,035 2,092,664
---------- ------- ------- ----------
$4,099,125 $ 3,121 $ 8,109 $4,094,137
========== ======= ======= ==========
</TABLE>
No gross gain or losses were realized during the year ended December
31, 1997. In 1996, gross realized gains and gross realized losses on sales
of available for sale investments were $7,230 and $1,657, respectively.
Note 3 - Mortgage Backed Securities
--------------------------
Mortgage backed securities at December 31 consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
GNMA participating certificates $1,009,703 $1,219,954
FHLMC participating certificates 897,141 1,214,998
FNMA participating certificates 418,399 489,475
REMIC - 182,525
---------- ----------
2,325,243 3,106,952
Net - unamortized premiums
and discounts 22,650 33,461
---------- ----------
$2,347,893 $3,140,413
========== ==========
</TABLE>
F-11
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 3 - Mortgage Backed Securities - Continued
--------------------------
The amortized cost and fair value of mortgage backed securities are
as follows as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
December 31, 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
GNMA participating certificates $1,019,533 $ 26,156 $ - $1,045,689
FHLMC participating certificates 904,815 - 7,764 897,051
FNMA participating certificates 423,545 1,638 7,477 417,706
---------- --------- -------- ----------
$2,347,893 $ 27,794 $ 15,241 $2,360,446
========== ========= ======== ==========
December 31, 1996
-----------------------------------------------------
GNMA participating certificates $1,236,797 $ - $ 47,151 $1,189,646
FHLMC participating certificates 1,228,470 - 18,818 1,209,652
FNMA participating certificates 495,077 2,819 12,741 485,155
REMIC 180,069 1,909 - 181,978
---------- -------- -------- ----------
$3,140,413 $ 4,728 $ 78,710 $3,066,431
========== ======== ======== ==========
</TABLE>
No gains or losses were realized during the years ended December
31, 1997 and 1996.
Certain mortgage backed securities including REMICs are subject to
significant prepayment risks. In periods of declining interest rates
mortgages may be repaid more rapidly than anticipated resulting in
greater amortization of premiums and reduced yields. In addition, the
Bank may be unable to reinvest at an interest rate comparable to the
rate on the prepaying mortgage backed security. In contrast, in periods
of increasing interest rates, market values of mortgage backed
securities, including REMICs, will decline. Since principal payments on
REMICs do not commence upon purchase of the investment, REMICs are more
susceptible to market value fluctuations. Cash flows from the REMICs
include interest only for one or more years and principal and interest
payments thereafter provided by mortgage backed securities guaranteed
by FNMA and backed by residential mortgages. All interest payments on
the Bank's REMIC are at fixed rates. Management anticipates full
recoverability of the principal balance of the REMIC.
F-12
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 4 - Loans Receivable
----------------
The composition of loans is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Real estate mortgages - primarily
single family residences $14,136,652 $12,993,097
Construction 1,655,200 1,561,611
Home equity and second mortgages -
residential 1,583,458 1,584,099
Commercial real estate 2,067,201 3,058,393
Consumer installment loans 18,503 31,991
Loans secured by savings accounts 169,008 213,817
----------- -----------
19,630,022 19,443,008
Less
----
Loan loss allowance (180,000) (180,000)
Undisbursed portion of loans in process (501,183) (604,950)
Deferred loan origination fees (144,307) (145,323)
----------- -----------
(825,490) (930,273)
----------- -----------
$18,804,532 $18,512,735
=========== ===========
</TABLE>
Residential lending is generally considered to involve less risk
than other forms of lending, although payment experience on these loans
is dependent to some extent on economic and market conditions in the
Bank's lending area. Commercial and construction loan repayments are
generally dependent on the operations of the related properties or the
financial condition of its borrower or guarantor. Accordingly,
repayment of such loans can be more susceptible to adverse conditions
in the real estate market and the regional economy.
Substantially all of the Bank's loans receivable are mortgage loans
secured by residential and commercial real estate properties located in
the State of Maryland. Loans are extended only after evaluation by
management of customers' creditworthiness and other relevant factors on
a case-by-case basis. The Bank generally does not lend more than 95%
of the appraised value of a property and requires private mortgage
insurance on residential mortgages with loan-to-value ratios in excess
of 80%. In addition, the Bank generally obtains personal guarantees of
repayment from borrowers and/or others for construction, commercial and
multifamily residential loans and disburses the proceeds of
construction and similar loans only as work progresses on the related
projects.
F-13
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 4 - Loans Receivable - Continued
----------------
Impaired loans as defined by SFAS No. 114 are summarized as follows
for the years ended December 31:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Recorded investment $144,702 $117,358
Allowance for loan losses - -
</TABLE>
Impaired loans as defined by SFAS No. 114 for which interest income
has been reduced are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Aggregate recorded investment $114,887 $117,358
======== ========
Interest income that would have been
recorded $ 16,882 $ 13,050
Interest income recognized 6,322 6,900
-------- --------
Interest income not recognized $ 10,560 $ 6,150
======== ========
</TABLE>
The Bank was not committed to fund additional amounts on these
loans.
Non-accrual loans that are not subject to SFAS No. 114 for which
interest has been reduced amount to approximately $29,815 and $100,412
at December 31, 1997 and 1996, respectively.
Interest income that would have been recorded under the original
terms of such loans and the interest income actually recognized for the
years ended December 31 are summarized below:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
Interest income that would have been recorded $ 5,034 $ 8,591
Interest income recognized 3,878 -
-------- --------
Interest income not recognized $ 1,156 $ 8,591
======== ========
</TABLE>
The following is a summary of the allowance for loan losses:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
Balance beginning $180,000 $156,000
Provision for losses on loans - 24,000
-------- --------
Balance ending $180,000 $180,000
======== ========
</TABLE>
F-14
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 4 - Loans Receivable - Continued
----------------
An analysis of the activity with respect to loans to officers and
directors was as follows:
<TABLE>
<CAPTION>
For Years Ended
December 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Beginning balance............. $352,434 $195,718
Additions..................... - 324,000
Deductions.................... (21,900) (167,284)
------- -------
Ending balance................ $330,534 $352,434
======= =======
</TABLE>
The loans are secured by real property and savings accounts.
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of
its customers. These financial instruments include commitments to make
loans and lines of credit and involve to varying degrees elements of
credit risk in excess of the amount recognized in the statement of
financial position. The contract amounts of these instruments express
the extent of involvement the Bank has in each class of financial
instruments. The Bank's exposure to credit loss from non-performance by
the other party to the financial instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Unless otherwise noted, the Bank requires collateral or other
security to support financial instruments with off-balance-sheet credit
risk.
<TABLE>
<CAPTION>
Contract Amount at
Financial Instruments Whose Contract ---------------------
Amounts Represent Credit Risk December 31,
-------------------------------------- ---------------------
1997 1996
---- ----
<S> <C> <C>
Loan commitments $154,500 $414,000
Home equity lines of credit 775,733 641,471
</TABLE>
The Bank's outstanding commitments to make loans secured by real
estate, exclusive of the undisbursed portion of loans in process and
the undrawn portion of home equity lines of credit, at December 31,
1997, consisted of a $154,500 of fixed rate loans from 7.75% to 8.25%
and no adjustable rate loans. As of December 31, 1996, loan
commitments consisted of $316,000 of fixed rate loans from 7.50% to
8.50% and $98,000 of adjustable rate loans at 8.50%.
Home equity loans are loan commitments to individuals as long as
there is no violation of any condition established in the contract.
Commitments under home equity lines expire fifteen years after the date
the loan closes and are secured by real estate. The Bank evaluates each
customer's credit worthiness on a case-by-case basis.
F-15
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 4 - Loans Receivable - Continued
----------------
The credit risk involved in these financial instruments is
essentially the same as that involved in extending loan facilities to
customers. No amount has been recognized in the statement of financial
position at December 31, 1997 as a liability for credit loss.
Note 5 - Loan Servicing
--------------
Mortgage loans serviced for others are not included in the
accompanying statements of financial condition. The unpaid principal
balances of these loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Mortgage loan portfolio serviced for other
investors $1,960,462 $2,586,420
========== ==========
</TABLE>
Note 6 - Premises and Equipment
----------------------
Premises and equipment at December 31 are summarized by major
classification as follows:
<TABLE>
<CAPTION>
December 31, Estimated
------------ Useful
1997 1996 Lives
---- ---- ---------
<S> <C> <C> <C>
Land $213,812 $213,812
Building 47,008 152,228 30 Years
Building improvements 212,749 212,749 10-30 Years
Furniture, fixtures and equipment 109,060 109,060 3-15 Years
-------- --------
582,629 687,849
Accumulated depreciation (236,119) (236,276)
-------- --------
$346,510 $451,573
======== ========
</TABLE>
Note 7 - Investment in Federal Home Loan Bank of Atlanta Stock
-----------------------------------------------------
The Bank is required to maintain an investment in the stock of
the Federal Home Loan Bank of Atlanta ("FHLB") in an amount equal to at
least 1% of the unpaid principal balances of the Bank's residential
mortgage loans or 1/20 of its outstanding advances from the FHLB,
whichever is greater. Purchases and sales of stock are made directly
with the FHLB at par value.
F-16
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 8 - Deposits
--------
Deposits are composed of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1996
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
N.O.W. accounts $ 1,014,488 2.83 $ 731,990 2.66
Savings accounts 6,689,774 4.18 7,262,864 4.18
Term certificates 19,937,933 6.22 20,777,278 6.17
----------- -----------
$27,642,195 $28,772,132
=========== ===========
</TABLE>
Scheduled maturities of term certificates are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1996
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Amount % Amount %
------ -------- ------ --------
Less than 1 year $10,560,133 53.0% $ 9,749,042 46.9%
More than 1 year through 2 years 6,880,628 34.5 6,137,224 29.6
More than 2 years through 3 years 1,926,277 9.7 3,289,552 15.8
After 3 years 570,895 2.8 1,601,460 7.7
----------- ----- ----------- -----
$19,937,933 100.0% $20,777,278 100.0%
=========== ===== =========== =====
</TABLE>
The aggregate amount of jumbo certificates with a minimum denomination of
$100,000 was approximately $2,888,799 and $3,249,957 at December 31, 1997 and
1996, respectively. Deposits in excess of $100,000 are not insured by the
Savings Association Insurance Fund.
Interest Expense on Deposits
----------------------------
<TABLE>
<CAPTION>
For Years Ended
December 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
N.O.W. accounts $ 24,970 $ 20,310
Savings accounts 287,671 292,115
Term certificates 1,233,815 1,319,512
---------- ----------
$1,546,456 $1,631,937
========== ==========
</TABLE>
F-17
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 8 - Deposits - Continued
--------
Deposit Insurance Reform. Currently, there are two deposit insurance
funds maintained by the Federal Deposit Insurance Corporation ("FDIC"), the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). The
Bank's deposits are insured by SAIF. Legislation has been passed concerning the
Deposit Insurance Reform that required the Bank to pay a one-time assessment of
.657% of insured deposits at March 31, 1995, which was approximately $186,000.
The Bank's SAIF deposit insurance premiums were reduced to .064% of insured
deposits beginning January 1, 1997 from the current rate of .23% of insured
deposits. BIF and SAIF may be merged on January 1, 1999.
Note 9 - Profit Sharing Plan
-------------------
The Bank has in effect a profit sharing plan for full-time employees
who have completed one full year of service with the Bank. The Bank may make
annual contributions of up to 15% of its payroll. The plan does not provide for
employee contributions. Each participant in the plan becomes fully vested after
five consecutive years of service under the plan and upon retirement receives
the contributions on behalf of the participant and the earnings thereon. During
the year ended December 31, 1997, the Bank made contributions of $5,750. For the
year ended 1996, the Bank made no contributions to the plan.
Note 10- Common Stock and Organization Structure
---------------------------------------
In April of 1994, the shareholders approved a Stock Option and
Incentive Plan pursuant to which options to purchase up to 13,828 shares of the
Bank's authorized but unissued common stock were reserved for future issuance.
Options granted under the Plan may be incentive stock options within the meaning
of Section 422 of the Internal Revenue Code. Currently outstanding options are
exercisable at $10 per share, market value at the date of grant.
The following table summarizes the status of and changes in the
Bank's stock option plan during the past two years, as retroactively adjusted
for the Bank's 3% stock dividend.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Options Exercise
Options Price Exercisable Price
------- --------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at end of 1995 4,790 $ 9.71 4,790 $ 9.71
Granted 1,699 9.71
Exercised -
-------
Outstanding at end of 1996 6,489 9.71 6,489 $ 9.71
Granted 1,050 12.00 1,050 $12.00
Exercised (900) 9.71
-------
Outstanding at end of 1997 6,639 $10.07 6,639 $10.07
=======
</TABLE>
F-18
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 10- Common Stock and Organization Structure - Continued
---------------------------------------
SFAS No. 123 requires the Bank to make certain disclosures as if the
fair value method of accounting had been applied to the Bank's stock
option grants made subsequent to 1994. Accordingly, the Bank's
estimated the grant date fair value of each option awarded in 1997 and
1996 using the Black-Scholes Option-Pricing model with the following
relevant assumptions: dividend yield of 3.0%, risk-free interest rate
of 5.92% and 6.62%, respectively, and expected lives of 7.64 and 8.25
years. The assumption for expected volatility was zero due to the lack
of any stock trades at prices other than $12 and $10 for the year ended
December 31, 1997 and 1996, respectively. Had 1997 and 1996
compensation cost been determined including the weighted-average
estimate of fair value of each option granted of $2.64 and $2.36, the
Bank's net income would be reduced to proforma amount of $161,160 and
$24,407, respectively. Proforma earnings per share would be $2.26 and
$.34 in 1997 and 1996, respectively.
Note 11- Retained Earnings
-----------------
Under the regulatory capital requirements of the Office of Thrift
Supervision ("OTS"), savings banks are required to maintain minimal
capital requirements by satisfying three capital standards: a tangible
capital requirement, a leverage ratio requirement and a risk-based
capital requirement. Under the tangible capital requirement, the
Bank's tangible capital (the amount of stock and retained earnings
computed under generally accepted accounting principles) must be equal
to 1.5% of adjusted total assets. Under the leverage ratio
requirement, the Bank's core capital must be equal to 3.0% of adjusted
total assets. In addition, under the risk-based capital requirement,
the Bank must maintain core and supplemental capital (core capital plus
any general loss reserves) equal to 8% of risk-weighted assets (total
assets plus off-balance-sheet items multiplied by the appropriate risk
weights).
The Federal Deposit Insurance Corporation Improvement Act (FDICIA)
of 1991 was signed into law on December 19, 1991, and regulations
implementing the prompt corrective action provisions became effective
on December 12, 1992. The prompt corrective action regulations define
specific capital categories based on an institution's capital ratios.
The capital categories, in declining order, are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized". Institutions
categorized as "undercapitalized" or lower are subject to certain
restrictions, including the requirement to file a capital plan with its
primary federal regulator, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other
F-19
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 11 - Retained Earnings - Continued
-----------------
things. To be considered "well capitalized" an institution must
generally have a leverage capital ratio of at least 5%, a tier one
risk-based capital ratio of at least 6% and a total risk-based capital
ratio of at least 10%. At December 31, 1997, the Bank met the criteria
required to be considered "well capitalized" under this regulation
As of December 31, 1997, the most recent notification from the
Federal Deposit Insurance Corporation has 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 and Tier I leverage ratios
at least 100 to 200 basis points above those ratios set forth in the
table. There have been no conditions or events since that notification
that management believes have changed the Bank's category.
The following table presents the Bank's capital position based on
the December 31, 1997 financial statements.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ----------------------- --------------------------
Amount % Amount % Amount %
------ -- ------ -- ------ --
<S> <C> <C> <C> <C> <C> <C>
Tangible (1) $2,007,076 6.6% $ 453,172 1.5% $ N/A N/A
Tier I capital (2) 2,007,076 15.1% N/A N/A 795,675 6.0%
Core (1) 2,007,076 6.6% 906,343 3.0% 1,510,572 5.0%
Risk-weighted (2) 2,110,076 15.9% 1,060,900 8.0% 1,326,125 10.0%
(1) To adjusted total assets.
(2) To risk-weighted assets.
</TABLE>
F-20
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 11 - Retained Earnings - Continued
----------------
The following table presents the calculation of risk-based
capital and tangible assets used to determine the Bank's capital
position.
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Total stockholders' equity $ 2,028,752
Less: Unrealized gain on securities
available for sale net of applicable
income taxes 21,676
------------
Tangible and core capital 2,007,076
General valuation allowance 103,000
------------
Risk-based capital $ 2,110,076
===========
Total assets $30,233,114
Less: Unrealized gain on securities
available for sale 21,676
------------
Tangible and adjusted tangible assets $30,211,438
===========
Risk-weighted assets $13,261,245
===========
</TABLE>
The OTS has adopted an interest rate component to the regulatory
capital requirements effective January 1, 1994. The rule requires additional
capital to be maintained if the Bank's interest rate risk exposure, measured by
the decline in the market value of the Bank's net portfolio value, exceeds 2% of
assets as a result of a 200 basis point shift in interest rates. As of December
31, 1997, the Bank is not subject to the interest rate risk requirement.
For the purpose of granting to eligible savings account holders a
priority in the event of future liquidation, the Bank established a special
account at the time of conversion to the stock form of ownership in an amount
equal to its total retained earnings at January 27, 1989. In the event of future
liquidation of the Bank (and only in such an event), an eligible account holder
who continues to maintain his savings account shall be entitled to receive a
distribution from the special account. The amount of the special account will be
decreased in an amount proportionately corresponding to decreases in the savings
account balances of eligible account holders on each subsequent annual
determination date. The balance of the special account at December 31, 1997 is
included in retained earnings. No dividends may be paid to the stockholders if
such dividends would reduce regulatory capital of the Bank below the amount
required for the special account.
F-21
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 11- Retained Earnings - Continued
-----------------
OTS regulations limit the payment of dividends and other capital
distributions by the Bank. The Bank is able to pay dividends during a
calendar year without regulatory approval to the extent of the greater
of (i) an amount which will reduce by one-half its surplus capital
ratio at the beginning of the year plus all its net income determined
on the basis of generally accepted accounting principles for that
calendar year or (ii) 75% of net income for the last four calendar
quarters.
The Bank is restricted in paying dividends on its stock to the
greater of the restrictions described in the preceding paragraph, or an
amount that would reduce its retained earnings below its regulatory
capital requirement, the accumulated bad debt deduction, or the
liquidation account described in the second preceding paragraph.
The Bank was allowed a special bad debt deduction limited generally
to 8% of otherwise taxable income for the year beginning January 1,
1988 through December 31, 1995. Beginning January 1, 1996 the
percentage of taxable income method of computing the Bank's tax bad
debt deduction is no longer allowed and the amount by which the tax
reserve for bad debts exceeds such amount at December 31, 1987 must be
recaptured over a six year period. A tax liability has been established
for the recapture. If the amounts which qualified as deductions for
federal income tax purposes prior to December 31, 1987 are later used
for purposes other than to absorb loan losses, including distributions
in liquidations, they will be subject to federal income tax at the then
current corporate rate. Retained earnings at December 31, 1997 and 1996
include $253,000, for which no provision for federal income tax has
been provided. The unrecorded deferred income tax liability on the
above amount was approximately $98,000.
Note 12- Income Taxes
------------
The income tax provision (benefit) consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Current expense (benefit) $108,912 $(72,765)
Deferred (benefit) expense (21,464) 55,312
-------- --------
Total tax provision (benefit) $ 87,448 $(17,453)
======== ========
</TABLE>
F-22
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 12- Income Taxes - Continued
------------
The amount computed by applying the statutory federal income tax
rate to income before federal taxes is less than the taxes provided for
the following reasons:
<TABLE>
<CAPTION>
For Years Ended December 31,
----------------------------------------------
1997 1996
--------------------- ---------------------
Percent Percent
of Pretax of Pretax
Amount Income Amount Income
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Statutory federal
income tax rate $ 85,105 34.00 $ 3,451 34.00
Decrease Resulting From
- -----------------------
Surtax exemption (4,916) (1.96) (4,936) (48.63)
State tax net of federal income tax benefit 11,623 4.64 (331) (3.26)
Other adjustments (4,364) (1.74) (15,637) (154.05)
-------- ----- -------- -------
$ 87,448 34.94 $(17,453) (171.94)
======== ===== ======== =======
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Deferred loan origination fees $ 13,168 $ 18,682
Loan loss allowance 67,482 63,828
Reserve for uncollected interest 4,392 5,228
Tax basis of foreclosed real estate in
excess of book 16,168 -
Deferred compensation 18,664 14,386
Other 7,205 4,522
-------- --------
Total gross deferred tax assets 127,079 106,646
Deferred Tax Liabilities:
Federal Home Loan Bank of Atlanta stock dividends 26,880 25,425
Tax reserves for bad debt 13,636 16,122
Net unrealized appreciation on available for
sale securities 13,639 4,166
-------- --------
Total gross deferred tax Liabilities 54,155 45,713
-------- --------
Net deferred tax assets $ 72,924 $ 60,933
======== ========
</TABLE>
F-23
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 13 - Disclosure About Fair Value of Financial Instruments
----------------------------------------------------
The estimated fair values of the Bank's financial instruments are
summarized below. The fair values of a significant portion of these
financial instruments are estimates derived using present value
techniques prescribed by the FASB and may not be indicative of the
net realizable or liquidation values. Also, the calculation of
estimated fair values is based on market conditions at a specific
point in time and may not reflect current or future fair values.
The carrying amount is a reasonable estimate of fair value for
cash, federal funds and interest-bearing deposits in other banks due
to the short-term nature of these investments. Fair value is based
upon market prices quoted by dealers for investment securities and
estimates using bid prices published in financial newspapers for
mortgage backed securities. The carrying amount of Federal Home Loan
Bank of Atlanta stock is a reasonable estimate of fair value. Loans
receivable were discounted using a single discount rate, comparing the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities, except
for adjustable rate mortgages which were considered to be at market
rates. These rates were used for each aggregated category of loans as
reported on the Office of Thrift Supervision Quarterly Report. The
fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered on deposits of similar remaining
maturities.
The Bank is a party to financial instruments with off-balance
sheet risk in the normal course of business, including mortgage loan
commitments and undisbursed home equity lines of credit. The fixed
rate loan commitments were a blended rate based on the relative risk
of the properties involved and the undisbursed home equity lines of
credit are at adjustable rates. Accordingly, all the off-balance sheet
items are considered to be at market.
The estimated fair values of the Bank's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------
Carrying Estimated
Value Fair Value
--------- ----------
<S> <C> <C>
Financial Assets
- ----------------
Cash, interest-bearing deposits
in other banks and federal funds $ 2,686,349 $ 2,686,349
Investment securities available for
sale 2,385,665 2,385,665
Investment securities held to
maturity 2,845,260 2,842,265
Mortgage backed securities 2,347,893 2,360,446
Loans receivable 18,804,532 18,129,000
Federal Home Loan Bank of Atlanta
stock 214,600 214,600
</TABLE>
F-24
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
DECEMBER 31, 1997 AND 1996
- --------------------------
Note 13- Disclosure About Fair Value of Financial Instruments - Continued
----------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
-------------------------
Carrying Estimated
Value Fair Value
-------- ----------
<S> <C> <C>
Financial Liabilities
---------------------
Deposits $27,642,195 $27,704,262
Off-Balance Sheet
-----------------
Loan commitments and home equity
lines of credit $ - $ 903,233
</TABLE>
Note 14- Recent Accounting Pronouncements
--------------------------------
FASB Statement on Reporting Comprehensive Income - In June 1997,
FASB issued SFAS No. 130, which establishes standards for reporting and display
of comprehensive income and its components. This Statement is effective for
fiscal years beginning after December 15, 1997. Management believes the
adoption of this Statement will not have a material effect on the Bank's
financial statements.
FASB Statement on Disclosures About Segments of an Enterprise and
Related Income - In June 1997, FASB issued SFAS No. 131, which establishes
standards for the way public companies report information about operating
segments in the annual and interim financial statements. This Statement is
effective for fiscal years beginning after December 15, 1997. Management
believes the adoption of this Statement will not have a material effect on the
financial statements of the Bank.
FASB Statement on Employers Disclosures About Pensions and Other
Postretirement Benefits - In February 1998, FASB issued SFAS No. 132 which
standardizes disclosure requirements for pensions and postretirement benefits.
This Statement is effective for fiscal years beginning after December 15, 1997.
Management believes the adoption of this Statement will not have a material
effect on the financial statements of the Bank.
F-25
<PAGE>
COLUMBIAN BANK A FEDERAL SAVINGS BANK
-------------------------------------
Havre de Grace Maryland
-----------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
-------- -----------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash $ 431,158 $ 476,225
Interest bearing deposits in other banks 1,650,843 1,638,421
Federal funds sold 1,009,478 571,703
Investments available for sale 2,515,965 2,385,665
Investments held to maturity 2,499,844 2,845,260
Mortgage backed securities 2,253,591 2,347,893
Loans receivable - net 18,615,357 18,804,532
Foreclosed real estate 374,339 284,339
Accrued interest receivable - loans 115,286 112,067
- investments 83,285 71,410
- mortgage backed
securities 12,324 12,905
Premises and equipment - net 342,250 346,510
Federal Home Loan Bank of Atlanta stock at cost 214,600 214,600
Prepaid and refundable income taxes 2,607 6,921
Deferred income taxes 71,990 72,924
Other assets 11,764 41,739
----------- -----------
Total assets $30,204,681 $30,233,114
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
- -----------
Checks outstanding in excess of bank balance $ 79,898 $ 210,759
Deposits 27,629,843 27,642,195
Advance payment by borrowers for taxes and
insurance 261,164 176,624
Income taxes payable 3,526 12,953
Other liabilities 153,086 161,831
----------- -----------
Commitments and contingencies 28,127,617 28,204,362
Stockholders' Equity
- --------------------
Common stock par value $1 per share; authorized
1,500,000 shares; issued and outstanding
75,291 and 72,080 shares, respectively 75,291 72,080
Paid in surplus 523,189 490,316
Retained earnings (substantially restricted) 1,454,893 1,444,680
Accumulated other comprehensive income 23,691 21,576
----------- -----------
Total stockholders' equity 2,077,064 2,028,652
----------- -----------
Total liabilities and stockholders' equity $30,204,681 $30,233,114
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-26
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------
<TABLE>
<CAPTION>
For Three Months Ended
March 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Interest Income
- ---------------
Interest on loans $400,073 $393,655
Interest on available for sale investments 39,771 39,400
Interest on held to maturity investments 53,586 56,336
Interest on mortgage backed securities 37,224 46,564
Other interest income 33,329 29,940
-------- --------
Total interest income 563,983 565,895
Interest Expense
- ----------------
Interest on deposits 372,221 387,996
-------- --------
Net interest income 191,762 177,899
Other Income
- ------------
All other income 15,389 13,029
Non-Interest Expenses
- ---------------------
Salaries and other related expenses 73,960 69,674
Occupancy 6,933 8,260
Deposit insurance premiums 6,924 5,712
Advertising 1,054 423
Data processing 10,572 6,417
Legal expenses 11,068 8,963
Professional fees 9,000 8,500
Other expenses 27,226 28,149
-------- --------
Total non-interest expenses 146,737 136,098
-------- --------
Income before income tax provision 60,414 54,830
Income tax provision 17,135 18,970
-------- --------
Net income 43,279 35,860
Other Comprehensive Income
- --------------------------
Unrealized holding gains (losses) on investments
available for sale net of taxes 2,015 (10,356)
--------- --------
Comprehensive income $ 45,294 $ 25,504
========= ========
Basic and diluted earnings per share $ .58 $ .49
========= ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-27
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------
<TABLE>
<CAPTION>
For Three Months Ended
March 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 43,279 $ 36,860
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
-----------------------------------------
Accretion of discount and amortization
of premium on investment securities - (7,560)
Accretion of discount and amortization of
premium on mortgage backed securities (30) 387
Amortization of deferred loan fees (5,641) (7,546)
Loan fees deferred 6,808 3,376
Gain on sale of investment (4,583) -
Provision for depreciation 4,260 5,577
Increase in accrued interest receivable on loans (3,219) (14,356)
Increase in accrued interest receivable on
investments and mortgage backed securities (11,294) (55,553)
Decrease in prepaid and refundable and deferred
income taxes 3,983 18,971
Decrease (increase) in other assets 29,975 (22,800)
Decrease in income taxes payable (9,427) -
Decrease in other liabilities (8,745) (84,193)
----------- ----------
Net cash provided (used) by operating
activities 45,366 (127,837)
Cash Flows from Investing Activities
- ------------------------------------
Purchase of available for sale securities (127,020) -
Sale of available for sale securities - 7,154
Purchases of held to maturity investments (1,800,000) (995,000)
Proceeds from maturity of held to maturity
investments 2,150,000 1,000,000
Principal collected on mortgage backed
securities 94,332 262,936
Longer term loans originated (2,079,424) (735,900)
Principal collected on longer term loans 2,154,795 718,916
(Increase) decrease in short-term loans 22,636 (7,613)
Proceeds from sale of foreclosed real estate - 61,280
----------- ----------
Net cash provided by investing activities 415,319 311,773
</TABLE>
F-28
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------
<TABLE>
<CAPTION>
For Three Months Ended
March 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Financing Activities
- ------------------------------------
Proceeds from exercise of stock options $ 10,800 $ -
Net increase in demand deposits, money
market and passbook accounts 238,836 253,789
Decrease in certificates of deposit (251,188) (298,950)
Increase in advances by borrowers for taxes
and insurance 84,640 81,897
Cash dividends paid on common stock (7,782) (7,256)
Decrease in checks outstanding in excess of
bank balance (130,861) -
---------- ----------
Net cash provided (used) by financing activities (55,555) 29,480
---------- ----------
Increase in cash and cash equivalents 405,130 213,416
Cash and cash equivalents at beginning of period 2,686,349 1,604,837
---------- ----------
Cash and cash equivalents at end of period $3,091,479 $1,818,253
========== ==========
The Following is a Summary of
Cash and Cash Equivalents
- -----------------------------
Cash $ 431,158 $ 406,031
Interest bearing deposits in other banks 1,650,843 1,062,222
Federal funds 1,009,478 350,000
---------- ----------
Cash and cash equivalents reflected on the
statement of cash flows $3,091,479 $1,818,253
========== ==========
Supplemental Disclosure of Cash Flows Information:
Net Cash Paid During the Period For:
Interest expense $ 370,882 $ 387,976
Stock dividends $ 25,284 $ 20,400
Net loan amount transferred to foreclosed real
estate $ 90,000 $ -
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-29
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
--------------------------------------
Havre de Grace, Maryland
------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------
Note 1 - Business
--------
The Bank's primary business activity is the acceptance of deposits
from the general public and the use of the proceeds for investments
and loan originations. The Bank is subject to competition from other
financial institutions. The Bank is subject to the regulations of
certain federal agencies and undergoes periodic examinations by those
regulatory authorities.
Note 2 - Basis of Financial Statement Presentation
-----------------------------------------
The financial statements have been prepared in conformity with
generally accepted accounting principles, but do not include all
information necessary for a complete presentation. However, all
adjustments (which consist only of normal recurring accruals) which, in
the opinion of management, are necessary for a fair presentation of the
unaudited financial statements have been included in the results of
operations for the three months ended March 31, 1998 and 1997,
respectively. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan
losses and the valuation of real estate owned.
During the three month period ended March 31, 1998, the Bank
implemented the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130. The Statement addresses the standards for
reporting and presentation of comprehensive income. Comprehensive
income is defined as "the change in equity of a business enterprise
during a period from transactions and other events and circumstances
from nonowner sources".
Note 3 - Cash Flow Presentation
----------------------
For purposes of the statements of cash flows, cash and cash
equivalents include cash and amounts due from depository institutions
and investments in federal funds.
F-30
<PAGE>
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
- --------------------------------------
Havre de Grace, Maryland
- ------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------
Note 4 - Basic and Diluted Earnings Per Share
------------------------------------
Basic and diluted earnings per common share for the three months
ended March 31, 1998 and 1997 are determined by dividing net income of
$43,279 and $35,860, respectively, by the weighted averaged number of
shares outstanding of 74,912 and 73,260, respectively, as retroactively
adjusted for a 3% stock dividend. Options to purchase 5,699 and 7,566
shares of common stock at an average cost of $9.79 per share were
outstanding at March 31, 1998 and 1997, respectively, but were not
included in the computation because they had no effect. The basic and
dilutive computations were the same.
<TABLE>
<CAPTION>
Shares Fraction Weighted
Dates Outstanding Outstanding of Period Average Shares
----------------- ----------- --------- --------------
<S> <C> <C> <C>
January 1 to January 31 74,155 x 1/3 24,718
Options exercised 1,136
------
February 1 to March 31 75,291 x 2/3 50,194
------
Weighted average shares 74,912
</TABLE>
F-31
<PAGE>
ANNEX A
---------------------------------
REORGANIZATION AND MERGER AGREEMENT
BY AND AMONG
CECIL BANCORP, INC.
AND
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
DATED AS OF MAY 29, 1998
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REORGANIZATION AND MERGER AGREEMENT
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THIS REORGANIZATION AND MERGER AGREEMENT ("Agreement") is dated as of May
29, 1998, by and among CECIL BANCORP, INC., a Maryland corporation ("Cecil") and
COLUMBIAN BANK, A FEDERAL SAVINGS BANK, a federal savings bank ("Columbian").
BACKGROUND
The parties have determined that it would be desirable and in their
respective best interests, including the best interests of their respective
shareholders, for (i) Cecil to organize Columbian Interim Federal Savings Bank
("NewSub") as a wholly owned interim federal savings bank subsidiary of Cecil,
to merge with and into Columbian (the "Merger"), pursuant to which each of the
issued and outstanding shares of common stock of Columbian ("Columbian common
stock") shall automatically by operation of law be converted into a number of
shares of common stock of Cecil and cash for fractional shares as set forth
herein (the "Merger Consideration") and the issued and outstanding shares of
NewSub common stock shall be converted by operation of law into an equal number
of newly issued shares of Columbian common stock all of which shall be owned by
Cecil, and (ii) following the Merger, Columbian shall survive the Merger and
operate as a wholly-owned subsidiary of Cecil under its present name and title
with its own board of directors for a period of at least three years thereafter.
The parties have determined that it would be in the best interests of their
respective stockholders to combine their respective companies through a tax-
free, stock-for-stock merger so that their respective stockholders will have an
equity ownership in the combined entity.
It is intended that (i) for federal income tax purposes, the Merger shall
qualify as a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code") and this Agreement shall
constitute a plan of reorganization pursuant to Section 368 of the Code, and
(ii) the Merger shall qualify for pooling of interests accounting treatment
under generally accepted accounting principles.
Concurrently with the execution and delivery of this Agreement, and as a
condition and inducement to Cecil's willingness to enter into this Agreement,
each of the directors of Columbian has entered into a voting agreement in the
form attached hereto as Exhibit A.
As a condition and as an inducement to Cecil's willingness to enter into
this Agreement, Cecil and Columbian are entering into a stock option agreement
(in the form attached hereto as Exhibit B) pursuant to which Columbian is
granting to Cecil an option to purchase shares of Columbian common stock.
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NOW THEREFORE, in consideration of the premises and mutual promises
hereinafter set forth, and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE I
THE MERGER AND RELATED MATTERS
1.1 Creation of NewSub. In order to effect the Merger provided for
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herein, Cecil shall cause NewSub to be organized as an interim federal savings
bank under the laws of the United States, all (except for directors' qualifying
shares, if any) of the issued and outstanding stock of which shall be owned by
Cecil. As soon as practical following its organization, Cecil shall cause
NewSub to approve and adopt a Plan of Merger with respect to the Merger (which
shall be in the form attached as Exhibit 1.1 hereto).
1.2 The Merger. On the Effective Date (as defined in Section 1.3 hereof),
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NewSub shall be merged with and into Columbian. The Merger shall be effected in
accordance with any and all applicable provisions of federal law including the
rules and regulations of the Office of Thrift Supervision ("OTS"). At the
Effective Date, the separate existence and corporate organization of NewSub
shall cease and Columbian shall thereafter continue as the surviving corporate
entity under the laws of the United States under the name of "Columbian Bank, A
Federal Savings Bank." Columbian after the Effective Date is sometimes referred
to in this Agreement as the "Resulting Association." At and after the Effective
Date, (i) the identity, existence, corporate organization, purposes, powers,
objects, franchises, privileges, rights and immunities of Columbian shall
continue in effect and be unimpaired by the merger, (ii) the separate corporate
existence of NewSub shall cease, and (iii) Columbian shall succeed, without
other transfer, to all the rights and property of NewSub and shall be subject to
all the debts and liabilities of NewSub in the same manner as if Columbian had
itself incurred them. All rights of creditors and all liens upon the property
of each of Columbian and NewSub shall be preserved unimpaired by the Merger,
provided that such liens upon property of NewSub shall be limited to the
property affected thereby immediately prior to the Effective Date. Each savings
account in Columbian at the Effective Date will constitute a savings account in
the Resulting Association equivalent in withdrawable amount to the withdrawal
value thereof, and subject to the same terms and conditions as such savings
account in Columbian at the Effective Date. The liquidation account of
Columbian shall not be affected by the Merger. From and after the Effective
Date, any action or proceeding by or against NewSub may be prosecuted to
judgment, which shall bind the Resulting Association, or the Resulting
Association may be proceeded against or substituted in its place.
1.3 Effective Date of the Merger. Upon satisfaction or waiver (in
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accordance with the provisions of this Agreement) of each of the conditions set
forth in Article V herein, Columbian and NewSub shall execute and cause to be
filed Articles of Combination, and such certificates or further documents as
shall be required by the OTS, with the OTS and with such other federal or state
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regulatory agencies as may be required in the opinion of legal counsel for Cecil
and Columbian under applicable law, rules and regulations. Upon approval by the
OTS and endorsement of such Articles of Combination by the OTS, the Merger and
other transactions contemplated by this Agreement shall become effective. The
Effective Date for all purposes hereunder shall be the date of such endorsement
by the OTS. The Merger shall not be effective unless and until it is approved
by the OTS.
1.4 Charter and Bylaws. On the Effective Date, the Charter and Bylaws of
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Columbian shall be and continue to be the Charter and Bylaws of the Resulting
Association unless and until the same shall be amended in accordance with
applicable law.
1.5 Conversion of Shares.
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(a) (i) On the Effective Date, by virtue of the Merger and without
any action on the part of Cecil or Columbian or the holders of shares of Cecil
or Columbian common stock, each outstanding share of Columbian common stock
issued and outstanding at the Effective Date (except for Dissenting Shares (as
such term is defined in paragraph (b) below) and shares referred to in
subparagraph (a)(ii) of this Section 1.5, but including shares held in any
401(k) plan of Columbian or held by Columbian in a fiduciary capacity) shall be
converted into the Merger Consideration and exchanged for the right to receive a
number of shares of Cecil common stock (the "Exchange Ratio") to be determined
as follows (subject to adjustment as set forth in subparagraph (a)(v) of this
Section 1.5):
(1) If the Cecil Trading Price (to be determined as described below)
is more than $29.375, the Exchange Ratio shall be 1.5645;
(2) If the Cecil Trading Price is more than $27.00 and equal to or
less than $29.375, the Exchange Ratio shall be determined by dividing $45.96 by
the Cecil Trading Price;
(3) If the Cecil Trading Price is equal to or more than $20.00 and
equal to or less than $27.00, the Exchange Ratio shall be 1.7021;
(4) If the Cecil Trading Price is less than $20.00, the Exchange Ratio
shall be determined by dividing $34.04 by the Cecil Trading Price.
For purposes of this Agreement, the "Cecil Trading Price" shall be
equal to the average of the closing price of a share of Cecil common stock (as
reported by the "Bloomberg Business News" Service ) for the last five days on
which shares of Cecil common stock were traded prior to the date of approval of
the Merger by the OTS.
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(ii) Any shares of Columbian common stock which are owned or held by
Columbian (except shares held in any 401(k) plan of Columbian or held in a
fiduciary capacity) or by Cecil or any of Cecil's subsidiaries (other than in a
fiduciary capacity) at the Effective Date shall cease to exist, and the
certificates for such shares shall as promptly as practicable be canceled and no
shares of capital stock of Cecil shall be issued or exchanged therefor.
(iii) Each share of common stock of NewSub issued and outstanding
immediately prior to the Effective Date shall be canceled and converted into one
share of common stock of Columbian.
(iv) At the Effective Date, the holders of certificates representing
shares of Columbian common stock shall cease to have any rights as stockholders
of Columbian, except the right to receive the Merger Consideration as provided
herein.
(v) If the holders of Cecil common stock shall have received or shall
have become entitled to receive, without payment therefor, during the period
commencing on the date hereof and ending with the Effective Date, additional
shares of common stock or other securities for their stock by way of a
reorganization, recapitalization, stock split, stock dividend, reverse stock
split reclassification, combination of shares or similar corporate rearrangement
in the capitalization of Cecil ("Stock Adjustment"), then the Exchange Ratio
shall be proportionately adjusted to take into account such Stock Adjustment.
(b) Any shares of Columbian common stock held by a holder who dissents
from the Merger and becomes entitled to obtain payment for the value of such
shares of Columbian common stock pursuant to the applicable provisions of the
rules and regulations of the OTS shall be herein called "Dissenting Shares."
Any Dissenting Shares shall not, after the Effective Date, be entitled to vote
for any purpose or receive any dividends or other distributions and shall not be
entitled to receive the Merger Consideration; provided, however, that shares of
Columbian common stock held by a dissenting stockholder who subsequently
withdraws a demand for payment, fails to comply fully with the requirements of
the rules and regulations of the OTS, or otherwise fails to establish the right
of such stockholder to be paid the value of such stockholders' shares under the
rules and regulations of the OTS shall be deemed to be converted into the right
to receive the Merger Consideration pursuant to the terms and conditions
referred to above.
(c) At the Effective Date, by virtue of the Merger without any action
on the part of any holder of any option, each option to purchase or other right
with respect to shares of Columbian common stock pursuant to stock options,
stock appreciation rights or other rights, including stock awards ("Columbian
Options") granted by Columbian under its stock option plans, as set forth in
Exhibit 1.5 hereto, and which are outstanding at the Effective Date, whether or
not exercisable, shall be converted into and become rights with respect to Cecil
common stock, and Cecil shall assume each Columbian Option, in accordance with
the terms of the plan under which it was issued and the stock option or other
agreement by which it is evidenced, except that from and after the Effective
Date, (i) each Columbian Option assumed by Cecil may be exercised solely for
shares
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of Cecil common stock (or cash in the case of stock appreciation rights),
(ii) the number of shares of Cecil common stock subject to such Columbian Option
shall be equal to the number of shares of Columbian common stock subject to such
Columbian Option immediately prior to the Effective Date multiplied by the
Exchange Ratio provided that any fractional shares so resulting shall be rounded
down to the nearest whole share, and (iii) the per share exercise price under
each such Columbian Option shall be adjusted by dividing the per share exercise
price under each such Columbian Option by the Exchange Ratio and rounding up to
the nearest cent. In addition, notwithstanding the clauses (ii) and (iii) of
the first sentence of this Section 1.5(c), each Columbian Option which is an
"incentive stock option" shall be adjusted as required by Section 424 of the
Code, and the regulations promulgated thereunder, so as not to constitute a
modification, extension or renewal of the option, within the meaning of Section
424(h) of the Code. Cecil and Columbian agree to take all necessary steps to
effectuate the foregoing provisions of this 1.5(c) including, on the part of
Cecil, reserving a sufficient number of shares of Cecil common stock for
issuance pursuant to the exercise of stock options as contemplated herein and
filing an appropriate registration statement with the Securities and Exchange
Commission ("SEC") not later than the Effective Date with respect to the shares
of Cecil common stock subject to such options and to make such other filings
required under federal and state securities laws not later than the Effective
Time to permit the exercise of such options and the sale of shares received
thereunder after the Effective Time, and Cecil shall continue to make such
filings thereafter as may be necessary to permit the continued exercise of
options and sale of shares.
(d) In approving this Agreement, Columbian and the Stock Option
Committee appointed by the Board of Directors of Columbian in accordance with
paragraph 5(a) of the Columbian 1994 Stock Option and Incentive Plan agree not
to permit the holders of options outstanding under such plan to receive cash
upon the "Change in Control" of Columbian in an amount equal to the excess of
the "Market Value" of the Columbian common stock subject to such option over the
"Exercise Price" of the shares subject to such option in accordance with Section
12 of the 1994 Stock Option and Incentive Plan.
1.6 Directors and Officers. The directors of the Resulting Association,
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who shall hold office until their resignation or removal or until their
successors have been elected and qualified in accordance with law and the
Resulting Association's Charter and Bylaws, shall be eight in number and shall
include the seven directors of Columbian as of the Effective Date and Mary B.
Halsey, who shall be appointed as a Director of the Resulting Association, and
shall be compensated for service as a Director of the Resulting Association in
accordance with the compensation arrangement for all other Resulting Association
Directors. The officers of Columbian as of the Effective Date, shall be the
initial officers of the Resulting Association after the Effective Date. The
names, residence addresses and terms of the initial Directors of the Resulting
Association are set forth in Exhibit 1.6 hereto. Notwithstanding anything to
the contrary herein, the Bylaws of Columbian shall be amended prior to the
Effective Date to increase the number of directors of Columbian to eight, which
shall be effective on the Effective Date, upon the filing of amended bylaws with
the OTS.
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1.7 Offices of the Resulting Association. Immediately after the Effective
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Date, the Resulting Association shall continue its business at the office
location(s) identified in Exhibit 1.7 hereto.
1.8 Authorization for Issuance of Cecil Common Stock; Exchange of
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Certificates.
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(a) Cecil shall reserve for issuance a sufficient number of shares of
its common stock for the purpose of issuing its shares to Columbian's
shareholders in accordance with this Article I. Immediately prior to the
Effective Date, Cecil shall make available for exchange or conversion, by
transferring to an exchange agent appointed by Cecil (the "Exchange Agent") for
the benefit of the holders of Columbian common stock: (i) such number of whole
shares of Cecil common stock as shall be issuable in connection with the payment
of the aggregate Merger Consideration (as computed pursuant to Section 1.5
herein, and as may be evidenced by a certificate therefor), and (ii) such funds
as may be payable in lieu of fractional shares of Cecil common stock (as
provided in Section 1.9 herein).
(b) After the Effective Date, holders of certificates theretofore
evidencing outstanding shares of Columbian common stock (other than Dissenting
Shares and as provided in Section 1.5(a)(ii)), upon surrender of such
certificates to the Exchange Agent, shall be entitled to receive certificates
representing the number of whole shares of Cecil common stock into which shares
of Columbian common stock theretofore represented by the certificates so
surrendered shall have been converted, as provided in Section 1.5 hereof, and
cash payments in lieu of fractional shares as provided in Section 1.9 hereof.
As soon as practicable after the Effective Date, the Exchange Agent will send a
notice and transmittal form to each Columbian shareholder of record at the
Effective Date whose Columbian stock shall have been converted into Cecil common
stock advising such shareholder of the effectiveness of the Merger and the
procedure for surrendering to the Exchange Agent outstanding certificates
formerly evidencing Columbian common stock in exchange for new certificates for
Cecil common stock and for cash payable in lieu of any fractional interest.
Upon surrender, each certificate evidencing Columbian common stock and cash for
fractional shares, if any, shall be canceled. The Exchange Agent shall make
such cancellation and exchanges of Columbian common stock for Cecil common stock
(and cash, as appropriate) for a period of one year from the Effective Date.
(c) Until surrendered as provided in this Section 1.8 hereof, each
outstanding certificate which, prior to the Effective Date, represented
Columbian common stock (other than Dissenting Shares and shares canceled at the
Effective Date pursuant to Section 1.5(a)(ii) hereof) will be deemed for all
corporate purposes to evidence ownership of the number of whole shares of Cecil
common stock into which the shares of Columbian common stock formerly
represented thereby were converted and the right to receive cash in lieu of any
fractional interest. However, until such outstanding certificates formerly
representing Columbian common stock are so surrendered, no dividend or
distribution payable to holders of record of Cecil common stock shall be paid to
any holder of such outstanding certificates, but upon surrender of such
outstanding certificates by such holder there shall be paid to such holder the
amount of any dividends or distribution, without
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interest, theretofore paid with respect to such whole shares of Cecil common
stock, but not paid to such holder, and which dividends or distribution had a
record date occurring on or subsequent to the Effective Date and the amount of
any cash, without interest, payable to such holder in lieu of fractional shares
pursuant to Section 1.9 hereof. After the Effective Date, there shall be no
further registration of transfers on the records of Columbian of outstanding
certificates formerly representing shares of Columbian common stock and, if a
certificate formerly representing such shares is presented to Cecil, it shall be
forwarded to the Exchange Agent for cancellation and exchange for certificates
representing shares of Cecil common stock, and cash for fractional shares as
herein provided. The Exchange Agent shall make such cancellation and exchanges
of Columbian Common Stock (and cash, as appropriate) for a period of one year
from the Effective Date.
(d) All shares of Cecil common stock and cash in lieu of any
fractional share issued and paid upon the surrender for exchange of Columbian
common stock in accordance with the above terms and conditions shall be deemed
to have been issued in full satisfaction of all rights pertaining to such shares
of Columbian common stock.
(e) If any new certificate for Cecil common stock is to be issued in
the name other than that in which the certificate surrendered in exchange
thereof is registered, it shall be a condition of the issuance therefor that the
certificate surrendered in exchange shall be properly endorsed and otherwise in
proper form for transfer and that the person requesting such transfer pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance of
a new certificate for shares of Cecil common stock in any name other than that
of the registered holder of the certificate surrendered, or establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(f) In the event any certificate for Columbian common stock shall have
been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for
such lost, stolen or destroyed certificate, upon the making of an affidavit of
that fact by the holder thereof, such shares of Cecil common stock and cash in
lieu of fractional shares, if any, as may be required pursuant hereto; provided,
however, that Cecil may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate to deliver a bond in such sum as it may direct as indemnity against
any claim that may be made against Cecil, Columbian, the Exchange Agent or any
other party with respect to the certificate alleged to have been lost, stolen or
destroyed.
1.9 No Fractional Shares. Notwithstanding any term or provision hereof,
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no fractional shares of Cecil common stock, and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in exchange for
any shares of Columbian common stock; no dividend or distribution with respect
to Cecil common stock shall be payable on or with respect to any fractional
share interests; and no such fractional share interest shall entitle the owner
thereof to vote or to any other rights of a shareholder of Cecil. In lieu of
such fractional share interest, any holder of Colombian common stock who would
otherwise be entitled to a fractional share of Cecil common stock will, upon
surrender of his certificate or certificates representing Columbian common stock
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outstanding immediately prior to the Effective Date, be paid the applicable cash
value of such fractional share interest, which shall be equal to the product of
the fraction of the share to which such holder would otherwise be entitled,
multiplied by the Cecil Trading Price as determined pursuant to Section 1.5(a)
of this Agreement. For the purposes of determining any such fractional share
interests, all shares of Cecil common stock received by the holders of Columbian
common stock shall be combined so as to calculate the maximum number of whole
shares of Cecil common stock issuable to such Columbian shareholder in the
Merger.
1.10 Shareholders' Approval. The Board of Directors of Columbian
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shall, within 45 days of the effective date of the Registration Statement,
submit the Merger to its shareholders for approval (the "Shareholders
Approval"). The affirmative approval of the holders of at least two-thirds of
the issued and outstanding shares of Columbian common stock entitled to vote
shall be required for such approval.
1.11 Registration Statement; Prospectus/Proxy Statement.
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(a) For the purposes (i) of registering the Cecil common stock to be
issued to holders of Columbian common stock in connection with the Merger with
the SEC and with applicable state securities authorities, (ii) of submitting the
Merger to its shareholders for the Shareholders Approval, and (iii) of preparing
for filing with the OTS the proxy materials for consideration of the Merger by
Columbian stockholders, the parties hereto shall cooperate in the preparation of
an appropriate registration statement (such registration statement, together
with all and any amendments and supplements thereto, being herein referred to as
the "Registration Statement"), including the prospectus/proxy statement
satisfying all applicable requirements of applicable state laws, and of the
Securities Act of 1933 (the "1933 Act") and the Securities Exchange Act of 1934
(the "1934 Act") and the rules and regulations thereunder (such prospectus/proxy
statement or information statement, together with any and all amendments or
supplements thereto, being herein referred to as the "Prospectus/Proxy
Statement").
(b) Cecil shall furnish such information concerning Cecil and the
Cecil Subsidiaries (as defined in Section 3.1 hereof) as is necessary in order
to cause the Prospectus/Proxy Statement, insofar as it relates to such
corporations, to comply with Section 1.11(a) hereof. Cecil agrees to promptly
advise Columbian if at any time prior to the Columbian shareholders meeting any
information provided by Cecil in the Prospectus/Proxy Statement becomes
incorrect or incomplete in any material respect and to provide the information
needed to correct such inaccuracy or omission. Cecil shall promptly file with
the SEC, and furnish to Columbian for filing with the OTS and for distribution
to shareholders of Columbian, such supplemental information as may be necessary
in order to cause such Prospectus/Proxy Statement, insofar as it relates to
Cecil and the Cecil Subsidiaries, to comply with Section 1.11(a).
(c) Columbian shall furnish Cecil with such information concerning
Columbian as is necessary in order to cause the Prospectus/Proxy Statement,
insofar as it relates to Columbian, to comply with Section 1.11(a) hereof.
Columbian agrees to promptly advise Cecil if at any time
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prior to the Columbian shareholders meeting any information provided by Cecil
with the Prospectus/Proxy Statement becomes incorrect or incomplete in any
material respect and to provide Cecil with the information needed to correct
such inaccuracy or omission. Columbian shall furnish Cecil with such
supplemental information as may be necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to Columbian, to comply with
Section 1.11(a).
(d) Cecil shall as expeditiously as possible file the Registration
Statement with the SEC and applicable state securities agencies. Cecil shall
use all reasonable efforts to cause the Registration Statement to become
effective under the 1933 Act and applicable state securities laws at the
earliest practicable date. Columbian authorizes Cecil to utilize in the
Registration Statement the information concerning Columbian provided to Cecil
for the purpose of inclusion in the Prospectus/Proxy Statement. Columbian shall
have the right to review and comment on the form of proxy statement included in
the Registration Statement as well as those portions containing or describing
information concerning Columbian. Cecil shall advise Columbian promptly when
the Registration Statement has become effective and of any supplements or
amendments thereto, and Cecil shall furnish Columbian with copies of all such
documents. Prior to the Effective Date or the termination of this Agreement,
each party shall consult with the other with respect to any material (other
than the Prospectus/Proxy Statement) that might constitute a "prospectus"
relating to the Merger within the meaning of the 1933 Act.
(e) Columbian and Cecil shall consult with each other in order to
determine whether any directors, officers or shareholders of Columbian may be
deemed to be "affiliates" of Columbian or Cecil ("affiliated persons") within
the meaning of Rule 145 of the SEC promulgated under the 1933 Act. All shares
of Cecil common stock issued to such Columbian affiliated persons in connection
with the Merger shall bear a legend upon the face thereof stating that transfer
of the securities is or may be restricted by the provisions of the 1933 Act
and/or pooling of interests accounting requirements, and notice shall be given
to Cecil's transfer agent of such restriction, provided that such legend shall
be removed by delivery of a substitute certificate without such legend if such
Columbian affiliated person shall have delivered to Cecil a copy of a letter
from the staff of the SEC or an opinion of counsel, in form and substance
satisfactory to Cecil, to the effect that such legend is not required for
purposes of the 1933 Act, and, in any event, at any time after the expiration of
two years from the Effective Date unless, in the opinion of counsel for Cecil,
such person was an "affiliate" of Cecil within the meaning of Rule 145 within
three months prior to the expiration of such two year period. So long as shares
of such Cecil common stock bear such legend, no transfer of such Cecil common
stock shall be allowed unless and until the transfer agent is provided with such
information as may reasonably be requested by counsel for Cecil to assure that
such transfer will not violate applicable provisions of the 1933 Act, or rules,
regulations or policies of the SEC and the SEC's rules relating to pooling of
interests accounting treatment. Notwithstanding anything to the contrary
herein, if the Merger qualifies for pooling of interests accounting treatment
shares of Cecil common stock issued to such affiliates of Columbian and shares
of Cecil common stock held by persons who are affiliates of Cecil immediately
prior to the Effective Time shall not be transferable until such time as
financial results covering at least 30 days of combined operations of
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Cecil and Columbian have been published within the meaning of Section 201.01 of
the SEC's Codification of Financial Reporting Policies.
1.12 Cooperation; Regulatory Approvals. The parties shall cooperate
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and use reasonable best efforts to complete the transactions contemplated
hereunder at the earliest practicable date. Each party shall use their best
efforts to cause each of their affiliates and subsidiaries to cooperate, in the
preparation and submission by them, as promptly as reasonably practicable, of
such applications, petitions, and other documents and materials as any of them
may reasonably deem necessary or desirable to the OTS, Federal Trade Commission
("FTC"), Department of Justice ("DOJ"), SEC, other regulatory authorities,
holders of the voting shares of common stock of Columbian, and any other persons
for the purpose of obtaining any approvals or consents necessary to consummate
the transactions contemplated by this Agreement. At the date hereof, none of
the parties is aware of any reason that the regulatory approvals required to be
obtained by it would not be obtained.
1.13 Closing. If (i) this Agreement has been duly approved by the
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shareholders of Columbian, and (ii) all relevant conditions of this Agreement
have been satisfied or waived, a closing (the "Closing") shall take place as
promptly as practicable thereafter at the principal office of Cecil, or at such
other place as the parties may agree, at which the parties hereto will exchange
certificates, opinions, letters and other documents as required hereby and will
make the filing described in Section 1.3 hereof. Such Closing will take place
as soon as practicable as agreed by the parties, provided, however, that the
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Closing shall be no more than thirty (30) days after the satisfaction or waiver
of all conditions and/or obligations contained in Article V of this Agreement.
1.14 Closing of Transfer Books. At the Effective Date, the transfer
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books for Columbian common stock shall be closed, and no transfer of shares of
Columbian common stock shall thereafter be made on such books.
1.15 Possible Alternative Structures. Notwithstanding anything to the
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contrary contained in the Agreement, Cecil shall be entitled to revise the
structure of the transactions contemplated herein, provided, however, that no
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such change shall (A) alter or change the amount or kind of consideration to be
issued to holders of Columbian common stock as provided for in this Agreement,
(B) adversely affect the tax treatment to Columbian shareholders, (C) adversely
affect the qualification of the Merger as a pooling of interests for accounting
and financial reporting purposes, (D) affect the ability of Columbian to
continue as a separate entity for at least a three-year period following the
Effective Date or (E) materially impede or delay consummation of the
transactions contemplated herein.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COLUMBIAN
Columbian represents and warrants to Cecil that, except as disclosed in
Schedule I delivered by Columbian to Cecil concurrently with or prior to the
date of execution of this Agreement:
2.1 Organization, Good Standing, Authority, Insurance, Etc. Columbian is
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a savings association duly organized, validly existing and in good standing
under the laws of the United States. Columbian does not have any equity or other
interest in any "subsidiary" within the meaning of Section 10(a)(1)(G) of the
Home Owners' Loan Act ("HOLA") or in any other company, entity, partnership,
joint venture or similar organization. Columbian has all requisite power and
authority and is duly qualified and licensed to own, lease and operate its
properties and conduct its business as it is now being conducted. Columbian has
delivered to Cecil a true, complete and correct copy of the charter and the
bylaws of Columbian. Columbian is qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which qualification
is necessary under applicable law, except to the extent that any failure to so
qualify would not, in the aggregate, have a material adverse effect on the
business, financial condition or results of operations of Columbian. Columbian
is a member in good standing of the Federal Home Loan Bank of Atlanta and all
eligible accounts issued by Columbian are insured by the Savings Association
Insurance Fund ("SAIF") to the maximum extent permitted under applicable law.
Columbian is a "qualified thrift lender" as defined in Section 10(m) of the HOLA
and the rules and regulations thereunder.
The minute books of Columbian contain complete and accurate records of all
meetings and other corporate actions held or taken of its shareholders and
Boards of Directors (including the committees of such Boards).
2.2 Capitalization. The authorized capital stock of Columbian consists of
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(i) 1,500,000 shares of common stock, par value $1.00 per share, of which 75,343
shares were issued and outstanding as of the date of this Agreement, and (ii)
500,000 shares of preferred stock, par value $1.00 per share, of which no shares
were issued and outstanding as of the date of this Agreement. All outstanding
shares of Columbian common stock are duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights. Except for outstanding
options under the 1994 Stock Option and Incentive Plan ("Stock Option Plan")
(the number of which are as set forth in Section 2.2 of Schedule I) and such
option granted by Columbian to Cecil pursuant to this Agreement and under the
terms and conditions set forth in the related agreement appended hereto as
Exhibit B, there are no options, convertible securities, warrants, or other
rights (preemptive or otherwise) to purchase or acquire any of Columbian's
capital stock and no oral or written agreement, contract, arrangement,
understanding, plan or instrument of any kind (collectively, "Contract") to
which Columbian or any of its affiliates is subject with respect to the
issuance, voting or sale of issued or unissued shares of Columbian's capital
stock. A true and complete copy of the Stock Option Plan, as in effect on the
date of this Agreement, is attached as Section 2.2 of Schedule I.
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2.3 Financial Statements and Regulatory Reports.
-------------------------------------------
(a) Columbian has delivered to Cecil: (i) Statements of Financial
Condition, Statements of Operations, Statements of Stockholders' Equity and
Statements of Cash Flows of Columbian as of and for the years ended December 31,
1997 and 1996, certified by Anderson Associates, LLP; and (ii) a statement of
condition, statement of operations, statement of stockholders' equity and
statement of cash flows of Columbian for the three-month period ended March 31,
1998. Each of the foregoing financial statements fairly presents the
consolidated financial condition, assets, liabilities and results of operations
of Columbian, at their respective dates and for the respective periods then
ended and has been prepared in accordance with generally accepted accounting
principles consistently applied, except as otherwise noted in a footnote thereto
and subject, in the case of interim financial statements, to normal recurring
year-end adjustments, which are not material in any case or in the aggregate and
the absence of notes.
(b) Columbian previously delivered, or will deliver, to Cecil the
Columbian regulatory reports, consisting of the thrift financial reports,
consolidated reports of condition and income, and accompanying schedules, filed
by Columbian with the OTS for each calendar quarter, beginning with the quarter
ended December 31, 1994, through the Effective Date ("Regulatory Reports"). The
Regulatory Reports have been, or will be, prepared in accordance with applicable
accounting principles and practices, and were true and correct in all material
respects.
2.4 Absence of Undisclosed Liabilities. Except (i) as disclosed in
----------------------------------
Section 2.4 of Schedule I, (ii) as reflected, noted or adequately reserved
against in the financial statements referred to in Section 2.3(a) herein, or
(iii) for deposits incurred in the ordinary course of business consistent with
past practice, Columbian does not have any material liabilities (whether
accrued, absolute, contingent or otherwise) of specific application to
Columbian.
2.5 Absence of Changes. Since December 31, 1997, Columbian has conducted
------------------
its business in the ordinary course of business and, except as disclosed in
Section 2.5 of Schedule I, Columbian has not undergone any change in condition
(financial or otherwise), assets, liabilities, business or operations, other
than changes in the ordinary course of business which have not been, either in
any case or in the aggregate, materially adverse. Without limiting the
foregoing, except as disclosed in Section 2.5 of Schedule I, since December 31,
1997:
(i) Columbian has not issued, sold, granted, conferred or awarded (or
agreed to issue, sell, grant, confer or award) any of its equity securities
(except shares of Columbian common stock issued pursuant to exercise of
options previously granted under the Columbian Stock Option Plan), or
options to acquire its equity securities, or any corporate debt securities
which would be classified under generally accepted accounting principles as
long-term debt on the balance sheets of Columbian; (ii) Columbian has not
effected any stock split or adjusted, combined, reclassified or otherwise
changed its capitalization; (iii) Columbian has not discharged or satisfied
any material lien or paid any material obligation or liability (absolute or
contingent), other than in the ordinary course of business; (iv)
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Columbian has not sold, assigned, transferred, leased, exchanged, or
otherwise disposed of any of its material properties or assets; (v) except
as required by contract or law, Columbian has not (A) increased the rate of
compensation of, or paid any bonus to, any of its directors, officers, or
other employees, (B) entered into any new, or amended or supplemented any
existing, employment, management, consulting, deferred compensation,
severance, or other similar contract, (C) entered into, terminated, or
substantially modified any of the Employee Plans (as defined in Section
2.15 hereafter) or (D) agreed to do any of the foregoing; (vi) Columbian
has not suffered any material damage, destruction, or loss, whether as a
result of misappropriation, theft, fire, explosion, earthquake, accident,
casualty, labor trouble, requisition, or taking of property by any
regulatory authority, flood, windstorm, embargo, riot, or other casualty or
event, and whether or not covered by insurance; and (vii) Columbian has not
canceled or compromised any debt, except for debts of $5,000 or less,
individually or in the aggregate, charged off or compromised in accordance
with the past practice of Columbian.
2.6 Dividends, Distributions and Stock Purchases and Sales. Except as
------------------------------------------------------
disclosed in Section 2.6 of Schedule I, since December 31, 1997, Columbian has
not declared, set aside, made or paid any dividend or other distribution in
respect of Columbian common stock, or purchased, issued or sold any shares of
Columbian common stock.
2.7 Prospectus/Proxy Statement. At the time the Prospectus/Proxy
--------------------------
Statement is mailed to the shareholders of Columbian for the solicitation of
proxies for the approval of the Merger and at all times subsequent to such
mailing up to and including the time of such approval, such Prospectus/Proxy
Statement (including any supplements thereto), with respect to all information
set forth therein relating to Columbian shareholders, Columbian common stock,
this Agreement, the Merger and all other transactions contemplated hereby, will:
(a) Comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act and the rules and regulations under the 1933 Act and the
1934 Act; and
(b) Not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
they are made, not misleading.
2.8 No Broker's or Finder's Fees. Except as set forth in Section 2.8 of
----------------------------
Schedule I, no agent, broker, investment banker, person or firm acting on behalf
or under authority of Columbian is or will be entitled to any broker's or
finder's fee or any other commission or similar fee directly or indirectly in
connection with the Merger or any other transaction contemplated hereby.
2.9 Contracts. Each written or oral contract entered into by Columbian
---------
(other than deposit and loan contracts with customers entered into by Columbian
in the ordinary course of business) which involves aggregate payments or
receipts in excess of $5,000 per year or which cannot be fully performed within
six months from the date hereof, including without limitation every
13
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agreement, lease, license, indenture, mortgage and other commitment to which
Columbian is a party or by which it or any of its properties may be bound (all
such contracts involving annual payments in excess of $5,000, or which cannot be
fully preformed within such six month period, are being collectively referred to
herein as "Material Contracts") is identified in Section 2.9 of Schedule I.
Except as disclosed in Section 2.9 of Schedule I, all Material Contracts are
valid and in full force and effect.
2.10 Litigation. Except as disclosed in Section 2.10 of Schedule I: (i)
----------
there is no litigation, investigation or proceeding pending or, to the knowledge
of the senior officers of Columbian, threatened that involves Columbian or any
of its properties; (ii) there are no outstanding orders, writs, injunctions,
judgments, decrees, regulations, directives, consent agreements or memoranda of
understanding issued by any federal, state or local court or governmental
authority or arbitration tribunal issued against or with the consent of
Columbian.
2.11 Compliance with Law. Columbian is in compliance in all material
-------------------
respects with all laws and regulations applicable to its operations or with
respect to which compliance is a condition of engaging in the business thereof,
except for failures to comply, which, in the aggregate, would not have a
material adverse effect on the business, financial condition or results of
operations of Columbian, and Columbian has not received notice from any federal,
state or local government or governmental agency of any material violation of
any of the above.
2.12 Corporate Actions.
-----------------
(a) The Board of Directors of Columbian has duly approved and
authorized its officers to execute and deliver this Agreement, the Plan of
Merger and the Stock Option Agreement and to take all action necessary to
consummate the Merger and the other transactions contemplated hereby and
thereby.
(b) The Board of Directors of Columbian has taken all necessary
action to exempt this Agreement, the Plan of Merger and the Stock Option
Agreement and the transactions contemplated hereby and thereby from, and this
Agreement, the Plan of Merger and the Stock Option Agreement and the
transactions contemplated hereby and thereby are exempt from (i) any applicable
state takeover laws, (ii) any state laws limiting or restricting the voting
rights of stockholders, (iii) any state laws requiring a stockholder approval
vote in excess of the vote normally required in transactions of similar type not
involving a "related person," "interested stockholder" or person or entity of
similar type and (iv) any provision in its charter or bylaws (A) restricting or
limiting stock ownership or the voting rights of stockholders or (B) requiring a
stockholder approval vote in excess of the vote normally required in
transactions of similar type not involving a "related person," "interested
stockholder" or person or entity of similar type.
2.13 Authority. Except as set forth in Section 2.13 of Schedule I, the
---------
execution, delivery and performance of this Agreement by Columbian does not
violate any of the provisions of, or constitute a breach or default under or
give any person the right to terminate or accelerate payment
14
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or performance under the charter or bylaws of Columbian, any regulatory
restraint on the acquisition of Columbian or control thereof (subject to receipt
of all required regulatory approvals), or any contract, agreement, lease, note,
bond, mortgage, indenture, deed, license or other instrument or obligation to
which Columbian is a party or is subject or by which any of its properties or
assets is bound. Columbian has all requisite corporate power and authority to
enter into this Agreement and the Plan of Merger, and to perform its obligations
hereunder and thereunder, subject to the receipt of the approval of Columbian's
shareholders required under applicable law and regulations and subject to
receipt of all required regulatory approvals. This Agreement constitutes the
valid and binding obligation of Columbian and is enforceable in accordance with
its terms, except as enforceability may be limited by applicable laws relating
to bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors' rights
generally and general principles of equity.
2.14 Labor Relations and Employment Agreements. Columbian is not a party
-----------------------------------------
to or bound by any collective bargaining agreement. To the knowledge of
Columbian's senior officers, Columbian is not the subject of a proceeding
asserting that it has committed an unfair labor practice (within the meaning of
the National Labor Relations Act) or seeking to compel Columbian to bargain with
any labor organization as to wages or conditions of employment, nor are there
any labor disputes pending, or to the knowledge of the senior officers of
Columbian threatened, that might materially and adversely affect the condition
(financial or otherwise), assets, liabilities, business or operations of
Columbian. Except as disclosed in Section 2.14 of Schedule I, Columbian does not
have any employment contract, severance agreement, deferred compensation
agreement, consulting agreement or similar obligation ("Employment Obligation")
with any director, officer, employee, consultant or agent. Except as disclosed
in Section 2.14 of Schedule I, Columbian does not have any contract, plan or
arrangement which provides for payments or benefits in certain circumstances
which, together with other payments or benefits payable to any participant
therein or party thereto, might render any portion of any such payments or
benefits subject to disallowance of deduction therefor as a result of the
application of Section 162, 280G or any other section of the Code.
2.15 Employee Benefits.
-----------------
(a) Columbian does not maintain any funded deferred compensation
plans (including profit sharing, pension, savings or stock bonus plans),
unfunded deferred compensation arrangements or employee benefit plans as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (collectively, the "Employee Plans"), other than any plans set
forth in Section 2.15 of Schedule I. Columbian has not incurred or reasonably
expects to incur any liability to the Pension Benefit Guaranty Corporation
except for required premium payments which, to the extent due and payable, have
been paid. To the knowledge of Columbian, the Employee Plans intended to be
qualified under Section 401(a) of the Code are so qualified, and Columbian is
not aware of any fact which would adversely affect the qualified status of such
plans. Except as set forth in Section 2.15 of Schedule I, Columbian does not (a)
provide health, medical, death or survivor benefits to any former employee or
beneficiary thereof, or (b) maintain any form of current (exclusive of base
salary and base wages) or deferred compensation,
15
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bonus, stock option, stock appreciation right, benefit, severance pay,
retirement, incentive, group or individual health insurance, welfare or similar
plan or arrangement for the benefit of any single or class of directors,
officers or employees, whether active or retired (collectively "Benefit
Arrangements").
(b) To the knowledge of Columbian, (i) no condition exists that could
constitute grounds for the termination of any Employee Plan under Section 4042
of ERISA; (ii) no "prohibited transaction," as defined in Section 406 of ERISA
and Section 4975 of the Code, has occurred with respect to any Employee Plan, or
any other employee benefit plan maintained by Columbian; and (iii) Columbian has
not incurred or does not expect to incur, directly or indirectly, any liability
under Title IV of ERISA arising in connection with the termination of, or a
complete or partial withdrawal from, any plan covered or previously covered by
Title IV of ERISA.
2.16 Property and Assets. Columbian has good and marketable title to all
-------------------
of its real property reflected in the financial statements at December 31, 1997,
referred to in Section 2.3 herein, or acquired subsequent thereto, free and
clear of any lien, claim, charge, restriction or encumbrance (collectively,
"Encumbrance"), except for (a) such items shown in such financial statements or
in the notes thereto, (b) liens for current real estate taxes not yet
delinquent, (c) customary title exceptions that have no material adverse effect
upon the value of such property, (d) property sold or transferred in the
ordinary course of business since the date of such financial statements, (e)
pledges or liens incurred in the ordinary course of business and (f) as
otherwise specifically indicated in Section 2.16 of Schedule I. Columbian
enjoys peaceful and undisturbed possession under all material leases for the use
of real property under which it is the lessee; all of such leases are valid and
binding and in full force and effect, and Columbian is not in default in any
material respect under any such lease. All property and assets material to its
business and currently used by Columbian are, in all material respects, in good
operating condition and repair, normal wear and tear excepted.
2.17 Tax Matters.
-----------
(a) Except as set forth in Section 2.17 of Schedule I, Columbian has
duly and properly filed all federal, state, local and other tax returns required
to be filed by it and has made timely payments of all taxes due and payable,
whether disputed or not; the current status of audits of such returns by the
Internal Revenue Service ("IRS") and other applicable agencies is as set forth
in Section 2.17 of Schedule I; and, except as set forth in Section 2.17 of
Schedule I, there is no agreement by Columbian for the extension of time or for
the assessment or payment of any taxes payable. Except as set forth in Section
2.17 of Schedule I, neither the IRS nor any other taxing authority is now
asserting or, to the best knowledge of Columbian, threatening to assert any
deficiency or claim for additional taxes (or interest thereon or penalties in
connection therewith), nor is Columbian aware of any basis for any such
assertion or claim.
16
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(b) Adequate provision for any federal, state, local, or foreign
taxes due or to become due for Columbian for any period or periods through and
including December 31, 1997, has been made and is reflected on the December 31,
1997 Columbian financial statements and has been or will be made with respect to
periods ending after December 31, 1997.
2.18 Environmental Matters. Except as set forth in Section 2.18 of
---------------------
Schedule I, none of the assets of Columbian (defined for purposes of this
subsection as the real property and tangible personal property owned or leased
by Columbian as of the date of this Agreement and as of the Effective Date)
contain any hazardous materials (defined as any substance whose nature and/or
quantity or existence, use, manufacture or effect render it subject to federal,
state or local regulation as potentially injurious to public health or welfare,
including, without limitation, friable asbestos or PCBs ("Hazardous
Materials")), and Columbian shall provide, as part of Section 2.18 of Schedule
I, any and all documentation regarding hazardous materials and any of its assets
or properties. Except as set forth in Section 2.18 of Schedule I, to Columbian's
best knowledge without inquiry, no collateral securing any loan made by
Columbian contains any Hazardous Materials, and Columbian shall provide, as
part of Section 2.18 of Schedule I, any documentation regarding hazardous
materials and any of its loans. Except as set forth in Section 2.18 of Schedule
I, Columbian is not aware of, nor has Columbian received written notice from any
governmental or regulatory body of, any past, present or future conditions,
activities, practices or incidents which may interfere with or prevent
compliance or continued compliance with hazardous substance laws or any
regulation, order, decree, judgment or injunction, issued, entered, promulgated
or approved thereunder, or which may give rise to any common law or legal
liability, or otherwise form the basis of any claim, action, suit, proceeding,
hearing or investigation based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling, or the
emission, discharge, release or threatened release into the environment, of any
pollutant, contaminant or chemical, or industrial, toxic or hazardous substance
or waste. There is no civil, criminal or administrative claim, action, suit,
proceeding, hearing or investigation pending or, to the knowledge of Columbian's
senior officers, threatened against Columbian relating in any way to such
hazardous substance laws or any regulation, order, decree, judgment or
injunction issued, entered, promulgated or approved thereunder.
2.19 Governmental Approvals and Other Conditions. Columbian is not aware
-------------------------------------------
of any reason why (i) the regulatory approvals that are required to be obtained
by Cecil in connection with the transactions contemplated herein should not be
granted, or (ii) such regulatory approvals should be conditioned on any
requirement restricting or limiting Cecil's future ability to carry on its
business and that of its banking subsidiaries (including Columbian), or (iii)
any of the conditions precedent as specified in Article V to consummate the
transactions contemplated herein are unlikely to be fulfilled within the
applicable time period or periods required for satisfaction of such condition or
conditions.
2.20 SEC Filings. No registration statement, prospectus, proxy statement,
-----------
schedule or report (taken together with any amendments thereto) filed and not
withdrawn since January 1, 1996 by Columbian with the SEC under the 1933 Act or
the 1934 Act, on the date of effectiveness (in the
17
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case of such registration statements or prospectuses) or on the date of filing
(in the case of such reports or schedules) or on the date of mailing (in the
case of such proxy statements), contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, (in the case of any
prospectus in light of the circumstances under which they were made) not
misleading.
2.21 Asset Classification.
--------------------
(a) Section 2.21(a) of Schedule I sets forth a list, accurate and
complete in all material respects, of each loan, extension of credit and other
asset of Columbian that has been adversely designated, criticized or classified
by Columbian or any regulatory authority as of March 31, 1998, separated by
category of classification or criticism (the "Asset Classification"); and no
amounts of loans, extensions of credit or other assets that have been adversely
designated, classified or criticized through the date hereof by any
representative of any government entity as "Special Mention," "Substandard,"
"Doubtful," "Loss" or words of similar import are excluded from the amounts
disclosed in the Asset Classification, other than amounts of loans, extensions
of credit or other assets that were charged off by Columbian before the date
hereof.
(b) All evidences of indebtedness reflected as assets in the balance
sheet of Columbian as of December 31, 1997, or acquired since such date, are
(except with respect to those assets which are no longer assets of Columbian)
binding obligations of the respective obligors named therein except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors rights generally, and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding may be brought, and
the payment of no material amount thereof (either individually or in the
aggregate with other evidences of indebtedness) is subject to any defenses which
have been threatened or asserted against Columbian. All such indebtedness which
is secured by an interest in real property is secured by a valid and perfected
mortgage lien having the priority specified in the loan documents. Except as
set forth in Section 2.21(b) of Schedule I, all loans originated or purchased by
Columbian were at the time entered into and at all times since in compliance in
all material respects with all applicable laws (including, without limitation,
all consumer protection laws) and regulations. Columbian administers its loan
and investment portfolios (including, but not limited to, adjustments to
adjustable mortgage loans) in accordance with all applicable laws and
regulations and the terms of applicable instruments. The records of Columbian
regarding all loans outstanding on its books are accurate in all material
respects and the risk classification system has been established in accordance
with the applicable regulatory requirements.
2.22 Community Reinvestment Act. Columbian's rating pursuant to its most
--------------------------
recent examination by federal regulatory authorities pursuant to the provisions
of the Community Reinvestment Act was a "satisfactory" or better. Columbian has
not received any comment letters relating to its Community Reinvestment Act
Statement or is otherwise aware of any adverse reaction to such statement.
18
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2.23 Loan Portfolio. The allowance for loan losses reflected and shown,
--------------
or to be shown, on the balance sheets contained in the financial statements
provided for in Section 2.3(a) hereof are and will be with respect to financial
statements dated after the date hereof adequate to provide for all known and
reasonably anticipated possible losses, net of recoveries relating to loans
previously charged off, on loans and leases outstanding and accrued interest
receivable on non-performing loans as of the date of such balance sheet, in
accordance with the requirements of generally accepted accounting principles.
No regulatory authority has requested Columbian to increase the allowance for
loan losses during or since 1996 that has not been responded to in a manner
satisfactory to such regulatory authority.
2.24 Pooling of Interests and Tax Free Reorganization. Columbian knows of
------------------------------------------------
no reason relating to it why the Merger would not qualify as a pooling of
interests for accounting purposes or as a tax-free reorganization under the
Code.
2.25 Exceptions to Representations and Warranties. On or before the date
--------------------------------------------
hereof, Columbian has delivered to Cecil its disclosure schedules contained in
Schedule I, setting forth, among other things, exceptions to any and all of its
representations and warranties in this Article II, provided that the mere
inclusion of an exception in Schedule I shall not be deemed an admission by
Columbian that such an exception represents a material fact, event or
circumstance or would result in a material adverse effect or material adverse
change.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CECIL
Cecil represent and warrant to Columbian that, except as disclosed in
Schedule II delivered by Cecil to Columbian concurrently with or prior to the
date of execution of this Agreement:
3.1 Organization, Good Standing, Authority, Insurance, Etc. Cecil is a
------------------------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the State of Maryland and is duly registered as a "savings and loan
holding company" under the HOLA. Section 3.1 of Schedule II lists each
"subsidiary" of Cecil within the meaning of Section 10(a)(1)(G) of HOLA
(individually a "Cecil Subsidiary" and collectively the "Cecil Subsidiaries").
Each of the Cecil Subsidiaries is duly organized, validly existing, and in good
standing under the laws of the respective jurisdiction under which it is
organized. Cecil and each Cecil Subsidiary have all requisite power and
authority and are duly qualified and licensed to own, lease and operate its
properties and conduct its business as it is now being conducted. Cecil and
each Cecil Subsidiary is qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which qualification is necessary
under applicable law, except to the extent that any failures to so qualify would
not, in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of the Cecil and the Cecil Subsidiaries,
taken as a whole. Each Cecil Subsidiary that is a federally insured savings
institution ("Bank Subsidiary") is a member in good standing of its applicable
Federal Home Loan
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Bank, and all eligible accounts issued by such institution are insured by the
Savings Association Insurance Fund to the maximum extent permitted under
applicable law. Each Bank Subsidiary is a "domestic building and loan
association" as defined in Section 7701(a)(19) of the Code and is a "qualified
thrift lender" as defined in Section 10(m) of the HOLA and the rules and
regulations thereunder.
3.2 Capitalization. The authorized capital stock of Cecil consists of
--------------
(i) 4,000,000 shares of common stock, par value $0.01 per share, of which
470,182 shares were issued and outstanding as of the date of this Agreement, and
(ii) 1,000,000 shares of preferred stock, par value $0.01 per share, of which no
shares were issued and outstanding as of the date of this Agreement. All
outstanding shares of Cecil common stock are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. All shares of Cecil
common stock to be issued upon the Merger will be, when issued, duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights. Except
as set forth in Section 3.2 of Schedule II, there are no options, convertible
securities, warrants or other rights (preemptive or otherwise) to purchase or
acquire any of Cecil's capital stock and no oral or written agreement,
arrangement, understanding, plan or instrument of any kind (collectively, "Cecil
Contract") to which Cecil or any of its affiliates is subject with respect to
the issuance, voting or sale of issued and unissued shares of Cecil's capital
stock.
3.3 Ownership of Subsidiaries. All the outstanding shares of the
-------------------------
capital stock of the Cecil Subsidiaries are validly issued, fully paid,
nonassessable and owned beneficially and of record by Cecil or a Cecil
Subsidiary free and clear of any Encumbrance. There are no options, convertible
securities, warrants, or other rights (preemptive or otherwise) to purchase or
acquire any capital stock of any Cecil Subsidiary and no Contracts to which
Cecil or any of its affiliates is subject with respect to the issuance, voting
or sale of issued or unissued shares of the capital stock of any of the Cecil
Subsidiaries.
3.4 Financial Statements. Cecil has delivered to Columbian: (i)
--------------------
Consolidated Statements of Financial Condition, Consolidated Statements of
Income, Consolidated Statement of Changes in Stockholders' Equity, and
Consolidated Statements of Cash Flows of Cecil and the Cecil Subsidiaries as of
and for the years ended December 31, 1997 and 1996, certified by Simon Master &
Sidlow, P.A. and (ii) Consolidated Statements of Financial Condition,
Consolidated Statements of Income, Consolidated Statements of Changes in
Stockholders' Equity and Consolidated Statements of Cash Flows of Cecil and the
Cecil Subsidiaries as of and for the three-month period ended March 31, 1998.
Each of the foregoing financial statements fairly presents the consolidated
financial position, assets, liabilities and results of operations of Cecil and
the Cecil Subsidiaries at their respective dates and for the respective periods
then ended and has been prepared in accordance with generally accepted
accounting principles consistently applied, except as otherwise noted in a
footnote thereto and subject, in the case of the interim financial statements,
to normal recurring year-end adjustments, which are not material in any case or
in the aggregate and the absence of notes.
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3.5 Absence of Undisclosed Liabilities. Except (i) as disclosed in
----------------------------------
Section 3.5 of Schedule II, (ii) as reflected, noted or adequately reserved
against in the financial statements referred to in Section 3.4 herein, or (iii)
for deposits incurred in the ordinary course of business consistent with past
practice, Cecil and the Cecil Subsidiaries do not have any material liabilities
(whether accrued, absolute, contingent or otherwise) of specific application to
Cecil or the Cecil Subsidiaries.
3.6 Absence of Changes. Since December 31, 1997, Cecil and the Cecil
------------------
Subsidiaries have conducted their respective businesses in the ordinary course
of business and, except as disclosed in Section 3.6 of Schedule II, Cecil and
the Cecil Subsidiaries have not undergone any change in condition (financial or
otherwise), assets, liabilities, business or operations, other than changes in
the ordinary course of business which have not been, either in any case or in
the aggregate, materially adverse on a consolidated basis.
3.7 Prospectus/Proxy Statement. At the time the Prospectus/Proxy
--------------------------
Statement is mailed to the shareholders of Columbian for the solicitation of
proxies for the approval of the Merger and at all times subsequent to such
mailing up to and including the time of such approval, such Prospectus/Proxy
Statement (including any supplements thereto), with respect to all information
set forth therein relating to Cecil (including the Cecil Subsidiaries) and its
shareholders, Cecil common stock, this Agreement, the Merger and all other
transactions contemplated hereby, will:
(a) Comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act and the rules and regulations under the 1933 Act and the
1934 Act; and
(b) Not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
they are made, not misleading.
3.8 Litigation. Except as disclosed in Section 3.8 of Schedule II: (i)
----------
there is no litigation, investigation or proceeding pending or, to the knowledge
of the senior officers of Cecil, threatened, that involves Cecil or any Cecil
Subsidiary or any of their respective properties and that, if determined
adversely, would materially and adversely affect the condition (financial or
otherwise), assets, liabilities, business or operations of Cecil or any of its
Subsidiaries; or (ii) there are no outstanding orders, writs, injunctions,
decrees, consent agreements, memoranda of understanding or other directives of
any federal, state or local court or governmental authority or of any
arbitration tribunal against or with the consent of Cecil or any Cecil
Subsidiary that materially and adversely affect the condition (financial or
otherwise), assets, liabilities, business or operations of Cecil and the Cecil
Subsidiaries, taken as a whole, or restrict in any material manner the right of
Cecil or any Cecil Subsidiary to conduct its business as presently conducted.
3.9 No Broker's or Finder's Fees. Except as set forth in Section 3.9 of
----------------------------
Schedule II, no agent, broker, investment banker, person or firm acting on
behalf or under authority of Cecil or any of the Cecil Subsidiaries is or will
be entitled to any broker's or finder's fee or any other commission
21
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or similar fee directly or indirectly in connection with the Merger or any other
transaction contemplated hereby.
3.10 Compliance With Law. Cecil and the Cecil Subsidiaries are in
-------------------
compliance in all material respects with all laws and regulations applicable to
their respective operations or with respect to which compliance is a condition
of engaging in the business thereof, except for failures to comply, which, in
the aggregate, would not have a material adverse effect on the business,
financial condition or results of operations of Cecil and the Cecil
Subsidiaries, taken as a whole, and Cecil has not received notice from any
federal, state or local government or governmental agency of any material
violation of any of the above.
3.11 Corporate Actions. The Board of Directors of Cecil has duly
-----------------
authorized its officers to execute and deliver this Agreement, the Stock Option
Agreement and the Plan of Merger and approve the Plan of Merger and to take all
action necessary to consummate the Merger and the other transactions
contemplated hereby and thereby. The shareholders of Cecil are not required to
approve the Merger or any of the other transactions contemplated by this
Agreement. In its capacity as sole shareholder of NewSub, Cecil will approve
the Merger. All corporate authorizations by the Board of Directors of Cecil
required for the consummation of the Merger and the transactions contemplated
hereby have been obtained.
3.12 Authority. Except as set forth in Section 3.12 of Schedule II, the
---------
execution, delivery and performance of this Agreement by Cecil and the Plan of
Merger by NewSub does not violate any of the provisions of, or constitute a
breach or default under or give any person the right to accelerate payment or
performance under the articles of incorporation or bylaws of Cecil or the
articles of incorporation, charter or bylaws of any other Cecil Subsidiary.
Cecil and NewSub have all requisite corporate power and authority to enter into
this Agreement and, with respect to NewSub, the Plan of Merger, and to perform
their obligations hereunder and thereunder, subject to receipt of all required
regulatory approvals. This Agreement constitutes the valid and binding
obligation of Cecil and NewSub, and is enforceable in accordance with its terms,
except as enforceability may be limited by applicable laws relating to
bankruptcy, insolvency or creditors' rights generally and general principles of
equity.
3.13 Property and Assets. Cecil and the Cecil Subsidiaries have good and
-------------------
marketable title to all of their real property reflected in the financial
statements at December 31, 1997, referred to in Section 3.4 herein, or acquired
subsequent thereto, free and clear of all Encumbrances, except for (a) such
items shown in such financial statements or in the notes thereto, (b) liens for
current real estate taxes not yet delinquent, (c) customary title exceptions
that have no material adverse effect upon the value of such property, (d)
property sold or transferred in the ordinary course of business since the date
of such financial statements, (e) pledges or liens incurred in the ordinary
course of business and (f) as otherwise specifically indicated in Section 3.13
of Schedule II. Cecil and the Cecil Subsidiaries enjoy peaceful and undisturbed
possession under all material leases for the use of real property under which
they are the lessee; all of such leases are valid and binding and in full force
and effect, and neither Cecil nor any Cecil Subsidiary is in default in any
material respect under
22
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any such lease. All property and assets material to their business and currently
used by Cecil and the Cecil Subsidiaries are, in all material respects, in good
operating condition and repair, normal wear and tear excepted.
3.14 Tax Matters.
-----------
(a) Except as set forth in Section 3.14 of Schedule II, Cecil and each
of the Cecil Subsidiaries have duly and properly filed all federal, state, local
and other tax returns required to be filed by them and have made timely payments
of all taxes due and payable, whether disputed or not; the current status of
audits of such returns by the IRS and other applicable agencies is as set forth
in Section 3.14 of Schedule II; and, except as set forth in Section 3.14 of
Schedule II, there is no agreement by Cecil or any Cecil Subsidiary for the
extension of time or for the assessment or payment of any taxes payable. Except
as set forth in Section 3.14 of Schedule II, neither the IRS nor any other
taxing authority is now asserting or, to the best knowledge of Cecil,
threatening to assert any deficiency or claim for additional taxes (or interest
thereon or penalties in connection therewith), nor is Cecil aware of any basis
for any such assertion or claim.
(b) Adequate provision for any federal, state, local or foreign taxes
due or to become due for Cecil or any of the Cecil Subsidiaries for any period
or periods through and including December 31, 1997 has been made and is
reflected on the December 31, 1997 Cecil consolidated financial statements.
3.15 Environmental Matters. Except as set forth in Section 3.15 of
---------------------
Schedule II, none of the assets of Cecil and the Cecil Subsidiaries (defined for
purposes of this subsection as the real property and tangible personal property
owned or leased by Cecil or any Cecil Subsidiary as of the date of this
Agreement and as of the Effective Date) contain any Hazardous Materials, and
Cecil and the Cecil Subsidiaries shall provide, as part of Section 3.15 of
Schedule II, any documentation regarding hazardous materials and any of its
assets or properties. Except as set forth in Section 3.15 of Schedule II, to
Cecil's best knowledge without inquiry, no collateral securing any loan made by
Cecil or any Cecil Subsidiary contains any Hazardous Materials and Cecil and the
Cecil Subsidiaries shall provide, as part of Section 3.15 of Schedule II, any
documentation regarding hazardous materials and any of its loans. Neither of
Cecil nor any Cecil Subsidiary is aware of, nor has Cecil or any Cecil
Subsidiary received written notice from any governmental or regulatory body of
any past, present or future conditions, activities, practices or incidents which
may interfere with or prevent compliance or continued compliance with hazardous
substance laws or any regulation, order, decree, judgment or injunction, issued,
entered, promulgated or approved thereunder, or which may give rise to any
common law or legal liability, or otherwise form the basis of any claim, action,
suit, proceeding, hearing or investigation based on or related to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling, or the emission, discharge, release or threatened
release into the environment, of any pollutant, contaminant or chemical, or
industrial, toxic or hazardous substance or waste. There is no civil, criminal
or administrative claim, action, suit, proceeding, hearing or investigation
pending or, to the knowledge of Cecil's senior officers, threatened against
Cecil or any Cecil Subsidiary relating in any way to such hazardous substance
23
<PAGE>
laws or any regulation, order, decree, judgment or injunction issued, entered,
promulgated or approved thereunder.
3.16 SEC Filings. No registration statement, prospectus, proxy statement,
-----------
schedule or report (taken together with any amendments thereto) filed and not
withdrawn since January 1, 1996 by Cecil with the SEC under the 1933 Act or the
1934 Act, on the date of effectiveness (in the case of such registration
statements or prospectuses) or on the date of filing (in the case of such
reports or schedules) or on the date of mailing (in the case of such proxy
statements), contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein (in the case of any prospectus in light of the
circumstances under which they were made), not misleading.
3.17 Governmental Approvals and Other Conditions. Cecil is not aware any
-------------------------------------------
reason why (i) the regulatory approvals that are required to be obtained by it
in connection with the transactions contemplated herein should not be granted,
or (ii) such regulatory approvals should be conditioned on any requirement that
would present a significant impediment to its future ability to carry on
business and that of its banking subsidiaries, or (iii) any of the conditions
precedent as specified in Article V to the obligations to consummate the
transactions contemplated herein are unlikely to be fulfilled within the
applicable time period or periods required for satisfaction of such condition or
conditions.
3.18 Community Reinvestment Act. The rating of Cecil Federal Savings Bank
--------------------------
pursuant to its most recent examination by federal regulatory authorities
pursuant to the provisions of the Community Reinvestment Act was a
"satisfactory" or better. Neither Cecil nor Cecil Federal Savings Bank has
received any comment letters relating to its Community Reinvestment Act
Statement or is otherwise aware of any adverse reaction to such statement.
3.19 Pooling of Interests and Tax Free Reorganization. Cecil knows of no
------------------------------------------------
reason relating to it why the Merger would not qualify as a pooling of interests
for accounting purposes or as a tax-free reorganization under the Code.
3.20 Dividends, Distributions and Stock Purchases and Sales. Except as
------------------------------------------------------
disclosed in Section 3.20 of Schedule II, since December 31, 1997, Cecil has not
declared, set aside, made or paid any dividend or other distribution in respect
of Cecil common stock, or purchased, issued or sold any shares of Cecil common
stock.
3.21 Litigation. Except as disclosed in Section 3.21 of Schedule II: (i)
----------
there is no litigation, investigation or proceeding pending or, to the knowledge
of the senior officers of Cecil threatened that involves Cecil or any of its
properties: (ii) there are no outstanding orders, writs, injunctions,
judgments, decrees, regulations, directives, consent agreements or memoranda of
understanding issued by any federal, state or local court or governmental
authority or arbitration tribunal issued against or with the consent of Cecil.
24
<PAGE>
3.22 Loan Portfolio. The allowance for loan losses reflected and shown, or
--------------
to be shown, on the balance sheets contained in the financial statements
provided for in Section 3.4 hereof, are and will be with respect to financial
statements dated after the date hereof adequate to provide for all known and
reasonably anticipated possible losses, net of recoveries relating to loans
previously charged off, on loans and leases outstanding and accrued interest
receivable on non-performing loans as of the date of such balance sheet, in
accordance with the requirements of generally accepted accounting principles.
No regulatory authority has requested Cecil to increase the allowance for loan
losses during or since 1996 that has not been responded to in a manner
satisfactory to such regulatory authority.
3.23 Asset Classification. Section 3.23 of Schedule II sets forth a list,
--------------------
accurate and complete in all material respects, of each loan, extension of
credit and other asset of Cecil Federal Savings Bank that has been adversely
designated, criticized or classified by Cecil Federal Savings Bank or any
regulatory authority as of March 31, 1998, separated by category of
classification or criticism (the "Asset Classification"); and no amounts of
loans, extensions of credit or other assets that have been adversely designated,
classified or criticized through the date hereof by any representative of any
government entity as "Special Mention," "Substandard," "Doubtful," "Loss" or
words of similar import are excluded from the amounts disclosed in the Asset
Classification, other than amounts of loans, extensions of credit or other
assets that were charged off by Cecil Federal Savings Bank before the date
hereof.
3.24 Year 2000. Cecil or a Cecil Subsidiary has developed and implemented
---------
a program to address, on a timely basis, the "Year 2000 Problem" (that is, the
risk that computer applications used by the Company may be unable to recognize
and perform properly date sensitive functions involving certain dates prior to
and any date after December 31, 1999) and reasonably anticipates that it will,
on a timely basis, successfully resolve the Year 2000 Problem for all material
computer applications used by Cecil. Expenses associated with resolving Year
2000 Problem technology issues are not expected to have a material adverse
effect on the financial condition or results of operations of Cecil and the
Cecil Subsidiaries, taken as a whole.
3.25 Exceptions to Representations and Warranties. On or before the date
--------------------------------------------
hereof, Cecil has delivered to Columbian its disclosure schedules contained in
Schedule II, setting forth, among other things, exceptions to any and all of its
representations and warranties in this Article III, provided that the mere
inclusion of an exception in Schedule II shall not be deemed an admission by
Cecil that such an exception represents a material fact, event or circumstance
or would result in a material adverse effect or material adverse change.
25
<PAGE>
ARTICLE IV
COVENANTS
4.1 Investigations; Access and Copies; Notification of Event or
-----------------------------------------------------------
Developments; Between the date of this Agreement and the Effective Date,
- ------------
Columbian agrees to give to Cecil and its representatives and agents, and Cecil
agrees to give to Columbian and its representatives and agents, full access (to
the extent lawful) to all of the premises, books, records and employees of
Columbian or Cecil, respectively, at all reasonable times, and to furnish the
other party its agents or representatives access to and true and complete copies
of such financial and operating data, all documents with respect to matters to
which reference is made in Article II (by Columbian) or Article III (by Cecil)
of this Agreement or on any list, schedule or certificate delivered or to be
delivered in connection therewith, and such other documents, records, or
information with respect to the business and properties of it as Columbian or
Cecil, respectively, shall from time to time reasonably request; provided,
--------
however, that any such inspection (a) shall be conducted in such manner as not
- -------
to interfere unreasonably with the operation of the business of the entity
inspected and (b) shall not affect any of the representations and warranties
hereunder. Cecil and Columbian will give prompt written notice to the other
party of any event or development (x) which, had it existed or been known on the
date of this Agreement, would have been required to be disclosed under this
Agreement, (y) which would cause any of its representations and warranties
contained herein to be inaccurate or otherwise materially misleading, or (z)
which materially relate to the satisfaction of the conditions set forth in
Article V of this Agreement.
4.2 Conduct of Business of Columbian. Between the date of this Agreement
--------------------------------
and the Effective Date, and except as otherwise consented to by Cecil in
writing, which consent shall not be unreasonably withheld, Columbian agrees:
(a) That, except as otherwise set forth in Section 4.2 hereof,
Columbian shall conduct its business only in the ordinary course, and maintain
its books and records in accordance with past practices and not take any action
that would materially (i) adversely affect or delay the ability to obtain the
Governmental Approvals (as defined in Section 5.1(c) hereof), (ii) adversely
affect Columbian's ability to perform its obligations hereunder or (iii)
adversely affect the Merger from being accounted for as a pooling of interests
or constituting a tax-free reorganization;
(b) That Columbian shall not, without the prior written consent of
Cecil (i) declare, set aside or pay any dividend or make any other distribution
with respect to Columbian's capital stock or reacquire any of Columbian's
outstanding shares, except that up to the Effective Date, Columbian shall be
allowed to pay its regular semi-annual cash dividend totaling not more than
$16,000 through the remainder of 1998; (ii) issue or sell or buy any shares of
capital stock of Columbian, except shares of Columbian common stock issued
pursuant to exercise of options outstanding as of the date of this Agreement
pursuant to the Stock Option Plan or pursuant to the terms of the Stock Option
Agreement; (iii) effect any stock split, stock dividend or other
reclassification of Columbian's common stock; or (iv) grant any options or issue
any warrants
26
<PAGE>
exercisable for or securities convertible or exchangeable into capital stock of
Columbian or grant any stock appreciation or other rights with respect to shares
of capital stock of Columbian;
(c) That Columbian shall not, without the prior written consent of
Cecil (which consent shall not be unreasonably withheld): (i) sell or dispose
of any assets of Columbian other than the sale of single-family residential
mortgage loans in the ordinary course; (ii) change or waive any provision of its
charter or bylaws, except as set forth in Section 1.6; (iii) grant to any
employee of Columbian an increase in compensation, bonus or benefits except
increases in compensation, bonus or benefits in the ordinary course of business
to non-officer employees consistent with their past practice; (iv) adopt any new
or amend or terminate any existing Employment Obligation, Employee Plans or
Benefit Arrangements of any type, (v) authorize severance pay or other benefits
for any employee of Columbian; (vi) incur any material obligation or enter into,
amend or extend any Material Contract, except as may be necessary for Columbian
to invest in government-backed securities, in accordance with past practice;
(vii) engage in any lending activities not in the ordinary course consistent
with past practice; (viii) form any new subsidiary; (ix) purchase any equity
securities other than Federal Home Loan Bank stock; (x) make any investment
which would cause Columbian to not be a qualified thrift lender under Section
10(m) of the HOLA; (xi) borrow or agree to borrow any amount of funds; (xii)
hire any new permanent employees except as may be consistent with past practice;
(xiii) make any capital expenditures exceeding $20,000 in the aggregate except
that Columbian shall be permitted to apply for and establish a branch office at
Route 40 in Havre de Grace, Maryland; (xiv) establish interest and fee schedules
related to Columbian's deposit products or lending products which materially
differ from Columbian's past practice; (xv) merge into, consolidate with,
affiliate with, or be purchased or acquired by, any other person or entity, or
permit any other person or entity to be merged, consolidated or affiliated with
it or be purchased or acquired by it; (xvi) make any material change in its
accounting methods or practices, except changes as may be required by generally
accepted accounting principles or by regulatory requirements; or (xvii) take or
cause to be taken any action which would disqualify the Merger as a pooling of
interests for accounting purposes or as a tax free reorganization under Section
368 of the Code.
4.3 No Solicitation. Columbian will not authorize or permit any officer,
---------------
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Columbian, directly or indirectly, to
initiate contact with any person or entity in an effort to solicit, initiate or
encourage, or otherwise initiate, encourage or solicit any "Takeover Proposal"
(as such term is defined below). Except as Columbian's Board of Directors'
fiduciary duties may otherwise require, Columbian will not authorize or permit
any officer, director, employee, investment banker, financial consultant,
attorney, accountant or other representative of Columbian, directly or
indirectly, (A) to cooperate with, or furnish or cause to be furnished any non-
public information concerning its business, properties or assets to, any person
or entity in connection with any Takeover Proposal; (B) to negotiate any
Takeover Proposal with any person or entity; or (C) to enter into any agreement,
letter of intent or agreement in principle as to any Takeover Proposal. As used
in this Agreement with respect to Columbian, "Takeover Proposal" shall mean any
proposal, other than as contemplated by this Agreement, for a merger or other
business combination involving Columbian or for the acquisition of a ten percent
(10%) or greater equity interest in Columbian, or for the
27
<PAGE>
acquisition of ten percent (10%) or more of the assets of Columbian. Columbian
shall notify Cecil immediately upon it or any officer, director, employee,
investment banker, financial consultant, attorney, accountant or other
representative of it receiving, or it becoming aware of the possible receipt of
a Takeover Proposal or having contact initiated with it by any party other than
the Cecil regarding a Takeover Proposal.
4.4 Shareholder Approval. Columbian shall call the meeting of its
--------------------
shareholders to be held for the purpose of voting upon the Merger and related
matters, as soon as practicable. In connection with such meeting, Columbian's
Board of Directors shall recommend approval of the Merger, subject to their
fiduciary duties, and the recommendation of Columbian's Board of Directors shall
be reflected in the Prospectus/Proxy Statement. Columbian shall take all
reasonable action to solicit from its shareholders proxies in favor of approval.
In exercising its fiduciary duties, Columbian's Board of Directors may consider
whether Columbian has received an opinion of RP Financial, LC dated within five
days of mailing of the Proxy Statement/Prospectus to Columbian shareholders
stating that the Merger Consideration is fair to Columbian shareholders from a
financial point view (Columbian hereby agreeing that it shall use all
commercially reasonable efforts to obtain such opinion from RP Financial, LC
and, if not forthcoming therefrom within a reasonable period of time following a
request made therefor, to obtain such opinion from at least one such other
reasonably acceptable investment banking firm); provided, further, however, that
the Columbian Board of Directors shall not be required to make such
recommendation if it reasonably determines in good faith not to so recommend,
because to so recommend would constitute a violation of the Board's fiduciary
duties under applicable law, as determined by the Board of Directors with the
assistance of counsel, Kutak Rock, Washington, D.C.
4.5 Filing of Regulatory Applications. Cecil shall prepare and file as
---------------------------------
soon as practicable after the date hereof all required applications for
regulatory approval of the Merger and the other transactions contemplated
herein. Cecil shall provide copies of each such application to Columbian for
review by Columbian and its counsel prior to the proposed date of filing. Cecil
shall use all reasonable efforts to obtain prompt approval of each required
application.
4.6 Publicity. Neither Cecil nor Columbian shall, without the prior
---------
approval of the other, issue or make, or permit any of its directors, employees,
officers or agents to issue or make, any press release, disclosure or statement
to the press or any third party with respect to the Merger or the other
transactions contemplated hereby, except as required by law. The parties shall
cooperate when issuing or making any press release, disclosure or statement with
respect to the Merger or the other transactions contemplated hereby.
4.7 Cooperation Generally. If, at any time after the Effective Date,
---------------------
Cecil or the Resulting Association shall consider or be advised that any further
deeds, assignments or assurances or any other acts are necessary or desirable to
vest, perfect or confirm, of record or otherwise, in the Resulting Association
its right, title or interest in, to or under any of the rights, properties or
assets of Columbian or otherwise carry out the purposes of this Agreement,
Columbian and its officers and directors shall be deemed to have granted to the
Cecil and the Resulting Association an irrevocable
28
<PAGE>
power of attorney (in their respective corporate capacities) to execute and
deliver all such deeds, assignments or assurances and to do all acts necessary
or desirable to vest, perfect or confirm title and possession to such rights,
properties or assets in the Resulting Association and otherwise to carry out the
purposes of this Agreement, and the officers and directors of the Resulting
Association and Cecil are authorized in the name of Columbian or otherwise to
take any and all such action.
4.8 Additional Financial Statements and Reports. As soon as reasonably
-------------------------------------------
practicable after they become publicly available, Columbian shall furnish to
Cecil its financial statements as contemplated in Section 2.3 herein, and Cecil
shall furnish to Columbian Cecil's consolidated financial statements as
contemplated in Section 3.4 herein, in each case, for all periods prior to the
Effective Date. Such financial statements will be prepared in conformity with
generally accepted accounting principles applied on a consistent basis and
fairly present the financial condition, results of operations and cash flows of
Columbian and Cecil, respectively, subject, in the case of unaudited financial
statements, to (a) normal year-end audit adjustments, (b) any other adjustments
described therein and (c) the absence of notes which, if presented, would not
differ materially from those included in its most recent audited consolidated
balance sheet.
4.9 Consents of Third Parties. Each of Columbian and Cecil shall use all
-------------------------
reasonable efforts to obtain as soon as practicable all consents and approvals
of any third parties necessary or desirable for consummation of the Merger and
other transactions contemplated by this Agreement.
4.10 NewSub. Prior to the Effective Date, Cecil will take such necessary
------
action to cause (i) NewSub to be organized as an interim Federal savings
institution under the laws and regulations of the United States of America, and
to ensure that NewSub, after its organization and prior to the Effective Date
has not, and will not engage in any activities other than in connection with, or
as contemplated by this Agreement, (ii) NewSub to become a wholly-owned
subsidiary of Cecil, (iii) the directors and stockholder of NewSub to approve
the transactions contemplated by this Agreement; (iv) NewSub to become a party
to the Plan of Merger; and (v) NewSub to have all corporate power and authority
to consummate the transactions contemplated hereunder and to carry out all of
its obligations with respect to such transactions.
4.11 Affiliates Agreements. Columbian and Cecil shall use all reasonable
---------------------
efforts to cause each affiliated person of Columbian and Cecil for purposes of
SEC Rule 145 and for purposes of qualifying the Merger for "pooling of
interests" accounting treatment to deliver to Cecil, as soon as practicable
after the date of this Agreement, and prior to the date of the shareholders
meeting called by Columbian to approve this Agreement, a written agreement, in
the form of Exhibit 4.11 hereto, providing that such person will not sell,
pledge, transfer or otherwise dispose of any shares of Cecil common stock or
Columbian common stock now or hereafter held by such affiliated person,
including, without limitation, the shares of Cecil common stock to be received
by such affiliated person, in the Merger: (1) otherwise than in compliance with
the applicable provisions of the 1933 Act and the rules and regulations
thereunder or (2) during the period commencing 30 days prior to the consummation
of the Merger and ending at the time of the publication of financial results
covering at least 30 days of combined operations of Cecil and Columbian.
29
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4.12 Forbearances of Cecil. Between the date of this Agreement and the
---------------------
Effective Date, Cecil shall not take any action that would (i) adversely affect
or delay the ability to obtain the Governmental Approvals (as defined in Section
5.1(c) hereof), (ii) adversely affect Cecil's ability to perform its obligations
hereunder or (iii) adversely affect the Merger from being accounted for as a
pooling of interests or constituting a tax-free reorganization under Section 368
of the Code.
4.13 Update Disclosures. Five business days prior to the Effective
------------------
Date, Columbian and Cecil shall update Schedule I and Schedule II, respectively,
hereto by notice to Cecil and Columbian, respectively, to reflect any matters
which have occurred from and after the date hereof which, if existing on the
date hereof, would have been required to be described therein; provided,
however, that no such update shall affect the conditions to the obligations of
Columbian and Cecil to consummate the transactions contemplated hereby, and any
and all changes reflected in any such update shall be considered in determining
whether such conditions have been satisfied.
ARTICLE V
CONDITIONS OF THE MERGER;
TERMINATION OF AGREEMENT
5.1 General Conditions. The obligations of Cecil and Columbian to effect
------------------
the Merger shall be subject to the following conditions:
(a) Stockholder Approval. The holders of the outstanding shares of
--------------------
Columbian common stock shall have approved this Agreement, the Plan of Merger
and the Merger by the vote of at least two-thirds of the outstanding Columbian
common stock.
(b) No Proceedings. No order shall have been entered and remain in
--------------
force restraining or prohibiting the Merger in any legal, administrative,
arbitration, investigatory or other proceedings (collectively, "Proceedings") by
any governmental or judicial or other authority.
(c) Government Approvals. To the extent required by applicable law or
--------------------
regulation, all approvals of or filings with any governmental authority
(collectively, "Governmental Approvals"), including without limitation those of
the OTS, the Federal Trade Commission, the U.S. Department of Justice, the
Securities and Exchange Commission, and any state securities or blue sky
authorities, shall have been obtained or made and any waiting periods shall have
expired in connection with the consummation of the Merger. All other statutory
or regulatory requirements for the valid consummation of the Merger and related
transactions shall have been satisfied.
(d) Registration Statement. The Registration Statement shall have
----------------------
been declared effective and shall not be subject to a stop order of the SEC and,
if the offer and sale of Cecil's common stock in the Merger pursuant to this
Agreement is subject to the Blue Sky laws of any state, shall not be subject to
a stop order of any state securities commissioner.
30
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(e) Federal Tax Opinion. Receipt of an opinion of Housley Kantarian &
-------------------
Bronstein to both Cecil and Columbian, in a form and content reasonably
satisfactory to Cecil and Columbian, to the effect that (i) the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code,
(ii) the exchange in the Merger of Columbian common stock for Cecil common stock
will not give rise to gain or loss to shareholders of Columbian with respect to
such exchange (except to the extent of any cash received for fractional shares
redeemed, or shares of dissenting stockholders), and (iii) neither Columbian nor
Cecil will recognize gain or loss as a consequence of the Merger. Each of Cecil
and Columbian shall provide a letter setting forth the facts, assumptions and
representations on which such counsel may rely in rendering its opinion.
(f) Accountants' Pooling Letter. Each party shall have received a
---------------------------
letter, dated as of the Closing, from its independent auditors to the effect
that the Merger will qualify for pooling-of-interests accounting treatment under
the Accounting Principles Board Opinion No. 16 and SEC Accounting Series
Releases No. 130 and No. 135, as amended, if consummated in accordance with this
Agreement.
5.2 Conditions to Obligations of Cecil. The obligations of Cecil to
----------------------------------
effect the Merger and the other transactions contemplated herein shall be
subject to the following additional conditions:
(a) No Material Adverse Change. Between the date of this Agreement
--------------------------
and the Effective Date, there shall not have occurred any material adverse
change in the financial condition, business or results of operations of
Columbian other than any such change attributable to or resulting from changes
in law, regulation or generally accepted accounting principles or
interpretations thereof of general application to the banking and thrift
industries.
(b) Representations and Warranties to be True; Fulfillment of
---------------------------------------------------------
Covenants and Conditions. The representations and warranties of Columbian shall
- ------------------------
be true in all material respects at the Effective Date with the same effect as
though made at the Effective Date (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date);
except (1) as contemplated by this Agreement, (2) as consented to in writing by
Cecil or (3) for breaches of representations and warranties which would not
have, or would not reasonably be expected to have, a material adverse effect on
the financial condition, business or operations of Columbian; Columbian shall
have performed all obligations and complied with each covenant, in all material
respects, under this Agreement on its part to be performed or complied with at
or prior to the Effective Date except for failures to perform or comply with
such obligations and covenants which would not have, or would not reasonably be
expected to have, any material adverse effect on the financial condition,
business or operations of Columbian; and Columbian shall have delivered to Cecil
a certificate, dated the Effective Date and signed by its chief executive
officer and chief financial officer, to such effect.
(c) Acceptance of Legal Matters. The form and substance of all legal
---------------------------
matters contemplated hereby and all papers delivered hereunder shall be
reasonably acceptable to counsel to Cecil.
31
<PAGE>
(d) Consents Under Agreements. Columbian shall have obtained the
-------------------------
consent or approval of each person (other than the Governmental Approvals) whose
consent or approval shall be required in order to permit consummation of the
Merger under any loan or credit agreement, note, mortgage, indenture, lease,
license or other agreement or instrument, except those for which failure to
obtain such consents and approvals would not, individually or in the aggregate,
have a material adverse effect on Columbian or upon the consummation of the
transactions contemplated hereby.
(e) Dissenters Rights. No greater than six percent (6.0%) of the
-----------------
outstanding Columbian common stock entitled to vote at the meeting of
Columbian's stockholders to be held for the purpose of voting upon the Merger
and related matters, shall have delivered the written notice of intent to demand
payment and become Dissenting Shares pursuant to the applicable provisions of
the OTS rules and regulations.
(f) No Litigation. Columbian shall not be a party to any pending
-------------
litigation, reasonably probable of being determined adversely to Columbian,
which would have a material adverse effect on the business, financial condition
or results of operations of Columbian.
(g) Regulatory Approval. All Governmental Approvals required
-------------------
hereunder to consummate the transactions contemplated hereby shall have been
obtained without the imposition of any conditions which Cecil reasonably and in
good faith determines to be unduly burdensome upon the conduct of the business
of Cecil.
(h) Affiliate Letters. Cecil shall have received the letter
-----------------
agreements from all affiliated persons of Columbian as contemplated in Section
4.11 herein.
(i) Opinion of Counsel. Cecil shall have received from counsel to
------------------
Columbian an opinion dated as of the Effective Date covering the following
matters:
(i) Columbian is a federal saving bank, validly existing, and in
good standing under the laws of the United States of
America;
(ii) This Agreement has been duly authorized, executed and
delivered by Columbian and (assuming this Agreement is a
binding obligation of Cecil) constitutes a valid and binding
obligation of Columbian enforceable in accordance with its
terms, subject as to enforceability to applicable
bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights
generally and to the application of equitable principles and
judicial discretion; and
(iii) To the actual knowledge of such counsel, no consent or
approval, which has not already been obtained from any
governmental
32
<PAGE>
authority, is required for execution and delivery by
Columbian of this Agreement or consummation of the Merger.
Such opinion may (i) expressly rely as to matters of fact upon certificates
furnished by appropriate officers of Columbian or appropriate government
officials; (ii) may be limited to federal law and the laws of the State of
Maryland and (iii) incorporate, be guided by, and be interpreted in
accordance with, the Legal Opinion Accord of the ABA Section of Business
Law (1991).
5.3 Conditions to Obligations of Columbian. The obligations of Columbian
--------------------------------------
to effect the Merger and the other transactions contemplated herein shall be
subject to the following additional conditions:
(a) No Material Adverse Change. Between the date of this Agreement
--------------------------
and the Effective Date, there shall not have occurred any material adverse
change in the financial condition, business or results of operations of Cecil
and the Cecil Subsidiaries, taken as a whole, other than any such change
attributable to or resulting from changes in law, regulation or generally
accepted accounting principles or interpretations thereof of general application
to the banking and thrift industries.
(b) Representations and Warranties to be True; Fulfillment of
---------------------------------------------------------
Covenants and Conditions. The representations and warranties of Cecil shall be
- ------------------------
true in all material respects at the Effective Date with the same effect as
though made at the Effective Date (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date) except
(i) as contemplated by this Agreement, (2) as consented to in writing by
Columbian or (3) for breaches of representations and warranties which would not
have, or would not reasonably be expected to have, a material adverse effect on
the financial condition, business or operations of Cecil; Cecil shall have
performed all obligations and complied with each covenant, in all material
respects, and all conditions under this Agreement on its part to be performed or
complied with at or prior to the Effective Date except for failure to perform or
comply with such obligations and covenants which would not have, or would not
reasonably be expected to have, any material adverse effect on the financial
condition, business or operations of Cecil and the Cecil Subsidiaries, taken as
a whole; and Cecil shall have delivered to Columbian a certificate, dated the
Effective Date and signed by its chief executive officer and chief financial
officer, to such effect.
(c) Acceptance of Legal Matters. The form and substance of all legal
---------------------------
matters contemplated hereby and all papers delivered hereunder shall be
reasonably acceptable to counsel to Columbian.
(d) No Litigation. Cecil shall not be a party to any pending
-------------
litigation, reasonably probable of being determined adversely to Cecil, which
would have a material adverse effect on the business, financial condition or
results of operations of Cecil and the Cecil subsidiaries, taken as a whole.
33
<PAGE>
(e) Affiliate Letters. Cecil shall have obtained from its affiliates
-----------------
the letter agreements from all affiliated persons of Cecil as contemplated in
Section 4.11 herein.
(f) Receipt of Consideration. The Exchange Agent in its fiduciary
------------------------
capacity shall have acknowledged in writing to Columbian receipt of the
aggregate Merger Consideration (including a reasonable estimate of the amount of
cash required to pay for fractional shares) for all shares of Columbian common
stock to be acquired hereunder.
(g) Opinion of Counsel. Columbian shall have received from counsel to
------------------
Cecil, an opinion dated as of Effective Date covering the following matters:
(i) Cecil is a Maryland corporation, validly existing and in
good standing under the laws of the State of Maryland;
(ii) This Agreement has been duly authorized, executed and
delivered by Cecil and (assuming this Agreement is a binding
obligation of Columbian) constitutes a valid and binding
obligation of Cecil enforceable in accordance with its
terms, subject as to enforceability to applicable
bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights
generally and to the application of equitable principles and
judicial discretion;
(iii) To the actual knowledge of such counsel, no consent or
approval, which has not already been obtained from any
governmental authority, is required for execution and
delivery by Cecil of this Agreement or consummation of the
Merger; and
(iv) The shares of Cecil common stock to be issued to the
Columbian stockholders and delivered in exchange for their
Columbian common stock will be, upon consummation of the
Merger in accordance with the terms of this Agreement, duly
authorized, validly issued, fully paid and nonassessable.
Such opinions may (i) expressly rely as to matters of fact upon
certificates furnished by appropriate officers of Cecil or appropriate
government officials; (ii) may be limited to federal law and the laws of
the State of Maryland and (iii) incorporate, be guided by, and be
interpreted in accordance with, the Legal Opinion Accord of the ABA Section
of Business Law (1991).
5.4 Termination of Agreement and Abandonment of Merger. This Agreement
--------------------------------------------------
may be terminated at any time before the Effective Date, whether before or after
approval thereof by shareholders of Columbian, as provided below:
34
<PAGE>
(a) Mutual Consent. By mutual consent of the parties, evidenced by
--------------
their written agreement.
(b) Breach. At any time prior to the Effective Time, by Cecil or
------
Columbian, if its Board of Directors so determines by a majority of the members
of its entire Board, in the event of either (i) a breach by the other party of
any representation, warranty or covenant contained herein which breach results
in a material and adverse change as to the breaching party which would have a
material adverse effect on the financial condition, business or operations of
the breaching party (and its subsidiaries taken as a whole, if applicable) and
which breach cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach.
(c) Closing Delay. At the election of either party, evidenced by
-------------
written notice, if the Closing shall not have occurred on or before December 31,
1998, or such later date as shall have been agreed to in writing by the parties;
provided, however, that the right to terminate under this Section 5.4(b) shall
- -------- -------
not be available to any party whose failure to perform an obligation hereunder
has been the cause of, or has resulted in, the failure of the Closing to occur
on or before the date of such written notice.
(d) Conditions to Cecil's Performance Not Met. By Cecil upon delivery
-----------------------------------------
of written notice of termination to Columbian if any event occurs which renders
impossible of satisfaction in any material respect one or more of the conditions
to the obligations of Cecil to effect the Merger set forth in Sections 5.1 and
5.2 and noncompliance is not waived by Cecil; provided, however, that the right
to terminate under this paragraph shall not be available to Cecil where its
failure to perform an obligation hereunder has been the cause of, or has
resulted in, the failure of the Closing to occur on or before the date of such
written notice.
(e) Conditions to Columbian's Performance Not Met. By Columbian upon
---------------------------------------------
delivery of written notice of termination to Cecil if any event occurs which
renders impossible of satisfaction in any material respect one or more of the
conditions to the obligations of Columbian to effect the Merger set forth in
Sections 5.1 and 5.3 and noncompliance is not waived by Columbian; provided,
however, that the right to terminate under this paragraph shall not be available
to Columbian where its failure to perform an obligation hereunder has been the
cause of, or has resulted in, the failure of the Closing to occur on or before
the date of such written notice.
(f) Cecil Trading Price. By Cecil or Columbian if the Cecil Trading
-------------------
Price as determined pursuant to Section 1.5(a) of this Agreement, is less than
$17.625.
ARTICLE VI
TERMINATION OF OBLIGATIONS; PAYMENT OF EXPENSES;
THIRD PARTY BENEFICIARIES
6.1 Termination; Lack of Survival of Representations and Warranties. In
---------------------------------------------------------------
the event of the termination and abandonment of this Agreement pursuant to
Section 5.4 of this Agreement, this
35
<PAGE>
Agreement shall become void and have no effect, except that (i) the provisions
of Sections 2.8 and 3.9 (Brokers and Finders), 4.6 (Publicity), 6.2 (Expenses)
and 8.2 (Confidentiality) of this Agreement shall survive any such termination
and abandonment, and (ii) a termination pursuant to Sections 5.4(c), 5.4(d) or
5.4(e) of this Agreement shall not relieve the breaching party from liability
for an uncured willful breach of a representation, warranty, covenant, or
agreement giving rise to such termination.
The representations, warranties and agreements of the parties set forth in
this Agreement shall not survive the Effective Date, and shall be terminated and
extinguished at the Effective Date, and from and after the Effective Date none
of the parties hereto shall have any liability to any other party on account of
any breach or failure of any of those representations, warranties and
agreements; provided, however, that the foregoing clause shall not (i) apply to
-------- -------
agreements of the parties which by their terms are intended to be performed
after the Effective Date, and (ii) shall not relieve any person for liability
for fraud, deception or intentional misrepresentation.
6.2 Payment of Expenses. Each of the parties hereto shall bear and pay
-------------------
all costs and expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder.
6.3 Third Party Beneficiaries. This Agreement is not intended to confer
-------------------------
nor does it confer upon any person other than the parties hereto any rights or
remedies hereunder, except with respect to the Merger Consideration upon
consummation of the Merger and except as contemplated in Sections 7.1 and 7.2
herein (each of which shall be enforceable by the party intended to be
benefitted thereby).
ARTICLE VII
CERTAIN FURTHER AGREEMENTS
7.1 Employees and Benefits.
----------------------
(a) (i) Cecil shall on and after the Effective Date, subject to the
exercise of its business judgment in its sole discretion, use reasonable efforts
to continue the employment of the employees of Columbian as of the Effective
Date.
(ii) No later than one year after the Effective Date, the
continuing employees of Columbian shall be eligible to receive medical, group
hospitalization, dental, life and disability insurance benefits, as well as
other employee benefits, under Cecil's employee benefit plans. Except with
respect to the Employee Stock Ownership Plan of Cecil (which is the subject of
Section 7.1(a)(iv) below), the continuing employees of Columbian, no later than
one year after the Effective Date, shall be entitled to participate in all
employee benefit plans sponsored by Cecil or any of the Cecil Subsidiaries to
the same extent as other employees of Cecil holding comparable positions and
such employees shall receive credit for their prior period of service to
Columbian for purposes of determining eligibility, participation and vesting in
all Cecil or Cecil Subsidiaries
36
<PAGE>
employee benefit plans and for receiving other employee benefits. Until
continuing employees of Columbian become participants in the Cecil employee
benefit plans, as described above, Columbian's medical, group hospitalization,
dental, life and disability insurance and other employee benefit plans shall
remain in effect.
(iii) For a period of one year after the Effective Date, the
continuing employees of Columbian shall be entitled to participate in
Columbian's profit sharing plan, which Plan (and the benefits or assets held
thereby), upon its termination, shall be for the benefit of the continuing
employees of Columbian. Such Columbian profit sharing plan shall terminate upon
the participation of the continuing employees of Columbian in Cecil's retirement
plan. In addition, the Rabbi Trust maintained by Columbian for the benefit of
Margaret Waldren, shall be honored in accordance with its terms.
(iv) Upon the Effective Date, the continuing employees of Columbian
shall be entitled to participate in the Cecil Employee Stock Ownership Plan
("ESOP") as employees of the Resulting Association, a subsidiary of Cecil,
provided however, that for purposes of determining eligibility for, and vesting
of benefits under the ESOP, service with Columbian prior to the Effective Date
shall not be treated as service with Cecil as employer, and service with the
Resulting Association as continuing employees after the Effective Date, shall be
treated as service with Cecil as employer.
(v) Two persons presently serving on the Board of Directors of
Columbian, Donald F. Angert and Robert L. Johnson, shall be appointed to the
Board of Directors of Cecil. Such persons will be compensated for serving as
directors of Cecil in accordance with compensation arrangements for all other
Cecil directors.
(vi) Mr. Donald F. Angert shall be appointed to the Board of Directors
of Cecil Federal Savings Bank and he shall be compensated for service as a
director of Cecil Federal Savings Bank in accordance with the compensation
arrangements for all other Cecil Federal Savings Bank directors.
(vii) Ms. Kathleen G. Guzzo shall be offered an employment agreement
with Columbian, to be effective upon the Effective Date, in the form attached as
Exhibit 7.1 hereto; and Mr. Donald F. Angert shall be allowed to continue to
defer his income under his deferred compensation agreement with Columbian, and
the Rabbi Trust established for the benefit of Mr. Angert shall be honored in
accordance with its terms.
7.2 Indemnification and Insurance.
-----------------------------
(a) From and after the Effective Date, Columbian (including any
successor thereto) shall indemnify, defend and hold harmless each person who is
now, or has been at any time prior to the date hereof or who becomes prior to
the Effective Date, an officer or director of Columbian (the "Indemnified
Parties") against all losses, claims, damages, costs, expenses
37
<PAGE>
(including attorney's fees), liabilities, judgments or amounts that are paid in
settlement of (which settlement shall require the prior written consent of Cecil
and Columbian, which consent shall not be unreasonably withheld) or in
connection with any claim, action, suit, proceeding or investigation whether
criminal, civil or administrative (each a "Claim") in which an Indemnified Party
is, or is threatened to be made, a party or a witness based in whole or in part
on or arising in whole or in part out of the fact that such person is or was a
director or officer of Columbian if such Claim pertains to any matter or fact
arising, existing or occurring prior to the Effective Date (including, without
limitation, the Merger and other transactions contemplated by this Agreement),
regardless of whether such Claim is asserted or claimed prior to, or at or
after, the Effective Date (the "Indemnified Liabilities") to the full extent
permitted under (i) applicable federal law in effect as of the date hereof or as
amended applicable to a time prior to the Effective Date or (ii) under
Columbian's Charter and Bylaws. Columbian shall pay expenses in advance of the
final disposition of any such action or proceeding to each Indemnified Party to
the full extent permitted by federal law in effect as of the date hereof or as
amended applicable to a time prior to the Effective Date upon receipt of any
undertaking required by applicable law. Any Indemnified Party wishing to claim
indemnification hereunder upon learning of any Claim, shall notify Cecil and
Columbian promptly after learning of any Claim (but the failure so to notify
Cecil and Columbian shall not relieve them from any liability which they may
have under this Section 7.2(a) except to the extent such failure materially
prejudices Cecil or Columbian) and shall deliver to Columbian the undertaking,
if any, required by applicable law.
(b) From and after the Effective Date, the continuing directors and
officers of Columbian, (i) shall also have indemnification rights having
prospective application in accordance with applicable Federal law and (ii) shall
be covered by the directors and officers liability insurance policy of Cecil and
its subsidiaries on a basis at least equal to the coverage provided to persons
in similar positions with Cecil or any of the Cecil Subsidiaries.
(c) The obligations of Cecil and Columbian provided under paragraphs
(a) and (b) of this Section 7.2 are intended to be the joint and several
obligations of Cecil and Columbian and to benefit, and be enforceable against
Cecil and Columbian directly by, the Indemnified Parties, and shall be binding
on all respective successors and permitted assigns of Cecil and Columbian.
(d) Subject to availability and a cost of no greater than $20,000,
Cecil shall permit Columbian to purchase and keep in force for a period of at
least three years following the Effective Date, directors' and officers'
liability insurance to provide coverage for acts or omissions of the type and in
the amount currently covered by Columbian's existing directors' and officers'
liability insurance for acts or omissions occurring on or prior to the Effective
Date or Cecil, at its sole election, will procure such coverage pursuant to the
existing liability insurance policy of Cecil subject to the cost limitation set
forth herein.
38
<PAGE>
ARTICLE VIII
GENERAL
8.1 Amendments. Subject to applicable law, this Agreement may be amended,
----------
whether before or after any relevant approval of shareholders, by an agreement
in writing executed in the same manner as this Agreement and authorized or
ratified by the Boards of Directors of the parties hereto, provided that, after
-------------
the adoption of the Agreement by the shareholders of Columbian, no such
amendment without further shareholder approval may change the amount or form of
the consideration to be received by Columbian shareholders in the Merger.
8.2 Confidentiality. All information disclosed hereafter by any party to
---------------
this Agreement to any other party to this Agreement, including, without
limitation, any information obtained pursuant to Section 4.1 hereof, shall be
kept confidential by such other party and shall not be used by such other party
otherwise than as herein contemplated, all in accordance with the terms of the
existing confidentiality agreements between the parties (collectively, the
"Confidentiality Agreements"). In the event of the termination of this
Agreement, each party shall return upon request to the other party all documents
(and reproductions thereof) received from such other party (and, in the case of
reproductions, all such reproductions made by the receiving party) that include
information subject to the confidentiality requirement set forth above.
8.3 Governing Law. This Agreement and the legal relations between the
-------------
parties shall be governed by and construed in accordance with the laws of the
State of Maryland without taking into account any provision regarding choice of
law, except to the extent certain matters may be governed by federal law by
reason of preemption.
8.4 Notices. Any notices or other communications required or permitted
-------
hereunder shall be sufficiently given if sent by registered mail or certified
mail, postage prepaid, addressed, if to Cecil or Columbian, to
Cecil Cecil Bancorp, Inc.
127 North Street
Elkton, Maryland 21921
Attn: Mary B. Halsey, President
with copy to: Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
Attn: Howard S. Parris, Esquire
Columbian Columbian Bank, A Federal Savings Bank
303-307 St. John Street
Havre de Grace, Maryland 21078
Attn: Donald F. Angert, President
39
<PAGE>
with copy to: Kutak Rock
1101 Connecticut Avenue, N.W., Suite 1000
Washington, D.C. 20036
Attn: Paul D. Borja, Esquire
or such other address as shall be furnished in writing by any such party, and
any such notice or communication shall be deemed to have been given two business
days after the date of such mailing (except that the notice of change of address
shall not be deemed to have been given until received by the addressee).
Notices may also be sent by telegram, telex, facsimile transmission or hand
delivery and in such event shall be deemed to have been given as of the date
received.
8.5 No Assignment. This Agreement may not be assigned by any of the
-------------
parties hereto, by operation of law or otherwise, except as contemplated hereby.
8.6 Headings. The description heading of the several Articles and
--------
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
8.7 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
8.8 Construction and Interpretation. Except as the context otherwise
-------------------------------
requires, (a) all references herein to any state or federal regulatory agency
shall also be deemed to refer to any predecessor or successor agency, and (b)
all references to state and federal statutes or regulations shall also be deemed
to refer to any successor statute or regulation.
8.9 Entire Agreement. This Agreement, together with the schedules, lists,
----------------
exhibits and certificates required to be delivered hereunder, and any amendment
hereafter executed and delivered in accordance with Section 8.1, constitutes the
entire agreement of the parties, and supersedes any prior written or oral
agreement or understanding among any of the parties hereto pertaining to the
Merger, except that the Confidentiality Agreements shall remain in full force
and effect as contemplated in Section 8.2 herein and except with respect to the
Stock Option Agreement. This Agreement is not intended to confer upon any other
persons any rights or remedies hereunder except as expressly set forth herein.
8.10 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of the Agreement.
40
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunder duly authorized, all as of the
date set forth above.
CECIL BANCORP, INC. COLUMBIAN BANK, A FEDERAL
SAVINGS BANK
By: By:
-------------------------- ----------------------------
Name: Mary Beyer Halsey Name: Donald F. Angert
Title: President Title: President
<PAGE>
EXHIBIT A
VOTING AGREEMENT
May 29, 1998
Cecil Bancorp, Inc.
127 North Street
Elkton, Maryland 21921
Ladies and Gentlemen:
The undersigned is a director of Columbian Bank, A Federal Savings Bank
("Columbian") and is the beneficial holder of shares of common stock of
Columbian ("Columbian Common Stock").
Columbian and Cecil Bancorp, Inc. ("Cecil") are considering the execution
of a Reorganization and Merger Agreement ("Agreement") contemplating that Cecil
will organize a wholly owned interim federal savings bank subsidiary of Cecil
("Subsidiary"), to merge with and into Columbian (the "Merger"), pursuant to
which each of the issued and outstanding shares of Columbian Common Stock shall
automatically by operation of law be converted into a number of shares of common
stock of Cecil as set forth in the Agreement and the issued and outstanding
shares of Subsidiary Common Stock shall be converted by operation of law into an
equal number of newly issued shares of Columbian common stock all of which shall
be owned by Cecil, and following the Merger, Columbian shall survive the Merger
and operate as a wholly owned subsidiary of Cecil under its present name and
title. The execution of the Agreement is subject in the case of Cecil to the
execution and delivery of this letter agreement ("letter agreement"). In
consideration of the substantial expenses that Cecil will incur in connection
with the transactions contemplated by the Agreement and in order to induce Cecil
to execute the Agreement and to proceed to incur such expenses, the undersigned
agrees and undertakes, in his capacity as a shareholder of Columbian and not in
his capacity as a director of Columbian (in which capacity as a director his
fiduciary duties shall apply), as follows:
1. The undersigned, while this letter agreement is in effect, shall vote
or cause to be voted all of the shares of Columbian Common Stock that the
undersigned shall be entitled to so vote, whether such shares are beneficially
owned by the undersigned on the date of this letter agreement or are
subsequently acquired, whether pursuant to the exercise of stock options or
otherwise, at the Special Meeting of Columbian's stockholders to be called and
held following the date hereof, for the approval of the Agreement and the
Merger.
2. The undersigned acknowledges and agrees that any remedy at law for
breach of the foregoing provisions shall be inadequate and that, in addition to
any other relief which may be available, Cecil shall be entitled to temporary
and permanent injunctive relief without the necessity of proving actual damages.
<PAGE>
3. The foregoing restrictions shall not apply to shares with respect to
which the undersigned may have voting power as a fiduciary for others. In
addition, this letter agreement shall only apply to actions taken by the
undersigned in his capacity as a shareholder of Columbian and shall not in any
way limit or affect actions the undersigned may take in his capacity as a
director of Columbian.
4. This letter agreement shall automatically terminate upon termination
of the Agreement in accordance with its terms.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the
date first above written.
Very truly yours,
---------------------------
Signature
---------------------------
Name (please print)
Accepted and agreed to as of
the date first above written:
CECIL BANCORP, INC.
By:
-----------------------------
Its
<PAGE>
EXHIBIT B
STOCK OPTION AGREEMENT
Stock Option Agreement, dated as of May 29, 1998 (the "Agreement"), by and
between Cecil Bancorp, Inc. ("Grantee") , and Columbian Bank, A Federal Savings
Bank ("Issuer").
WITNESSETH:
WHEREAS, Issuer and Grantee have entered into a Reorganization and Merger
Agreement dated as of May 29, 1998 (the "Merger Agreement"), providing for,
among other things, the merger of Issuer with a to-be-formed subsidiary of
Grantee (the "Merger"); and
WHEREAS, as a condition and inducement to Grantee's execution of the Merger
Agreement, Grantee has required that Issuer agree, and Issuer has agreed, to
grant to Grantee the Option (as hereinafter defined); and
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, and intending to be legally bound hereby, Issuer and
Grantee agree as follows:
1. DEFINED TERMS. Capitalized terms which are used but not defined
herein shall have the meanings ascribed to such terms in the Merger Agreement.
2. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
up to 14,993 shares (as adjusted as set forth herein) (the "Option Shares,"
which shall include the Option Shares before and after any transfer of such
Option Shares) of Common Stock, par value $1.00 per share ("Issuer Common
Stock"), of Issuer at a purchase price per Option Share (the "Purchase Price")
of $29.50 provided, however, that in no event shall the number of Option Shares
for which the Option is exercisable exceed 19.9% of the issued and outstanding
shares of Issuer Common Stock without giving effect to any shares subject to or
issued pursuant to the Option.
3. EXERCISE OF OPTION.
(a) Provided that (i) Grantee or Holder (as hereinafter defined), as
applicable, shall not be in material breach of the agreements or covenants
contained in this Agreement or the Merger Agreement, and (ii) no preliminary or
permanent injunction or other order against the delivery of shares covered by
the Option issued by any court of competent jurisdiction in the United States
shall be in effect, Holder may exercise the Option, in whole or in part, but
only if both a Preliminary Purchase Event (as hereinafter defined) and a
Purchase Event (as hereinafter defined) shall have
-1-
<PAGE>
occurred; provided, that the Option shall terminate and be of no further force
and effect upon the earliest to occur of:
(A) the Effective Date of the Merger;
(B) termination of the Merger Agreement in accordance with the terms
thereof prior to the occurrence of a Purchase Event or a Preliminary
Purchase Event (as hereinafter defined), other than a termination of
the Merger Agreement by Grantee based upon a willful breach by Issuer
of any of its representations, warranties, covenants or agreements
set forth in the Merger Agreement (a "Default Termination"),
(C) 12 months after the termination of the Merger Agreement by Grantee
pursuant to a Default Termination; and
(D) 12 months after termination of the Merger Agreement (other than
pursuant to a Default Termination) following the occurrence of a
Purchase Event or a Preliminary Purchase Event;
provided further, that the Holder shall have sent the written notice of such
exercise (as provided in subsection (e) of this Section 3) within six (6) months
following such Purchase Event; and provided, further, that any purchase of
shares upon exercise of the Option shall be subject to compliance with
applicable laws, including without limitation the Home Owners Loan Act, as
amended ("HOLA"), and the Bank Merger Act, as amended ("Bank Merger Act"). The
term "Holder" shall mean the holder or holders of the Option from time to time.
The Grantee is the initial Holder. The rights set forth in Section 8 hereof
shall terminate when the right to exercise the Option terminates (other than as
a result of a complete exercise of the Option) as set forth above.
(b) As used herein, a "Purchase Event" means any of the following events:
(i) any person (other than Grantee or any subsidiary of Grantee) shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3
promulgated under the Exchange Act) of or the right to acquire beneficial
ownership of, any "group" (as such term is defined in Section 13(d) (3) of
the Exchange Act) shall have been formed which beneficially owns or has the
right to acquire beneficial ownership of, 25% or more of the then
outstanding shares of Issuer Common Stock.
(ii) the occurrence of the Preliminary Purchase Event described in
clause (i) of subsection (c) of this Section 2, except that the percentage
referred to in clause (C) thereof shall be 15%.
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(c) As used herein, a "Preliminary Purchase Event" means any of the
following events:
(i) without Grantee's prior written consent, Issuer shall have
authorized, recommended or publicly proposed, or publicly announced an
intention to authorize, recommend or propose, or entered into an agreement
with any person (other than Grantee or any subsidiary of Grantee) to effect
(A) a merger, consolidation or similar transaction involving Issuer or any
of its subsidiaries, (B) the disposition, by sale, lease, exchange or
otherwise, of assets of Issuer or any of its subsidiaries representing in
either case 10% or more of the consolidated assets of Issuer and its
subsidiaries, or (C) the issuance, sale or other disposition of (including
by way of merger, consolidation, share exchange or any similar transaction)
securities representing 10% or more of the voting power of Issuer or any of
its subsidiaries (any of the foregoing an "Acquisition Transaction"); or
(ii) any person (other than the Grantee or a Grantee Subsidiary) shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3
promulgated under the Exchange Act) of, or the right to acquire beneficial
ownership of, any "group" (as such term is defined in Section 13(d)(3) of
the Exchange Act) shall have been formed which beneficially owns or has the
right to acquire beneficial ownership of 10% or more of the then-
outstanding shares of Issuer Common Stock.
(iii) any person (other than Grantee or any subsidiary of Grantee) shall
have commenced (as such term is defined in Rule 14d-2 under the Exchange
Act), or shall have filed a registration statement under the Securities Act
with respect to, a tender offer or exchange offer to purchase any shares of
Issuer Common Stock such that, upon consummation of such offer, such person
would own or control 10% or more of the then outstanding shares of Issuer
Common Stock (such an offer being referred to herein as a "Tender Offer"
and an "Exchange Offer," respectively); or
(iv) (A) the holders of Issuer Common Stock shall not have approved the
Merger Agreement at the meeting of such stockholders held for the purpose
of voting on the Merger Agreement, (B) such meeting shall not have been
held or shall have been canceled prior to termination of the Merger
Agreement or (C) Issuer's Board of Directors shall have withdrawn or
modified in a manner adverse to Grantee the recommendation of Issuer's
Board of Directors with respect to the Merger Agreement, in each case after
it shall have been publicly announced that any person (other than Grantee
or any subsidiary of Grantee) shall have (x) made, or disclosed an
intention to make, a proposal to engage in an Acquisition Transaction, (y)
commenced a Tender Offer or filed a registration statement under the
Securities Act with respect to an Exchange Offer, or (z) filed an
application (or given notice), whether in draft or final form, under the
HOLA, the Bank Merger Act or the Change in Bank Control Act of 1978, as
amended, for approval to engage in an Acquisition Transaction; or
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(v) Issuer shall have intentionally and knowingly breached any
representation, warranty, covenant or agreement contained in the Merger
Agreement and such breach would entitle Grantee to terminate the Merger
Agreement pursuant to (S)5.4(b) of the Merger Agreement after (x) a bona
fide proposal is made by any person (other than Grantee or any subsidiary
of Grantee) to Issuer or its stockholders to engage in an Acquisition
Transaction, (y) any person (other than Grantee or any Subsidiary of
Grantee) states its intention to Issuer or its stockholders to make a
proposal to engage in an Acquisition Transaction if the Merger Agreement
terminates or (z) any person (other than Grantee or any subsidiary of
Grantee) shall have filed an application or notice with any governmental
entity to engage in an Acquisition Transaction.
As used in this Agreement, "person" shall have the meaning specified in
Section 3(a)(9) and 13(d)(3) of the Exchange Act.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of
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any Preliminary Purchase Event or Purchase Event, it being understood that the
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giving of such notice by Issuer shall not be a condition to the right of Holder
to exercise the Option.
(e) In the event Holder wishes to exercise the Option, it shall send to
Issuer a written notice (the date of which being herein referred to as the
"Notice Date") specifying (i) the total number of Option Shares it intends to
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purchase pursuant to such exercise, and (ii) a place and date not earlier than
three business days nor later than 15 business days from the Notice Date for the
closing (the "Closing") of such purchase (the "Closing Date"). If prior
notification to or approval of the Office of Thrift Supervision ("OTS"), the
Federal Deposit Insurance Corporation, or any other governmental entity is
required in connection with such purchase, Issuer shall cooperate with Grantee
in the filing of the required notice of application for approval and the
obtaining of such approval and the Closing shall occur immediately following
such regulatory approvals (and any mandatory waiting periods).
4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On each Closing Date, Holder shall (i) pay to Issuer, in immediately
available funds by wire transfer to a bank account designated by Issuer, an
amount equal to the Purchase Price multiplied by the number of Option Shares to
be purchased on such Closing Date, and (ii) present and surrender this Agreement
to Issuer at the address of Issuer specified in Section 12(f) hereof.
(b) At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in Section 4(a), (i)
Issuer shall deliver to Holder (A) a certificate or certificates representing
the Option Shares to be purchased at such Closing, which Option Shares shall be
free and clear of all liens, claims, charges and encumbrances of any kind
whatsoever and subject to no preemptive rights, and (B) if the Option is
exercised in part only, an executed new agreement with the same terms as this
Agreement evidencing the right to purchase the balance of shares of Issuer
Common Stock purchasable hereunder, and (ii) Holder shall deliver to
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Issuer a letter agreeing that Holder shall not offer to sell or otherwise
dispose of such Option Shares in violation of applicable federal and state law
or of the provisions of this Agreement.
(c) In addition to any other legend that is required by applicable law,
certificates for the Option Shares delivered at each Closing shall be endorsed
with a restrictive legend which shall read substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED MAY 29, 1998. A
COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE
UPON RECEIPT BY ISSUER OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that the above legend shall be removed by
delivery of substitute certificate(s) without such legend if Holder shall have
delivered to Issuer a copy of a letter from the staff of the Commission, or an
opinion of counsel in form and substance reasonably satisfactory to Issuer and
its counsel, to the effect that such legend is not required for purposes of the
Securities Act.
(d) Upon the giving by Holder to Issuer of the written notice of exercise
of the Option provided for under Section 3(e), the tender of the applicable
purchase price in immediately available funds and the tender of this Agreement
to Issuer, Holder shall be deemed to be the holder of record of the shares of
Issuer Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of Issuer shall then be closed or that certificates representing
such shares of Issuer Common Stock shall not then be actually delivered to
Holder.
(e) Issuer agrees (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Issuer Common Stock so that the Option may be exercised without additional
authorization of Issuer Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Issuer Common
Stock, (ii) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer, (iii) promptly to take all action as may from time to time be required
(including (A) complying with all premerger notification, reporting and waiting
period requirements and (B) in the event prior approval of or notice to any
governmental entity is necessary before the Option may be exercised, cooperating
fully with Holder in preparing such applications or notices and providing such
information to such governmental entity as it may require) in order to permit
Holder to exercise the Option and Issuer duly and effectively to issue shares of
Issuer Common Stock pursuant hereto, and (iv) promptly to take all action
provided herein to protect the rights of Holder against dilution.
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5. REPRESENTATIONS AND WARRANTIES OF ISSUER. Issuer hereby represents and
warrants to Grantee (and Holder, if different that Grantee) as follows:
(a) DUE AUTHORIZATION. Issuer has a requisite corporate power and
authority to enter into this Agreement, and subject to any approvals referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Issuer, and this Agreement has been duly executed and delivered by Issuer.
(b) NO VIOLATIONS. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by Issuer
with any of the provisions hereof will not (i) conflict with or result in a
breach of any provision of its Charter or Bylaws or a default (or give rise to
any right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, debenture, mortgage, indenture,
license, material agreement or other material instrument or obligations to which
Issuer is a party, or by which it or any of its properties or assets may be
bound, or (ii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Issuer or any of its properties or assets.
(c) AUTHORIZED STOCK. Issuer has taken all necessary corporate and other
action to authorize and reserve and to permit it to issue, and at all times from
the date hereof until the obligation to deliver Issuer Common Stock upon the
exercise of the Option terminates, will have reserved for issuance upon exercise
of the Option that number of shares of Issuer Common Stock equal to the maximum
number of shares of Issuer Common Stock at any time and from time to time
purchasable upon exercise of the Option, and all such shares, upon issuance
pursuant to the Option, will be duly and validly issued, fully paid and
nonassessable, and will delivered free and clear of all liens, claims, charges
and encumbrances of any kind or nature whatsoever and not subject to any
preemptive rights.
6. REPRESENTATIONS AND WARRANTIES OF GRANTEE. Grantee hereby represents
and warrants to Issuer that Grantee has all requisite corporate power and
authority to enter into this Agreement and, subject to any approvals or consents
referred to herein, to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Grantee, and this Agreement has been duly
executed and delivered by Grantee.
7. ADJUSTMENT UPON CHANGES IN ISSUER CAPITALIZATION, ETC.
(a) In the event of any change in Issuer Common Stock by reason of a stock
dividend, stock split, split-up, recapitalization, combination, exchange of
shares or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price therefor, shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transactions so that Holder shall receive, upon exercise of the Option, the
number and class of shares or other securities or property that Holder would
have received in respect of Issuer Common Stock
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if the Option has been exercised immediately prior to such event, or the record
date therefor, as applicable. If any additional shares of Issuer Common Stock
are issued after the date of this Agreement (other than pursuant to an event
described in the first sentence of this Section 7(a)), the number of shares of
Issuer Common Stock subject to the Option shall be adjusted so that, after such
issuance, it, together with any shares of Issuer Common Stock previously issued
pursuant hereto, equals 19.9% of the number of shares of Issuer Common Stock
then issued and outstanding, without giving effect to any shares subject to or
issued pursuant to the Option.
(b) In the event that Issuer shall enter into an agreement: (i) to
consolidate with or merge into any person, other than Grantee or one of its
subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than Grantee or one of
its subsidiaries, to merge into Issuer and Issuer shall be the continuing or
surviving corporation, but, in connection with such merger, the then outstanding
shares of Issuer Common Stock shall be changed into or exchanged for stock or
other securities of Issuer or any other person or cash or any other property or
the outstanding shares of Issuer Common Stock immediately prior to such merger
shall after such merger represent less than 50% of the outstanding shares and
share equivalents of the merged company, or (iii) to sell or otherwise transfer
all or substantially all of its assets to any person, other than Grantee or one
of its subsidiaries, then, and in each such case, the agreement governing such
transactions shall make proper provisions so that the Option shall, upon the
consummation of any such transaction and upon the terms and condition set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of Holder, of any of (x) the Acquiring Corporation (as
hereinafter defined), (y) any person that controls the Acquiring Corporation or
(z) in the case of a merger described in clause (ii), Issuer (such person being
referred to as "Substitute Option Issuer").
(c) The Substitute Option shall have the same terms as the Option, provided
that, if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to Holder. Substitute Option Issuer also shall enter into an
agreement with Holder in substantially the same form as this Agreement, which
shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares of
Substitute Common Stock (as hereinafter defined) as is equal to the Assigned
Value (as hereinafter defined) multiplied by the number of shares of Issuer
Common Stock for which the Option was theretofore exercisable, divided by the
Average Price (as hereinafter defined). The exercise price of Substitute Option
per share of Substitute Common Stock (the "Substitute Option Price") shall then
be equal to the Purchase Price multiplied by a fraction in which the numerator
is the number of shares of Issuer Common Stock for which the Option was
theretofore exercisable and the denominator is the number of shares of the
Substitute Common Stock for which the Substitute Option is exercisable.
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<PAGE>
(e) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than
Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, or (iii) the transferee of all or substantially all of
Issuer's assets (or a substantial part of the assets of its subsidiaries
taken as a whole).
(2) "Substitute Common Stock" shall mean the shares of capital stock (or
similar equity interest) with the greatest voting power in respect of the
election of directors (or persons similarly responsible for the direction
of the business and affairs) of the Substitute Option Issuer.
(3) "Assigned Value" shall mean the highest of (w) the price per share of
Issuer Common Stock at which a Tender Offer or an Exchange Offer therefor
has been made, (x) the price per share of Issuer Common Stock to be paid by
any third party pursuant to an agreement with Issuer, (y) the highest
closing price for shares of Issuer Common Stock within the six-month period
immediately preceding the consolidation, merger or sale in question and (z)
in the event of a sale of all or substantially all of Issuer's assets or
deposits, an amount equal to (i) the sum of the price paid in such sale for
such assets (and/or deposits) and the current market value of the remaining
assets of Issuer, as determined by a nationally-recognized investment
banking firm selected by Holder, divided by (ii) the number of shares of
Issuer Common Stock outstanding at such time. In the event that a Tender
Offer or an Exchange Offer is made for Issuer Common Stock or an agreement
is entered into for a merger or consolidation involving consideration other
than cash, the value of securities or other property issuable or
deliverable in exchange for Issuer Common Stock shall be determined by a
nationally-recognized investment banking firm selected by Holder.
(4) "Average Price" shall mean the average closing price of a share of
Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day preceding
such consolidation, merger or sale; provided that if Issuer is the Issuer
of the Substitute Option, the Average Price shall be computed with respect
to a share of common stock issued by Issuer, the person merging into Issuer
or by any company which controls such person, as Holder may elect.
(f) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of Substitute Common Stock outstanding prior to exercise of the
Substitute Option.
(g) Issuer shall not enter into any transaction described in Section 7(b)
unless the Acquiring Corporation and any person that controls the Acquiring
Corporation assume in writing all the obligations of Issuer hereunder and take
all other actions that may be necessary so that the provisions of this Section 7
are given full force and effect (including, without limitations, any action that
may
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be necessary so that the holders of the other shares of common stock issued
by Substitute Option Issuer are not entitled to exercise any rights by reason of
the issuance or exercise of the Substitute Option and the shares of Substitute
Common Stock are otherwise in no way distinguishable from or have lesser
economic value (other than any diminution in value resulting from the fact that
the shares of Substitute Common Stock are restricted securities, as defined in
Rule 144 under the Securities Act or any successor provision) than other shares
of common stock issued by Substitute Option Issuer).
8. REPURCHASE AT THE OPTION OF HOLDER.
(a) Subject to the last sentence of Section 3(a), at the request of Holder
at any time commencing upon the first occurrence of a Repurchase Event (as
defined in Section 8(d)) and ending 12 months immediately thereafter, Issuer
shall repurchase from Holder (i) the Option and (ii) all shares of Issuer Common
Stock purchased by Holder pursuant hereto with respect to which Holder then has
beneficial ownership. The date on which Holder exercises its rights under this
Section 8 is referred to as the "Request Date." Such repurchase shall be at an
aggregate price (the "Section 8 Repurchase Consideration") equal to the sum of:
(i) the aggregate Purchase Price paid by Holder for any shares of Issuer
Common Stock acquired pursuant to the Option with respect to which Holder
then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined below)
for each share of Issuer Common Stock over (y) the Purchase Price (subject
to adjustment pursuant to Section 7), multiplied by the number of shares of
Issuer Common Stock with respect to which the Option has not been
exercised; and
(iii) the excess, if any, of the Applicable Price over the Purchase Price
(subject to adjustment pursuant to Section 7) paid (or, in the case of
Option Shares with respect to which the Option has been exercised but the
Closing Date has not occurred, payable) by Holder for each share of Issuer
Common Stock with respect to which the Option has been exercised and with
respect to which Holder then has beneficial ownership, multiplied by the
number of such shares.
(b) If Holder exercises its rights under this Section 8, Issuer shall,
within 10 business days after the Request Date, pay the Section 8 Repurchase
Consideration to Holder in immediately available funds, and contemporaneously
with such payment Holder shall surrender to Issuer the Option and the
certificates evidencing the shares of Issuer Common Stock purchased thereunder
with respect to which Holder then has beneficial ownership, and shall warrant
that it has sole record and beneficial ownership of such shares and that the
same are then free and clear of all liens, claims, charges and encumbrances of
any kind whatsoever. Notwithstanding the foregoing, to the extent that prior
notification to or approval of the OTS, the Federal Deposit Insurance
Corporation or any other governmental entity is required in connection with the
payment of all or any portion of the Section
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8 Repurchase Consideration, Holder shall have the ongoing option to revoke its
request for repurchase pursuant to Section 8, in whole or in part, or to require
that Issuer deliver from time to time that portion of the Section 8 Repurchase
Consideration that it is not then so prohibited from paying and promptly file
the required notice or application for approval and expeditiously process the
same (and each party shall cooperate with the other in the filing of any such
notice or application and the obtaining of any such approval). If the OTS, the
Federal Deposit Insurance Corporation or any other governmental entity
disapproves of any part of Issuer's proposed repurchase pursuant to this Section
8, Issuer shall promptly give notice of such fact to Holder. If the OTS, the
Federal Deposit Insurance Corporation or any other governmental entity prohibits
the repurchase in part but not in whole, then Holder shall have the right (i) to
revoke the repurchase request or (ii) to the extent permitted by the OTS, the
Federal Deposit Insurance Corporation or other governmental entity, determine
whether the repurchase should apply to the Option and/or Option Shares and to
what extent to each, and Holder shall thereupon have the right to exercise the
Option as to the number of Option Shares for which the Option was exercisable at
the Request Date less the sum of the number of shares covered by the Option in
respect of which payment has been made pursuant to Section 8(a)(ii) and the
number of shares covered by the portion of the Option (if any) that has been
repurchased. Holder shall notify Issuer of its determination under the preceding
sentence within five business days of receipt of notice of disapproval of the
repurchase.
Notwithstanding anything herein to the contrary, all of Grantee's rights
under this Section 8 shall terminate on the date of termination of the Option
pursuant to Section 3(a).
(c) For purposes of this Agreement, the "Applicable Price" means the
highest of (i) the highest price per share of Issuer Common Stock paid for any
such share by the person or groups described in Section 8(d)(i), (ii) the price
per share of Issuer Common Stock received by holders of Issuer Common Stock in
connection with any merger or other business combination transaction described
in Section 7(b)(i), 7(b)(ii) or 7(b)(iii), or (iii) the highest sales price per
share of Issuer Common Stock during the year preceding the Request Date;
provided, however, that in the event of a sale of less than all of Issuer's
assets, the Applicable Price shall be the sum of the price paid in such sale for
such assets and the current market value of the remaining assets of Issuer as
determined by a nationally-recognized investment banking firm selected by
Holder, divided by the number of shares of Issuer Common Stock outstanding at
the time of such sale. If the consideration to be offered, paid or received
pursuant to either of the foregoing clauses (i) or (ii) shall be other than in
cash, the value of such consideration shall be determined in good faith by an
independent nationally-recognized investment banking firm selected by Holder and
reasonably acceptable to Issuer, which determination shall be conclusive for all
purposes of this Agreement.
(d) As used herein, a "Repurchase Event" shall occur if (i) any person
(other than Grantee or any subsidiary of Grantee) shall have acquired beneficial
ownership of (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act), or the right to acquire beneficial ownership of, or any "group"
(as such term is defined in Section 13(d)(3) of the Exchange Act) shall have
been formed which beneficially owns or has the right to acquire beneficial
ownership of, 50% or more of
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the then outstanding shares of Issuer Common Stock, or (ii) any of the
transactions described in Section 7(b)(i), Section 7(b)(ii) or Section 7(b)(iii)
shall be consummated.
9. REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS. Issuer shall, subject to conditions of
Section 9(c), if requested by any Holder, as expeditiously as possible prepare
and file a registration statement under the Securities Act if such registration
is necessary in order to permit the sale or other disposition of any or all
shares of Issuer Common Stock or other securities that have been acquired by or
are issuable to Holder upon exercise of the Option in accordance with the
intended method of sale or other disposition stated by Holder in such request,
including without limitation a "shelf" registration statement under Rule 415
under the Securities Act or any successor provision, and Issuer shall use its
best efforts to qualify such shares or other securities for sale under any
applicable state securities laws.
(b) ADDITIONAL REGISTRATION RIGHTS. If Issuer at any time after the
exercise of the Option proposes to register any shares of Issuer Common Stock
under the Securities Act in connection with an underwritten public offering of
such Issuer Common Stock, Issuer will promptly give written notice to Holder of
its intention to do so and, upon the written request of Holder given within 30
days after receipt of any such notice (which request shall specify the number of
shares of Issuer Common Stock intended to be included in such underwritten
public offering by Holder), Issuer will cause all such shares for which a Holder
shall have requested participation in such registration to be so registered and
included in such underwritten public offering; provided, however, that Issuer
may elect to not cause any such shares to be so registered (i) if the
underwriters in good faith object for valid business reasons, or (ii) in the
case of a registration solely to implement an employee benefit plan or a
registration filed on Form S-4 under the Securities Act or any successor form;
provided, further, however, that such election pursuant to clause (i) may only
be made on time. If some but not all the shares of Issuer Common Stock with
respect to which Issuer shall have received requests for registration pursuant
to this Section 9(b) shall be excluded from such registration, Issuer shall make
appropriate allocation of shares to be registered among Holders permitted to
register their shares of Issuer Common Stock in connection with such
registration pro rata in the proportion that the number of shares requested to
be registered by each such Holder bears to the total number of shares requested
to be registered by all such Holders then desiring to have Issuer Common Stock
registered for sale.
(c) CONDITIONS TO REQUIRED REGISTRATION. Issuer shall use all reasonable
efforts to cause each registration statement referred to in Section 9(a) to
become effective and to obtain all consents or waivers of other parties which
are required therefor and to keep such registration statement effective;
provided, however, that Issuer may delay any registration or Option Shares
required pursuant to Section 9(a) for a period not exceeding 90 days if Issuer
shall in good faith determine that any such registration would adversely affect
an offering or contemplated offering of other securities by Issuer, and Issuer
shall not be required to register Option Shares under the Securities Act
pursuant to Section 9(a):
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(i) prior to the earliest of (A) termination of the Merger Agreement
pursuant to the terms thereof, and (B) a Purchase Event or a Preliminary
Purchase Event;
(ii) on more than one occasion during any calendar year and on more than
two occasions in total;
(iii) within 90 days after the effective date of a registration referred
to in Section 9(b) pursuant to which the Holder or Holders concerned were
afforded the opportunity to register such shares under the Securities Act
and such shares were registered as requested; and
(iv) unless a request therefor is made to Issuer by the Holder or
Holders of at least 25% or more of the aggregate number of Option Shares
(including shares of Issuer Common Stock issuable upon exercise of the
Option) then outstanding.
In addition to the foregoing, Issuer shall not be required to maintain the
effectiveness of any registration statement after the expiration of nine months
from the effective date of such registration statement. Issuer shall use all
reasonable efforts to make any filings, and take all steps, under all applicable
state securities laws to the extent necessary to permit the sale or other
disposition of the Option Shares so registered in accordance with the intended
method of distribution for such shares, provided, however, that Issuer shall not
be required to consent to general jurisdiction or to qualify to do business in
any state where it is not otherwise required to so consent to such jurisdiction
or to so qualify to do business.
(d) EXPENSES. Issuer will pay all expenses (including without limitation
registration fees, qualification fees, blue sky fees and expenses, accounting
expenses, legal expenses and printing expenses incurred by it) in connection
with each registration pursuant to Section 9(a) or (b) and all other
qualifications, notification or exemptions pursuant to Section 9(a) or (b).
Underwriting discounts and commissions relating to Option Shares, fees and
disbursements of counsel to the Holder(s) of Option Shares being registered and
any other expenses incurred by such Holder(s) in connection with any such
registration shall be borne by such Holder(s).
(e) INDEMNIFICATION. In connection with any registration under Section
9(a) or (b), Issuer hereby indemnifies each Holder, and each underwriter
thereof, including each person, if any, who controls such Holder or underwriter
within the meaning of Section 15 of the Securities Act, against all expenses,
losses, claims, damages and liabilities caused by any untrue, or alleged untrue,
statement of a material fact contained in any registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission,
or alleged omission, to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such expenses, losses, claims, damages or liabilities of such
indemnified party are caused by any untrue statement or alleged untrue statement
that was included by Issuer in any such registration statement or prospectus or
notification or offering circular (including any amendments or supplements
thereto)
-12-
<PAGE>
in reliance upon, and in conformity with, information furnished in writing to
Issuer by such indemnified party expressly for use therein, and Issuer and each
officer, director and controlling person of Issuer shall be indemnified by such
Holder, or by such underwriter, as the case may be, for all such expenses,
losses, claims, damages and liabilities caused by any untrue, or alleged untrue,
statement that was included by Issuer in any such registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) in reliance upon, and in conformity with, information
furnished in writing to Issuer by such Holder or such underwriter, as the case
may be, expressly for such use.
Promptly upon receipt by a party indemnified under this Section 9(e) of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this Section 9(e), such indemnified party shall notify
the indemnifying party in writing of the commencement of such action, but,
except to the extent of any actual prejudice to the indemnifying party, the
failure to so notify the indemnifying party shall not relieve it of any
liability which it may otherwise have to any indemnified party under this
Section 9(e). In case notice of commencement of any such action shall be given
to the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and reasonably satisfactory
to such indemnified party. The indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel (other than reasonable costs of
investigation) shall be paid by the indemnified party unless (i) the
indemnifying party agrees to pay the same, (ii) the indemnifying party fails to
assume the defense of such action with counsel reasonably satisfactory to the
indemnified party, or (iii) the indemnified party has been advised by counsel
that one or more legal defenses may be available to the indemnifying party that
may be contrary to the interest of the indemnified party, in wich case the
indemnifying party shall be entitled to assume the defense of such action
notwithstanding its obligations to bear fees and expenses of such counsel. No
indemnifying party shall be liable for any settlement entered into without its
consent, which consent may not be unreasonably withheld.
If the indemnification provided for in this Section 9(e) is unavailable to
a party otherwise entitled to be indemnified in respect of any expenses, losses,
claims, damages or liabilities referred to herein, then the indemnifying party,
in lieu of indemnifying such party otherwise entitled to be indemnified, shall
contribute to the amount paid or payable by such party to be indemnified as a
result of such expenses, losses, claims, damages or liabilities in such
proportion as is appropriate to reflect the relative benefits received by
Issuer, the selling Holders and the underwriters from the offering of the
securities and also the relative fault of Issuer, the selling Holders and the
underwriters in connection with the statement or omissions which results in such
expenses, losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The amount paid or payable by a party as a result of
the expenses, losses, claims, damages and liabilities referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any action or claim;
provided, however, that in
-13-
<PAGE>
no case shall the selling Holders be responsible, in the aggregate, for any
amount in excess of the net offering proceeds attributable to its Option Shares
included in the offering. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(g) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Any obligation by any Holder to indemnify shall be several
and not joint with other Holders.
In connection with any registration pursuant to Section 9(a) or (b) above,
Issuer and each selling Holder (other than Grantee) shall enter into an
agreement containing the indemnification provisions of this Section 9(e).
(f) MISCELLANEOUS REPORTING. Issuer shall comply with all reporting
requirements and will do all such other things as may be necessary to permit the
expeditious sale at any time of any Option Shares by the Holder(s) in accordance
with and to the extent permitted by any rule or regulation permitting
nonregistered sales of securities promulgated by the Commission from time to
time, including, without limitation, Rule 144A. Issuer shall at its expense
provide the Holder with any information necessary in connection with the
completion and filing of any reports or forms required to be filed by them under
the Securities Act or the Exchange Act, or required pursuant to any state
securities laws or the rules of any stock exchange.
(g) ISSUER TAXES. Issuer will pay all stamp taxes in connection with the
issuance and the sale of the Option Shares and in connection with the exercise
of the Option, and will save any Holder harmless, without limitation as to time,
against any and all liabilities, with respect to all such taxes.
10. QUOTATION; LISTING. If Issuer Common Stock or any other securities to
be acquired upon exercise of the Option are then authorized for quotation or
trading or listing on NASDAQ/NMS or any securities exchange, Issuer, upon the
request of Holder, will promptly file an application, if required, to authorize
for quotation or trading or listing the shares of Issuer Common Stock or other
securities to be acquired upon exercise of the Option on NASDAQ/NMS or such
other securities exchange and will use its best efforts to obtain approval, if
required, of such quotation or listing as soon as practicable.
11. DIVISION OF OPTION. Upon the occurrence of a Purchase Event or a
Preliminary Purchase Event, this Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender of this Agreement at the principal office of the Issuer for other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Issuer Common
Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any other Agreements and related Options for which this Agreement (and
the Option granted hereby) maybe exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
-14-
<PAGE>
12. MISCELLANEOUS
(a) EXPENSES. Except as otherwise provided in Section 9, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
(b) WAIVER AND AMENDMENT. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon the
execution and delivery of a written agreement executed by the parties hereto.
(c) ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; SEVERABILITY. This
Agreement, together with the Merger Agreement and the other documents and
instruments referred to herein and therein, between Grantee and Issuer (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof, and (ii) is not intended to confer upon any person other
than the parties hereto (other than the indemnified parties under Section 9(e)
and any transferee of the Option Shares or any permitted transferee of this
Agreement pursuant to Section 12(h)) any rights or remedies hereunder. If any
term, provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction or a federal or state regulatory agency to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that the Option does not permit Holder to acquire,
or does not require Issuer to repurchase, the full number of shares of Issuer
Common Stock as provided in Sections 3 and 8 (as adjusted pursuant to Section
7), it is the express intention of Issuer to allow Holder to acquire or to
require Issuer to repurchase such lesser number of shares as may be permissible
without any amendment or modification hereof.
(d) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland without regard to any
applicable conflicts of law rules.
(e) DESCRIPTIVE HEADINGS. The descriptive headings contained herein are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or sent by overnight mail service or mailed by registered or
certified mail (return receipt requested) postage prepaid, to the parties at the
following address (or at such other address for a party as shall be specified by
like notice):
If to Grantee: Cecil Bancorp, Inc.
127 North Street
Elkton, Maryland 21921
Attn: Mary B. Halsey, President
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<PAGE>
With a required copy to: Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
Attn: Howard S. Parris, Esquire
If to Issuer: Columbian Bank, A Federal Savings Bank
303-307 St. John Street
Havre de Grace, Maryland 21078
Attn: Donald F. Angert, President
With a required copy to: Kutak Rock
1101 Connecticut Avenue, N.W., Suite 1000
Washington, D.C. 20036
Attn: Paul D. Borja, Esquire
(g) COUNTERPARTS. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed, it
being understood that both parties need not sign the same counterpart.
(h) ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party, except that Holder may assign this Agreement
to a wholly-owned subsidiary of Holder and Holder may assign its rights
hereunder in whole or in part after the occurrence of a Purchase Event. Subject
to the preceding sentence, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successor and
assigns.
(i) FURTHER ASSURANCES. In the event of any exercise of the Option by
Holder, Issuer and Holder shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
(j) SPECIFIC PERFORMANCE. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief and
other equitable relief. Both parties further agree to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
-16-
<PAGE>
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
CECIL BANCORP, INC.
By:
------------------------
Mary Beyer Halsey
President
COLUMBIAN BANK, A FEDERAL
SAVINGS BANK
By:
------------------------
Donald F. Angert
President
-17-
<PAGE>
ANNEX B
DISSENTER AND APPRAISAL RIGHTS
DISSENTER AND APPRAISAL RIGHTS IN A FEDERAL STOCK SAVINGS AND LOAN
ASSOCIATION ARE GOVERNED BY SECTION 552.14 OF TITLE 12 OF THE CODE OF FEDERAL
REGULATIONS, THE TEXT OF WHICH IS REPRODUCED BELOW:
Sec. 552.14 DISSENTER AND APPRAISAL RIGHTS.
(a) RIGHT TO DEMAND PAYMENT OF FAIR OR APPRAISED VALUE. Except as provided
in paragraph (b) of this section, any stockholder of a Federal stock association
combining in accordance with Sec. 552.13 of this part shall have the right to
demand payment of the fair or appraised value of his stock: Provided, That such
stockholder has not voted in favor of the combination and complies with the
provisions of paragraph (c) of this section.
(b) EXCEPTIONS. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of the stock's fair or appraised value, if such stock was listed
on a national securities exchange or quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the
meeting at which the combination was acted upon or stockholder action is not
required for a combination made pursuant to Sec. 552.13(h)(2) of this part.
"Qualified consideration" means cash, shares of stock of any association or
corporation which at the effective date of the combination will be listed on a
national securities exchange or quoted on NASDAQ or any combination of such
shares of stock and cash.
(c) PROCEDURE -- (1) NOTICE. Each constituent Federal stock association
shall notify all stockholders entitled to rights under this section, not less
than twenty days prior to the meeting at which the combination agreement is to
be submitted for stockholder approval, of the right to demand payment of
appraised value of shares, and shall include in such notice a copy of this
section. Such written notice shall be mailed to stockholders of record and may
be part of management's proxy solicitation for such meeting.
(2) DEMAND FOR APPRAISAL AND PAYMENT. Each stockholder electing to make a
demand under this section shall deliver to the Federal stock association, before
voting on the combination, a writing identifying himself or herself and stating
his or her intention thereby to demand appraisal of and payment for his or her
shares. Such demand must be in addition to and separate from any proxy or vote
against the combination by the stockholder.
(3) NOTIFICATION OF EFFECTIVE DATE AND WRITTEN OFFER. Within ten days
after the effective date of the combination, the resulting association shall:
(i) Give written notice by mail to stockholders of constituent Federal
stock associations who have complied with the provisions of paragraph (c)(2) of
this section and have not voted in favor of the combination, of the effective
date of the combination;
(ii) Make a written offer to each stockholder to pay for dissenting
shares at a specified price deemed by the resulting association to be the fair
value thereof; and
(iii) Inform them that, within sixty days of such date, the respective
requirements of paragraphs (c)(5) and (6) of this section (set out in the
notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and statement of
income of the association the shares of which the dissenting stockholder holds,
for a fiscal year ending not more than sixteen months before the date of notice
and offer, together with the latest available interim financial statements.
1
<PAGE>
(4) ACCEPTANCE OF OFFER. If within sixty days of the effective date of
the combination the fair value is agreed upon between the resulting association
and any stockholder who has complied with the provisions of paragraph (c)(2) of
this section, payment therefor shall be made within ninety days of the effective
date of the combination.
(5) PETITION TO BE FILED IF OFFER NOT ACCEPTED. If within sixty days of
the effective date of the combination the resulting association and any
stockholder who has complied with the provisions of paragraph (c)(2) of this
section do not agree as to the fair value, then any such stockholder may file a
petition with the Office, with a copy by registered or certified mail to the
resulting association, demanding a determination of the fair market value of the
stock of all such stockholders. A stockholder entitled to file a petition under
this section who fails to file such petition within sixty days of the effective
date of the combination shall be deemed to have accepted the terms offered under
the combination.
(6) STOCK CERTIFICATES TO BE NOTED. Within sixty days of the effective
date of the combination, each stockholder demanding appraisal and payment under
this section shall submit to the transfer agent his certificates of stock for
notation thereon that an appraisal and payment have been demanded with respect
to such stock and that appraisal proceedings are pending. Any stockholder who
fails to submit his stock certificates for such notation shall no longer be
entitled to appraisal rights under this section and shall be deemed to have
accepted the terms offered under the combination.
(7) WITHDRAWAL OF DEMAND. Notwithstanding the foregoing, at any time
within sixty days after the effective date of the combination, any stockholder
shall have the right to withdraw his or her demand for appraisal and to accept
the terms offered upon the combination.
(8) VALUATION AND PAYMENT. The Director shall, as he or she may elect,
either appoint one or more independent persons or direct appropriate staff of
the Office to appraise the shares to determine their fair market value, as of
the effective date of the combination, exclusive of any element of value arising
from the accomplishment or expectation of the combination. Appropriate staff of
the Office shall review and provide an opinion on appraisals prepared by
independent persons as to the suitability of the appraisal methodology and the
adequacy of the analysis and supportive data. The Director after consideration
of the appraisal report and the advice of the appropriate staff shall, if he or
she concurs in the valuation of the shares, direct payment by the resulting
association of the appraised fair market value of the shares, upon surrender of
the certificates representing such stock. Payment shall be made, together with
interest from the effective date of the combination, at a rate deemed equitable
by the Director.
(9) COSTS AND EXPENSES. The costs and expenses of any proceeding under
this section may be apportioned and assessed by the Director as he or she may
deem equitable against all or some of the parties. In making this determination
the Director shall consider whether any party has acted arbitrarily,
vexatiously, or not in good faith in respect to the rights provided by this
section.
(10) VOTING AND DISTRIBUTION. Any stockholder who has demanded
appraisal rights as provided in paragraph (c)(2) of this section shall
thereafter neither be entitled to vote such stock for any purpose nor be
entitled to the payment of dividends or other distributions on the stock (except
dividends or other distribution payable to, or a vote to be taken by
stockholders of record at a date which is on or prior to, the effective date of
the combination): Provided, That if any stockholder becomes unentitled to
appraisal and payment of appraised value with respect to such stock and accepts
or is deemed to have accepted the terms offered upon the combination, such
stockholder shall thereupon be entitled to vote and receive the distributions
described above.
(11) STATUS. Shares of the resulting association into which shares of
the stockholders demanding appraisal rights would have been converted or
exchanged, had they assented to the combination, shall have the status of
authorized and unissued shares of the resulting association.
2
<PAGE>
ANNEX C
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-24926
CECIL BANCORP, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Maryland 52-1883546
---------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
127 North Street, Elkton, Maryland 21921-5547
- ---------------------------------------- ----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (410) 398-1650
----------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Not applicable
--------------
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
As of March 10, 1998, the registrant had 470,182 shares of Common Stock issued
and outstanding. The aggregate market value of shares held by nonaffiliates on
such date was $9,400,329 based on the closing sale price of $23.50 per share of
the Registrant's Common Stock on March 10, 1998. For purposes of this
calculation, it is assumed that the 70,167 shares held by directors and officers
of the Registrant, are shares held by affiliates.
Transitional small business disclosure format (check one): Yes No X
----- -----
DOCUMENT INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the year ended December
31, 1997 (the "Annual Report"). (Parts I and II).
2. Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting
of Stockholders (the "Proxy Statement"). (Part III)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
GENERAL
CECIL BANCORP, INC. Cecil Bancorp, Inc. (the "Company") was incorporated
under the laws of the State of Maryland in July 1994. On November 10, 1994,
Cecil Federal Savings Bank ("Cecil Federal" or the "Bank") converted from mutual
to stock form and reorganized into the holding company form of ownership as a
wholly owned subsidiary of the Company. As a result of the conversion and
reorganization, the Company issued and sold 481,361 shares of its common stock
at a price of $10.00 per share to its depositors, borrowers, stock benefit plans
and the public, thereby recognizing net proceeds of $4,315,057. The Company's
common stock is registered with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is classified as a unitary savings institution holding company subject
to regulation by the Office of Thrift Supervision ("OTS") of the Department of
the Treasury.
The Company's main office and telephone number are the same as Cecil
Federal's (see below). At December 31, 1997, the Company had total assets of
$63.7 million and stockholders' equity of $7.4 million, on a consolidated basis.
The Company is primarily engaged in the business of directing, planning and
coordinating the business activities of Cecil Federal. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Bank and its subsidiaries. In the future, the
Company may become an operating company or acquire or organize other operating
subsidiaries, including other financial institutions. Currently, the Company
does not maintain offices separate from those of Cecil Federal or employ any
persons other than its officers who are not separately compensated for such
service.
CECIL FEDERAL SAVINGS BANK. Cecil Federal is a community-oriented
financial institution which commenced operations in 1959 as a Federal mutual
savings and loan association. It converted to a Federal mutual savings bank in
January 1993 and, effective November 10, 1994, Cecil Federal converted from
mutual to stock form, with the sale and issuance of 100,000 shares of its Common
Stock to the Company. Its deposits have been federally insured up to applicable
limits, and it has been a member of the Federal Home Loan Bank ("FHLB") system
since 1959. Cecil Federal's deposits are currently insured by the Savings
Association Insurance Fund ("SAIF") of the FDIC and it is a member of the FHLB
of Atlanta.
Cecil Federal's primary business, as conducted through its two offices
located in Elkton and North East, Maryland, is the origination of mortgage loans
secured by single-family residential real estate located primarily in Cecil
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less, savings accounts
and transaction accounts. To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to four-
family residences, home equity loans and land loans. Cecil Federal also makes
consumer loans including education loans, personal and commercial lines of
credit, automobile loans and loans secured by deposit accounts. Cecil Federal
purchases mortgage-backed securities and invests in other liquid investment
securities when warranted by the level of excess funds.
The Bank has two wholly owned subsidiaries, Cecil Service Corporation and
Northeastern Service Corporation. Cecil Service Corporation's primary business
is leasing agent for the North East Plaza Branch and Northeastern Service
Corporation's primary business is insurance agent for mortgage life and
disability insurance for Cecil Federal's mortgage loan customers.
1
<PAGE>
Cecil Federal's business strategy is to operate as an independent
community-oriented savings bank dedicated to residential mortgage lending, and,
to a lesser extent, construction and consumer lending, funded primarily by
retail deposits. Cecil Federal has sought to implement this strategy by (1)
emphasizing residential mortgage lending through the origination of adjustable-
rate mortgage loans; (2) investing in adjustable-rate and short-term liquid
investments; (3) reducing interest rate risk exposure by better matching asset
and liability maturities and rates; (4) maintaining asset quality; (5)
containing operating expenses; and (6) maintaining a high level of capital
combined with moderate growth.
At December 31, 1997, Cecil Federal had total assets of $63.7 million,
deposits of $53.0 million, net loans receivable of $54.7 million, cash and
investment securities of $5.4 million and retained earnings of $7.4 million.
Cecil Federal's tangible capital to assets ratio at December 31, 1997 was 11.2%.
Cecil Federal exceeds all current regulatory capital requirements.
MARKET AREA
Cecil Federal's home office is located in the town of Elkton, Maryland,
which is in Cecil County. Cecil Federal operates one full service branch office
in North East, Maryland, which is also in Cecil County. Cecil Federal considers
Cecil County to be its primary market area as substantially all of its lending
and deposit gathering functions are performed within Cecil County.
Cecil Federal attracts deposits through two full service offices in Cecil
County, Maryland each with drive-through facilities. Cecil Federal's main
office in Elkton has served as Cecil Federal's largest single source of
deposits. Elkton is the County seat and has a population of 9,800. Elkton is a
center for commerce and industry, education and health care for the County.
Cecil Federal's full service branch is located in the North East Shopping Plaza
in North East. North East has a population of 1,913 and is geographically
located in the center of Cecil County. The population of Cecil County was
71,347 as of the 1990 census.
Major employers in Cecil County are Perry Point Veterans Hospital, medical
services; W.L. Gore & Associates, GORE-TEX fabric products; Union Hospital,
medical services; Thiokol Corporation; Blue Chip Products, automotive products;
Terumo Medical, medical products; as well as State, County and Local
Governments.
Cecil County is located in the extreme northeast of the Chesapeake Bay, at
the crux of four states - Maryland, Delaware, Pennsylvania and New Jersey.
Elkton is located about 50 miles from Philadelphia and Baltimore. One-fifth of
the U.S. population resides within 300 miles of the County. Interstate I-95,
the main north-south East Coast artery, bisects the County. In addition, the
four lane U.S. 40 parallels the Interstate. Cecil County has over 200 miles of
waterfront between 5 rivers and the Chesapeake Bay.
LENDING ACTIVITIES
GENERAL. Cecil Federal's primary business is the origination of mortgage
loans secured by single-family residential real estate located primarily in
Cecil County, Maryland. To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to four-
family residences, home equity loans and land loans. Cecil Federal also makes
consumer loans including education loans, personal and commercial lines of
credit, automobile loans, and loans secured by deposit accounts.
2
<PAGE>
ANALYSIS OF LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO
Set forth below is selected data relating to the composition of Cecil
Federal's loan and mortgage-backed securities portfolio by type of loan and type
of security at the dates indicated. At December 31, 1997, Cecil Federal had no
concentrations of loans exceeding 10% of total loans other than as disclosed
below.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan
- ------------
Real estate loans:
Construction loans (1).................. $ 3,134 5.89% $ 2,920 5.87% $ 867 1.87% $ 1,132 2.89% $ 1,517 4.40%
One- to four-family residential (2)(3).. 42,840 80.51 41,800 83.97 40,273 86.64 33,421 85.30 30,325 87.94
Multi-family residential................ 1,066 2.00 100 .20 103 .22 106 .27 109 .32
Land.................................... 1,390 2.61 1,569 3.15 2,070 4.45 2,081 5.31 832 2.41
Commercial.............................. 2,470 4.64 2,675 5.37 1,635 3.52 1,347 3.44 831 2.41
Commercial business loans................. 1,621 3.05 695 1.40 613 1.32 439 1.12 289 .84
Consumer loans:
Automobile loans........................ 819 1.54 655 1.32 569 1.22 291 .74 64 .19
Education loans......................... 75 .14 87 .17 85 .18 60 .15 50 .14
Savings account loans................... 542 1.02 632 1.27 604 1.30 543 1.39 582 1.69
Home improvement loans.................. 9 .02 12 .02 23 .05 48 .12 34 .10
Personal loans.......................... 1,775 3.33 1,769 3.56 1,542 3.32 1,100 2.81 695 2.02
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Subtotal loans...................... 55,741 104.75 52,914 106.30 48,384 104.09 40,568 103.54 35,328 102.46
Less:
Loans held for sale..................... 1,363 (2.56) 1,708 3.43 671 1.44
Loans in process........................ 893 (1.68) 1,260 2.53 945 2.03 1,102 2.81 624 1.82
Discounts and other..................... 100 (.19) 48 .10 172 .37 179 .46 130 .38
Loan loss reserve....................... 174 (.32) 118 .24 114 .25 106 .27 89 .26
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans.......................... 53,211 100.00% 49,780 100.00% 46,482 100.00% $39,181 100.00% $34,485 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Mortgage-backed securities................ $ 1,817 $ 2,165 $ 872 $ 1,026 $ 545
======= ======= ======= ======= =======
Total loans and mortgage-backed
securities......................... $55,028 $51,945 $47,354 $40,207 $35,030
======= ======= ======= ======= =======
- -------------------------
</TABLE>
(1) All construction loans were for residential properties.
(2) Includes home equity loans.
(3) Includes loans held for sale.
3
<PAGE>
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The primary emphasis
of Cecil Federal's lending activity is the origination of conventional mortgage
loans on one- to four-family residential dwellings. Most loans are originated
in amounts up to $150,000, on single-family properties located in Cecil
Federal's primary market area of Cecil County, Maryland. As of December 31,
1997, loans on one- to four-family residential properties accounted for
approximately 80.51% of Cecil Federal's loan portfolio. Cecil Federal makes
conventional mortgage loans, as well as loans guaranteed by the Farmers' Home
Association ("FmHA") and loans originated under the Maryland Community
Development Administration ("CDA") loan program.
Cecil Federal's mortgage loan originations are generally for terms of 15,
20 and 30 years, amortized on a monthly basis with interest and principal due
each month. Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without penalty. Conventional
residential mortgage loans granted by Cecil Federal customarily contain "due-on-
sale" clauses which permit Cecil Federal to accelerate the indebtedness of the
loan upon transfer of ownership of the mortgaged property.
Cecil Federal uses standard Federal Home Loan Mortgage Corporation
("FHLMC") documents, to allow for the sale of loans in the secondary mortgage
market. Cecil Federal's lending policies generally limit the maximum loan-to-
value ratio on mortgage loans secured by owner-occupied properties to 90% of the
lesser of the appraised value or purchase price of the property, with the
condition that private mortgage insurance is required on loans with a loan-to-
value ratio in excess of 80%. Loans originated under FmHA and CDA programs have
loan-to-value ratios of up to 100% due to the guarantees provided by those
agencies. The substantial majority of loans in Cecil Federal's loan portfolio
have loan-to-value ratios of 80% or less.
Cecil Federal, since the early 1980s, has offered adjustable-rate mortgage
loans with terms of up to 30 years. Adjustable-rate loans offered by Cecil
Federal include loans which reprice every one, three or five years and provide
for an interest rate which is based on the interest rate paid on U.S. Treasury
securities of a corresponding term. Cecil Federal also offers a loan product
which provides for a fixed interest rate for the first ten years, and then
converts to a one year adjustable rate loan.
Cecil Federal retains all adjustable-rate mortgages it originates, which
are designed to reduce Cecil Federal's exposure to changes in interest rates.
Cecil Federal's adjustable rate mortgages include caps on increases or decreases
of 2% per year, and 6% over the life of the loan. The retention of adjustable-
rate mortgage loans in Cecil Federal's loan portfolio helps reduce Cecil
Federal's exposure to increases in interest rates. However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage loans. It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest cost to the borrower.
Cecil Federal also originates conventional fixed-rate mortgages with terms
of 15, 20 or 30 years. Cecil Federal has originated all fixed-rate mortgage
loans in recent years for sale in the secondary mortgage market, and a
substantial majority of all fixed-rate loans originated since 1990 have been
sold, primarily to the Federal Home Loan Mortgage Corporation ("FHLMC"), with
servicing retained by Cecil Federal. Management assesses its fixed rate loan
originations on an ongoing basis to determine whether the Bank's portfolio
position warrants the loans being sold or held in the Bank's portfolio.
During the year ended December 31, 1997, Cecil Federal originated $5.5
million in adjustable-rate mortgage loans and $2.2 million in fixed-rate
mortgage loans (of which $1.7 million of fixed-rate mortgage loans were sold in
the secondary mortgage market). Approximately 19.70% of all loan originations
during 1997 were refinancings of loans already in Cecil Federal's loan
portfolio. At December 31, 1997, Cecil Federal's loan portfolio included $35.3
million in adjustable rate one- to four-family residential mortgages or 66.35%
of Cecil Federal's loan portfolio, and $7.5 million in fixed rate one- to four-
family residential loans or 14.10% of Cecil Federal's portfolio.
4
<PAGE>
Cecil Federal also offers second mortgage loans. These loans are secured
by a junior lien on residential real estate. The total of first and second
liens may not exceed an 80% loan to value ratio. Loans have terms of 5, 10 and
15 years and have fixed rates. As of December 31, 1997, Cecil Federal had $4.1
million outstanding in second mortgage loans.
During the first quarter of 1995, Cecil Federal began offering home equity
lines of credit. These loans are secured by a junior lien on residential real
estate. Customers are approved for a line of credit which provides for an
interest rate which varies monthly and customers pay 2% of the balance per
month. At December 31, 1997, Cecil Federal had $1.0 million in outstanding home
equity loans.
CONSTRUCTION LENDING. Cecil Federal's construction lending has primarily
involved lending to individuals for construction of single-family residences,
although Cecil Federal does lend to builders, and has, on occasion, loaned funds
for the construction of commercial properties and multi-family real estate. All
loans for the construction of speculative sale homes have a loan value ratio of
not more than 75%. Substantially all construction loans originated convert to a
permanent loan. Cecil Federal has financed the construction of non-residential
properties on a case by case basis. At December 31, 1997, the loan portfolio
included $3.1 million in loans secured by properties under construction.
A substantial majority of Cecil Federal's construction loans (except loans
to builders) are structured to convert to permanent loans upon completion of
construction, and usually have an initial construction loan term of six months
prior to converting to a permanent loan. Cecil Federal originated $0.7 million
in construction loans during the year ended December 31, 1997. Loan proceeds
are disbursed during the construction phase according to a draw schedule based
on the stage of completion. Construction projects are inspected by Cecil
Federal's officers. Construction loans are underwritten on the basis of the
estimated value of the property as completed and loan-to-value ratios must
conform to the requirements for the permanent loan.
LAND LOANS. Cecil Federal also, from time to time, originates loans
secured by raw land. Land loans originated to individuals have a term of up to
10 years and interest rates adjust every one, three or five years. Land loans
originated to developers have terms of up to three years. All land loans have a
loan-to-value ratio not exceeding 75%. In September 1997, Cecil Federal
originated its largest loan for $725,000, which is secured by raw land. This
loan is for a one-year term with a 56% loan to value ratio. This loan is to an
experienced developer of residential building lots. In June 1997, Cecil Federal
committed to a $500,000 participation with Susquehanna Bank for the property
known as Beacon Point. The loan has a two-year term, with a 15% loan to value
ratio. This project is a joint venture between two experienced residential
building lot developers. Both loans were current as of December 31, 1997.
Cecil Federal may expand its lending on raw land, as market conditions allow, to
qualified borrowers, experienced in the development and sale of raw land. At
December 31, 1997 Cecil Federal had $1.3 million in land loans outstanding, or
2.61% of Cecil Federal's loan portfolio.
RISKS OF CONSTRUCTION LENDING AND LAND LOANS. Loans involving construction
financing and loans on raw land have a higher level of risk than loans for the
purchase of existing homes since collateral values, land values, development
costs and construction costs can only be estimated at the time the loan is
approved. Cecil Federal has sought to minimize its risk in construction lending
and in lending for the purchase of raw land by offering such financing primarily
to builders and developers to whom Cecil Federal has loaned funds in the past
and to persons who intend to occupy the completed structure. The Bank also
limits construction lending and loans on raw land to the Cecil County market
area, with which management is familiar. All construction loans and loans on
raw land in Cecil Federal's loan portfolio were performing according to their
terms at December 31, 1997.
5
<PAGE>
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. Cecil Federal's permanent
multi-family and commercial real estate loans are secured by improved property
such as office buildings, apartment buildings and retail establishments which
are located in Cecil Federal's primary market area. At December 31, 1997, loans
secured by multi-family (i.e., more than four units) totaled $1,066,000, or
2.00%, of Cecil Federal's total loan portfolio and loans secured by commercial
properties constituted approximately $2.4 million, or 4.64%, of Cecil Federal's
total loan portfolio.
Multi-family and commercial real estate loans generally have terms of 20
years, and provide for interest rate adjustments every one, three or five years.
Multi-family and commercial mortgages are generally made in amounts not
exceeding 75% of the lesser of the appraised value or purchase price of the
property. All of Cecil Federal's multi-family and commercial property loans
require regular payments of principal and interest.
Loans secured by multi-family and commercial real estate generally are
larger and involve greater risks than one- to four-family residential mortgage
loans. Because payments on loans secured by such properties are often dependent
on successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. Cecil Federal seeks to minimize these risks in a variety
of ways, including limiting the size and loan-to-value ratios of its multi-
family and commercial real estate loans and, restricting such loans to its
primary market area.
COMMERCIAL BUSINESS LOANS. Cecil Federal offers commercial business loans
and both secured and unsecured loans and letters of credit, or lines of credit
for businesses located in its primary market area. Most business loans have a
six month term, while lines of credit can remain open for longer periods. All
owners, partners and officers must sign the loan agreement. The security for a
business loan depends on the amount borrowed, the business involved and the
strength of the borrower's firm and position. At December 31, 1997 Cecil
Federal had $1,621,000 outstanding in commercial business loans.
Commercial business lending entails significant risk, as the payments on
such loans may depend upon the successful operation or management of the
business involved. Although Cecil Federal attempts to limit its risk of loss on
such loans by limiting the amount and the term, and by requiring personal
guarantees of principals of the business (when additional guarantees are deemed
necessary by management and such guarantees are allowed by regulation), the risk
of loss on commercial business loans is substantially greater than the risk of
loss from residential real estate lending.
CONSUMER LENDING. Consumer loans comprise the second largest category of
loans outstanding for Cecil Federal. Cecil Federal's consumer loans consist of
automobile loans, savings account loans, education loans and home improvement
loans and other consumer loans. At December 31, 1997, the consumer loan
portfolio totaled $3.2 million, or 6.05%, of total loans. Consumer loans are
generally offered for terms of up to five years at fixed interest rates.
Management expects to continue to promote consumer loans as part of its strategy
to provide a wide range of personal financial services to its customers and as a
means to increase the yield on Cecil Federal's loan portfolio.
Cecil Federal makes loans for automobiles and recreational vehicles, both
new and used, directly to the borrowers. The loans can be for up to 100% of the
purchase price or the retail value listed by the National Automobile Dealers
Association. The terms of the loans are determined by the age and condition of
the collateral. Collision insurance policies are required on all these loans,
unless the borrower has substantial other assets and income. At December 31,
1997, the total amount of automobile loans was $819,000.
Cecil Federal makes savings account loans for up to 90% of the amount of
the depositor's savings account balance. The maximum amount of the loan takes
into consideration the amount of interest due. The term of the loan is either
interest due monthly on demand, or a term loan not to exceed 5 years. The
interest rate is 2% higher than the rate being paid on the savings account.
6
<PAGE>
Cecil Federal's education loans are made to existing deposit customers, in
amounts of up to $10,000, and are paid out over four years, with $2,500
disbursed per year. Interest is payable annually until the student leaves
school and amortization over an eight year period then begins.
Cecil Federal also makes other consumer loans, which may or may not be
secured. The term of the loans usually depends on the collateral. Unsecured
loans usually do not exceed $100,000 and have a term of no longer than 12
months. At December 31, 1997, the total amount of other consumer loans (which
consist of personal loans) was $1,775,000.
Consumer loans are generally originated at higher interest rates than
residential mortgage loans but also tend to have a higher risk than residential
loans due to the loan being unsecured or secured by rapidly depreciable assets.
Despite these risks, Cecil Federal's level of consumer loan delinquencies
generally has been low. No assurance can be given, however, that Cecil
Federal's delinquency rate on consumer loans will continue to remain low in the
future.
MORTGAGE-BACKED SECURITIES. Due to reduced opportunities for loan
originations in Cecil Federal's market area and pursuant to its asset/liability
management strategy, Cecil Federal has invested excess funds in mortgage-backed
securities. At December 31, 1997, the total investment in mortgage-backed
securities was $1,817,000. In April 1994, Cecil Federal purchased $750,000 in
fixed-rate FHLMC participation certificates with a maturity of 5 years, an
estimated life of 3 years, yielding approximately 6.0%. In September 1996, the
Bank also purchased $1,750,000 in fixed-rate participation certificates with a
maturity of 5 years, an estimated life of 3 years, yielding approximately 6.82%.
Prepayments in Cecil Federal's mortgage-backed securities portfolio may be
affected by declining and rising interest rate environments. In a low and
falling interest rate environment, prepayments would be expected to increase.
In such an event, Cecil Federal's fixed-rate securities purchased at a premium
price could result in actual yields that are lower than anticipated yields.
Additionally, the increased principal payments received may be subject to
reinvestment at lower rates. Conversely, in a period of rising rates,
prepayments would be expected to decrease, which would make less principal
available for reinvestment at higher rates. Cecil Federal has historically
invested in mortgage-backed securities as an alternative investment to
supplement its lending efforts and maintain compliance with certain regulatory
requirements. See "Regulation -- Qualified Thrift Lender Test." Further, under
the OTS's risk-based capital requirement, FHLMC mortgage-backed securities have
a risk weight of 20%, in contrast to the 50% risk weight carried by one- to
four-family performing residential loans. See "Regulation of the Bank --
Regulatory Capital Requirements." Mortgage-backed securities may also be used
as collateral for borrowings and through repayments, as a source of liquidity.
Further, since they have relatively short terms, Cecil Federal's mortgage-backed
securities are helpful in limiting Cecil Federal's interest rate risk. Cecil
Federal's mortgage-backed securities purchases decreased in recent months in
response to increased loan demand.
7
<PAGE>
LOAN MATURITY SCHEDULE
The following table sets forth certain information at December 31, 1997
regarding the dollar amount of loans maturing in Cecil Federal's portfolio based
on their contractual terms to maturity, including scheduled repayments of
principal. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due after Due after Due after
Due during the year 3 through 5 through 10 through Due after 15
ending December 31, 5 years after 10 years after 15 years after years after
---------------------- December 31, December 31, December 31, December 31,
1998 1999 2000 1997 1997 1997 1997 Total
------ ------ ------ ------------- -------------- -------------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage (1)(2) $ 400 $ 794 $ 188 $ 836 $4,357 $5,490 $35,701 $47,766
Real estate construction (1).. 2,734 400 -- -- -- -- -- 3,134
Consumer and commercial
business................. 2,321 481 629 1,120 290 -- -- 4,841
------ ------ ----- ------ ------ ------ ------- -------
Total.................. $5,455 $1,675 $ 817 $1,956 $4,647 $5,490 $35,701 $55,741
====== ====== ===== ====== ====== ======= ======== =======
- -------------------------
</TABLE>
(1) Loans are not net of loans in process and discounts.
(2) Includes loans held for sale.
The next table sets forth at December 31, 1997, the dollar amount of all
loans due after December 31, 1997 which have predetermined interest rates and
have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rates Adjustable Rates
------------- ----------------
(In thousands)
<S> <C> <C>
Real estate mortgage...... $ 9,705 $38,061
Real estate construction.. 3,134 --
Consumer and commercial
business................. 3,391 1,450
------- -------
Total................... $16,230 $39,511
======= =======
</TABLE>
8
<PAGE>
LOAN SOLICITATION AND PROCESSING. Upon receipt of a loan application from
a prospective borrower, a credit report and verifications are ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing. An appraisal of the real estate intended to secure the
proposed loan is undertaken by a qualified fee appraiser approved by Cecil
Federal. The Board of Directors of Cecil Federal has the responsibility and
authority for general supervision over the lending policies of Cecil Federal.
The Board has established written lending policies for Cecil Federal and has
delegated to its Loan Committee the authority to approve all loans of up to
$200,000. Secured loans of up to $50,000 and unsecured loans of up to $25,000
may be approved by Chief Executive Officer Mary Halsey or Chief Operating
Officer Brian Hale. Secured loans of up to $25,000 and unsecured loans of up to
$15,000 may be approved by Vice President Feltman. Assistant Secretary
Slijepcevic may approve secured loans of up to $25,000 and unsecured loans up to
$5,000. Branch managers may approve secured loans up to $10,000 and unsecured
loans up to $2,500. The Loan Committee consists of Chief Executive Officer
Halsey, Senior Vice President Hale, Vice President Feltman, two or three
directors and the chairman of the Appraisal Committee. All loans over $200,000
must be approved by the full Board of Directors. Interest rates on approved
loans are subject to change if the loan is not funded within 60 days after
approval, unless a written commitment has been made for a longer period. It has
been management's experience that substantially all approved loans are funded.
The aggregate amount of loans which a federal institution may make on the
security of liens on non-residential real property may not exceed 400% of the
institution's capital as determined under the capital standards mandated by
FIRREA. In addition, FIRREA authorizes the Director of OTS to permit federal
savings institutions to exceed the 400% of capital limit in certain
circumstances. This restriction has not had a material impact on Cecil
Federal's operations.
With certain limited exceptions, the maximum amount the Bank may lend to
any borrower (including certain related entities of the borrower) at any one
time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily marketable collateral. The Home Owners' Loan Act
("HOLA") additionally authorizes savings institutions to make loans to one
borrower, for any purpose, in an amount not to exceed $500,000 or, by order of
the Director of the OTS, in an amount not to exceed the lesser of $30,000,000 or
30% of unimpaired capital and surplus to develop residential housing, provided
(i) the purchase price of each single-family dwelling in the development does
not exceed $500,000, (ii) the savings institution is in compliance with the
fully phased-in capital requirements, (iii) the loans comply with applicable
loan-to-value requirements, and (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus. HOLA
also authorizes loans to any one borrower to finance sales of real property
acquired in satisfaction of debts in an amount up to 50% of unimpaired capital
and surplus. Loans-to-one-borrower limits do not apply to purchase money notes
taken from the purchaser of real property acquired by the institution in
satisfaction of debts previously contracted if no new funds are advanced to the
borrower and the savings association is not placed in a more detrimental
position as the result of such sale. Under these limits, at December 31, 1997,
Cecil Federal's loans-to-one borrower cannot exceed $1,102,850. At December 31,
1997, the largest amount loaned or committed to one borrower by Cecil Federal
was $1,159,400 which was in compliance with the Bank's loan to one borrower
limit at that time. This amount consisted of 19 single family dwellings and one
non-residential property. At December 31, 1997, the second largest loan or
committed to one borrower was $986,400. This amount consisted of 13 single
family dwellings and one non-residential property.
LOAN ORIGINATIONS AND SALES. Loan originations are derived from a number
of sources. Residential mortgage loan originations primarily come from walk-in
customers and referrals by realtors, depositors and borrowers. Applications are
taken at both offices, but are processed in Cecil Federal's main office, and
submitted for approval, as noted above.
Cecil Federal has not purchased loans in the secondary mortgage market.
All fixed-rate loans are originated according to FHLMC guidelines and, depending
on market conditions, may be sold to FHLMC after origination. Cecil Federal
retains servicing on all loans sold.
9
<PAGE>
Set forth below is a table showing Cecil Federal's loan and origination,
purchase and sale activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
(In thousands)
Loans originated:
Real estate loans:
Construction loans......... $ 708 $ 2,083 $ 669
One- to four-family........ 13,511 14,674 14,324
Multi-family............... 350 -- --
Non-residential and other.. 2,486 1,627 958
Consumer loans.............. 2,435 2,774 2,403
Commercial loans............ 1,330 135 715
------- ------- -------
Total loans originated..... $20,820 $21,293 $19,069
======= ======= =======
Loans sold:
Whole loans................. $ 3,040 $ 4,103 $ 1,046
------- ------- -------
Total loans sold........... $ 3,040 $ 4,103 $ 1,046
======= ======= =======
</TABLE>
INTEREST RATES AND LOAN FEES. Interest rates charged by Cecil Federal on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan interest rates reflect factors such as general
market interest rate levels, the supply of money available to the financial
institutions industry and the demand for such loans. These factors are in turn
affected by general economic conditions, the monetary policies of the Federal
government, including the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), and general supply of money in the economy.
In addition to interest earned on loans, Cecil Federal receives fees in
connection with loan commitments and originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period with the volume and type of loans
originated, which in turn is dependent on prevailing mortgage interest rates and
their effect on the demand for loans in the markets served by Cecil Federal.
Cecil Federal also receives servicing fees of .25% to .375% of the loan amount
of the loans that it services. At December 31, 1997, Cecil Federal was
servicing $18.8 million in loans for other financial institutions. For the
years ended December 31, 1997, 1996 and 1995 Cecil Federal recognized servicing
income of $42,100, $37,700 and $36,000, respectively, and total fee income of
$184,000, $188,000 and $157,000, respectively.
NON-PERFORMING LOANS AND OTHER PROBLEM ASSETS. Management reviews Cecil
Federal's portfolio on a regular basis. Cecil Federal's collection procedures
provide that when a loan becomes 10 days past due a written notification of the
late payment is sent. When the loan is past due 30 days, the borrower is
contacted by telephone, and payment is requested. After 45 days past due, a
property inspection and customer visit takes place. If payment is not received
by the time the loan is 90 days past due, the loan is placed on non-accrual
status, the borrower is contacted again, and efforts are made to formulate an
affirmative plan to cure the delinquency. After a loan becomes past due 60
days, Cecil Federal also provides a final notice that it will initiate legal
proceedings in 30 days, after which foreclosure procedures commence. Loans are
charged-off when management concludes that they are uncollectible.
Real estate acquired by Cecil Federal as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of its unpaid principal
balance or fair value. Any required write-down of the loan to its fair value
upon foreclosure is charged against the allowance for losses. Past OTS
examinations of general reserves have resulted in them being "minimally
adequate." In response, Cecil Federal, based on Management's evaluation of the
composition of its loan portfolio, is currently increasing its reserves to
provide a more adequate reserve against future possible losses and
delinquencies.
10
<PAGE>
The following table sets forth information with respect to Cecil Federal's
non-performing assets at the dates indicated. At the dates shown, Cecil
Federal, had no restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Residential real estate......................... $579,632 $260,060 $216,063 $14,896 $47,511
Consumer........................................ -- -- -- -- --
-------- -------- -------- ------- -------
Total.......................................... $579,632 $260,060 $216,063 $14,896 $47,511
======== ======== ======== ======= =======
Accruing loans which are contractually past
due 90 days or more:
Residential real estate......................... $100,596 $ -- $ -- $ -- $ --
Consumer........................................ 22,836 -- -- -- 555
-------- -------- -------- ------- -------
Total.......................................... $123,432 $ -- $ -- $ -- $ 555
======== ======== ======== ======= =======
Total of nonaccrual and 90 days past
due loans..................................... $703,064 $260,060 $216,063 $14,896 $48,066
======== ======== ======== ======= =======
Percentage of total loans........................ 1.32% .50% .46% .04% .14%
======== ======== ======== ======= =======
Other non-performing assets...................... $171,229 $ -- $ 73,000 $73,000 $73,000
======== ======== ======== ======= =======
- -------------------------
</TABLE>
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely. Payments received on a
non-accrual loan are either applied to the outstanding principal balance or
recorded as interest income, depending on assessment of the collectibility
of the loan.
Except as discussed below, at December 31, 1997, Cecil Federal did not have
any loans which were not currently classified as non-accrual, 90 days past due
or restructured but where known information about possible credit problems of
borrowers caused management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and would result in
disclosure as non-accrual, 90 days past due or restructured.
At December 31, 1997, Cecil Federal's nonaccruing loans and accruing loans
more than 90 days past due totaled $703,064, which consisted of 13 single-family
residential properties. During the year ended December 31, 1997, gross interest
income of $31,541 would have been recorded on loans accounted for on a non-
accrual basis if such loans had been current throughout the respective period.
Four of the existing delinquent single-family residential properties, totaling
$328,000, are currently in bankruptcy.
ASSET CLASSIFICATION AND ALLOWANCE FOR LOAN LOSSES. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general and specific allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish a specified
allowance in the amount of the portion of the asset classified loss, or charge
off such amount. An asset which does not currently warrant classification, but
which possesses weaknesses or deficiencies deserving close attention, is
required to be designated as "special mention." Currently, general loss
allowances established to cover losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital. See "Regulation of the Bank -- Regulatory Capital Requirements."
11
<PAGE>
In originating loans, Cecil Federal recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. General allowances are made pursuant to
management's assessment of the risk in Cecil Federal's loan portfolio as a
whole. Specific allowances are provided for individual loans when ultimate
collection is considered questionable by management after reviewing the status
of loans which are contractually past due and considering the net realizable
value of the security for the loan. Management continues to actively monitor
Cecil Federal's asset quality and to charge off loans against the allowance for
loan losses when appropriate, or to provide specific loss reserves when
necessary. Based on these factors, Cecil Federal contributes to its general
loan loss reserve as it considers necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions vary from the assumptions used in making the initial determinations.
In December 1993 the banking regulatory agencies, including the OTS,
adopted a policy statement regarding maintenance of an adequate allowance for
loan and lease losses and an effective loan review system. This policy includes
an arithmetic formula for checking the reasonableness of an institution's
allowance for loan loss estimate compared to the average loss experience of the
industry as a whole. Examiners will review an institution's allowance for loan
losses and compare it against the sum of (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is classified as
substandard; and (iii) for the portions of the portfolio that have not been
classified (including those loans designated as special mention), estimated
credit losses over the upcoming twelve months given the facts and circumstances
as of the evaluation date. This amount is considered neither a "floor" nor a
"safe harbor" of the level of allowance for loan losses an institution should
maintain, but examiners will view a shortfall relative to the amount as an
indication that they should review management's policy on allocating these
allowances to determine whether it is reasonable based on all relevant factors.
The following table sets forth an analysis of Cecil Federal's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1996 1994 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............. $ 118 $ 114 $ 106 $ 89 $ 67
----- ----- ----- ----- -----
Loans charged-off:
Residential real estate mortgage loans... 7 -- -- -- --
Consumer................................. 49 119 32 25 9
----- ----- ----- ----- -----
Total charge-offs.......................... 56 119 32 25 9
----- ----- ----- ----- -----
Recoveries:
Residential real estate mortgage loans... -- -- -- -- --
Consumer................................. 25 20 5 8 3
----- ----- ----- ----- -----
Total recoveries........................... 25 20 5 8 3
----- ----- ----- ----- -----
Net loans charged-off...................... 31 99 27 17 6
----- ----- ----- ----- -----
Provision for loan losses.................. 87 103 35 34 28
----- ----- ----- ----- -----
Balance at end of period................... $ 174 $ 118 $ 114 $ 106 $ 89
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period............ .06% .04% .06% .04% .02%
===== ===== ===== ===== =====
</TABLE>
12
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ---------------- -----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
- -------------
Real estate loans:
Construction loans............... $ 7,100 5.89% $ 8,000 5.87% $ -- 1.87% $ -- 2.89% $ -- 4.40%
One- to four-family residential.. 63,000 80.51 31,200 83.97 85,500 86.64 79,500 85.30 66,750 87.94
Multi-family residential......... 4,000 2.00 -- .20 -- .22 -- .27 -- .32
Land............................. 10,200 2.61 7,000 3.15 -- 4.45 -- 5.31 -- 2.41
Commercial....................... 18,400 4.64 8,000 5.37 -- 3.52 -- 3.44 -- 2.41
Commercial loans................... 24,200 3.05 9,000 1.40 -- 1.32 -- 1.12 -- .84
Automobiles........................ -- 1.54 -- 1.32 -- 1.22 -- .74 -- .19
Education loans.................... -- .14 -- .17 -- .18 -- .15 -- .14
Savings account loans.............. -- 1.02 -- 1.27 -- 1.30 -- 1.39 -- 1.69
Home improvement loans............. -- .02 -- .02 -- .05 -- .12 -- .10
Personal loans..................... 47,100 3.33 54,800 3.56 28,500 3.32 26,500 2.81 22,250 2.82
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
174,000 104.75 118,000 106.30 114,000 104.09 106,000 103.54 89,000 102.46
Less:
Loans held for sale.............. -- (2.56) -- 3.43 -- 1.44
Loans in process................. -- (1.68) -- 2.53 -- 2.03 -- 2.81 -- 1.82
Discounts and other............ -- (.19) -- .10 -- .37 -- .46 -- .38
Loan loss reserve................ -- (.32) -- .24 -- .25 -- .27 -- .26
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total allowance for loan losses.... $174,000 100.00% $118,000 100.00% $114,000 100.00% $106,000 100.00% $89,000 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======= ======
</TABLE>
13
<PAGE>
INVESTMENT ACTIVITIES. Cecil Federal is required under federal regulations
to maintain a minimum amount of liquid assets, which can be invested in
specified short-term securities, and is also permitted to make certain other
investments. See "Regulation." It has generally been Cecil Federal's policy to
maintain a liquidity portfolio substantially in excess of the amount required to
satisfy regulatory requirements. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, Management's judgment as
to the attractiveness of the yields then available in relation to other
opportunities, its expectations of the level of yield that will be available in
the future and its projections as to the short term demand for funds to be used
in Cecil Federal's loan origination and other activities.
The general objectives of Cecil Federal's investment policy are to (i)
maintain liquidity levels sufficient to meet the operating needs of Cecil
Federal and applicable regulatory requirements, (ii) minimize interest rate risk
by managing the repricing characteristics of Cecil Federal's assets and
liabilities, (iii) reduce credit risk by investing primarily in U.S. Treasury
and agency securities and (iv) absorb excess liquidity when loan demand is low
and/or deposit growth is high. Cecil Federal's investment activities are
conducted by senior management (specifically Chief Executive Officer Halsey and
supervised by the Board of Directors. Investments are governed by an investment
policy adopted by the Board, which currently provides for maintenance of an
investment portfolio for the purposes of providing earnings, ensuring a minimum
liquidity reserve and facilitating Cecil Federal's asset/liability management
objectives (e.g., limiting the weighted average terms to maturity or repricing
of Cecil Federal's interest-earning assets). In accordance with the policy,
management has primarily invested in U.S. Treasury, government and agency
securities and mutual funds.
Cecil Federal carries its investments at cost as adjusted for discounts and
unamortized premiums. Cecil Federal's intention is to hold all investments to
maturity and Cecil Federal does not currently foresee any conditions that would
require any sales of its investments. For additional information, see Notes 3
and 5 of Notes to Consolidated Financial Statements.
The following table sets forth the carrying value of Cecil Federal's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996 1995
--------------- ---------- ----------
<S> <C> <C> <C>
Investment securities:
U.S. government and agency securities..... $2,997,516 $2,490,069 $2,000,015
Other..................................... 528,043 496,358 247,724
---------- ---------- ----------
Total investment securities............. 3,525,559 2,986,427 2,247,739
Federal funds sold.......................... -- -- 100,000
Interest-earning deposits and certificates
of deposit................................. 880,809 502,207 1,036,527
FHLB stock.................................. 438,100 422,900 422,900
---------- ---------- ----------
Total investments...................... $4,844,468 $3,911,534 $3,850,166
========== ========== ==========
</TABLE>
14
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Cecil Federal's investment portfolio at
December 31, 1997.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
---------------- ----------------- ----------------- ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for
sale (1):
U.S. government and
agency securities........ $ -- --% $ -- --% $ -- --% $ -- --% $ -- $ -- --%
Other..................... 528 5.80 528 525 5.80
Interest-earning deposits
and certificates of
deposits.................. -- -- -- -- -- -- -- -- -- -- --
FHLB stock................ -- -- -- -- -- -- -- -- -- -- --
------ ------- ------- ------- ------ ------
Total.................... $ 528 5.80% $ -- -- $ -- -- $ -- -- $ 528 $ 525 5.80%
====== ==== ======= ======= ======= ====== ====== ====
Securities held to
maturity (1):
U.S. government and
agency securities........ $2,998 5.72% $ -- -- $ -- -- $ -- -- $2,998 $2,997 5.72
Other..................... -- -- -- -- -- -- -- -- -- -- --
Interest-earning deposits
and certificates of
deposits................. 881 8.57 -- -- -- -- -- -- 881 881 8.57
FHLB stock................ 438 7.13 -- -- -- -- -- -- 438 438 7.13
------ ------- ------- ------- ------ ------
Total.................... $4,317 5.75 $ -- -- $ -- -- $ -- -- $4,317 $4,316 5.75
====== ======= ======= ======= ====== ======
</TABLE>
15
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Cecil Federal's funds for
lending and other investment purposes. In addition to deposits, Cecil Federal
derives funds from loan principal repayments and interest payments and maturing
investment securities. Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources, or on a longer term basis for general
business purposes. Cecil Federal primarily utilizes advances from the Federal
Home Loan Bank of Atlanta for borrowings.
DEPOSITS. Deposits are attracted principally from within Cecil Federal's
primary market area through the offering of a variety of deposit instruments,
including savings accounts and certificates of deposit ranging in term from 91
days to 60 months, as well as regular checking, NOW, passbook and money market
deposit accounts. Deposit account terms vary, principally on the basis of the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate. Cecil Federal also offers individual retirement accounts
("IRAs").
Cecil Federal's policies are designed primarily to attract deposits from
local residents. Cecil Federal does not accept deposits from brokers due to the
volatility and rate sensitivity of such deposits. Interest rates paid, maturity
terms, service fees and withdrawal penalties are established by Cecil Federal on
a periodic basis. Determination of rates and terms are predicated upon funds
acquisition and liquidity requirements, rates paid by competitors, growth goals
and federal regulations.
16
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Cecil Federal between the dates
indicated.
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
Balance at From Balance at From Balance at
December 31, % December 31, December 31, % December 31, December 31, %
1997 Deposits 1996 1996 Deposits 1995 1995 Deposits
------------ --------- ------------- ------------ --------- ------------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Regular checking...... $ 1,434 2.68% $ 515 $ 919 1.92% $ 232 $ 687 1.53%
NOW accounts.......... 5,038 9.41 1,209 3,829 8.03 152 3,677 8.20
Passbook.............. 8,102 15.13 (699) 8,801 18.46 (663) 9,464 21.10
Statement savings..... 1,274 2.38 25 1,249 2.62 641 608 1.36
Commercial checking... 58 .11 33 25 .05 2 23 .05
Money market.......... 2,649 4.95 31 2,618 5.49 (408) 3,026 6.75
Christmas club........ 79 .15 (1) 80 .17 10 70 .15
91 day CD............. 6,224 11.62 1,904 4,320 9.06 1,497 2,823 6.29
6 month CD............ 4,919 9.19 915 4,004 8.40 1,271 2,733 6.09
1 year CD............. 5,656 11.12 691 5,265 11.04 (461) 5,726 12.77
18 month CD........... 2,447 4.57 446 2,001 4.20 (280) 2,281 5.09
30 month CD........... 2,499 4.67 238 2,261 4.74 (22) 2,283 5.09
42 month CD........... 52 .10 (125) 177 .37 7 170 .38
60 month CD........... 4,225 7.89 246 3,979 8.35 274 3,705 8.26
18 month IRA CD....... 7,520 14.05 508 7,012 14.71 (74) 7,086 15.80
14 month variable CD.. 1,061 1.98 (78) 1,139 2.39 649 490 1.09
------- ------ ------ ------- ------ ------ ------- ------
$53,537 100.00% $5,858 $47,679 100.00% $2,827 $44,852 100.00%
======= ====== ====== ======= ====== ====== ======= ======
</TABLE>
17
<PAGE>
SAVINGS PORTFOLIO
Savings deposits in Cecil Federal at December 31, 1997 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Percentage of
Rate * Term Category Amount Balances Total Savings
- ---------------- --------- ----------------------------- ------- -------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
0 % None Regular checking $ 50 $ 1,434 2.68%
1.98 None NOW Accounts 50 5,038 9.41
3.00 None Statement Savings 10 1,274 2.38
3.00 None Passbook Accounts 10 8,102 15.13
3.00 None Money Market Deposit Accounts 2,500 2,649 4.95
3.00 1 year Club Accounts 1 79 .15
Certificates of Deposit
-----------------------------
4.00 91 days 91-day certificate 500 6,224 11.62
5.55 14 month Variable Rate/Fixed Term 10,000 1,061 1.98
5.25 12-month Fixed-Term, Fixed-Rate 500 5,956 11.12
5.59 30-month Fixed-Term, Fixed-Rate 500 2,499 4.67
5.45 18-month Fixed-Term, Fixed-Rate 500 2,447 4.57
5.65 60-month Fixed-Term, Fixed-Rate 500 4,225 7.89
5.45 18-month 18-Month IRA Accounts 500 7,520 14.05
5.12 182 days 6-month Money Market 500 4,919 9.19
5.50 42 months Fixed-Term, Fixed-Rate 500 52 .10
------- ------
$53,537 100.00%
======= ======
- -------------------------
</TABLE>
* Represents weighted average interest rate.
TIME DEPOSITS BY RATES
The following table sets forth the time deposits in Cecil Federal
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
2 - 3.99% (1)... $ 79 $ 242 $ 261
4 - 5.99%....... 27,513 25,163 16,868
6 - 7.99%....... 7,390 4,833 10,226
8 - 9.99% (2)... -- -- 12
------- ------- -------
$34,982 $30,238 $27,367
======= ======= =======
- -------------------------
</TABLE>
(1) Includes Club Accounts.
(2) There are no officers or directors of Cecil Federal earning over 8% on
their deposits.
18
<PAGE>
TIME DEPOSIT MATURITY SCHEDULE
The following table sets forth the amount and maturities of time deposits
at December 31, 1997.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- --------------------- -------- --------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
2 - 3.99% (1).. $ 79 $ -- $ -- $ -- $ 79
4 - 5.99%...... 22,209 4,177 586 541 27,513
6 - 7.99%...... 5,159 1,157 838 236 7,390
------- ------ ------ ---- -------
$27,447 $5,334 $1,424 $777 $34,982
======= ====== ====== ==== =======
- -------------------------
</TABLE>
(1) Includes Club Accounts.
The following table indicates the amount of Cecil Federal's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
- --------------- -------------
(In thousands)
<S> <C>
Three months or less............ $2,718
Over three through six months... 3,457
Over six through twelve months.. 1,951
Over twelve months.............. 645
------
Total.......................... $8,771
======
</TABLE>
SAVINGS DEPOSIT ACTIVITY
The following table sets forth the savings activities of Cecil Federal for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
(In thousands)
Deposits........................................... $114,667 $92,077 $72,700
Withdrawals........................................ 111,302 91,349 75,528
-------- ------- -------
Net increase (decrease) before interest credited. 3,365 728 2,828
Interest credited.................................. 2,493 2,099 1,826
-------- ------- -------
Net increase (decrease) in savings deposits...... $ 5,858 $ 2,827 $ 4,654
======== ======= =======
</TABLE>
Management attributes the increase in deposits (prior to interest credited)
for the year ended December 31, 1997 to increased marketing of existing products
to current customers, and the addition of several new savings products.
19
<PAGE>
BORROWINGS. Savings deposits historically have been the primary source of
funds for Cecil Federal's lending and investment activities and for its general
business activities. Cecil Federal is authorized, however, to use advances from
the FHLB of Atlanta to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB typically would be
secured by Cecil Federal's stock in the FHLB and a portion of Cecil Federal's
mortgage loans. Cecil Federal utilized short-term advances from FHLB during the
year.
The FHLB of Atlanta functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions. As a
member, Cecil Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met.
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, Cecil Federal may invest up to 2% of
its assets in subsidiaries, with an additional investment of 1% of assets where
such investment serves primarily community, inner-city, and community
development purposes. Under such limitations, as of December 31, 1997, Cecil
Federal was authorized to invest up to approximately $1.9 million in the stock
of or in the loans to subsidiaries. In addition, institutions meeting
regulatory capital requirements and certain other tests may invest up to 50% of
their regulatory capital in conforming first mortgage loans to subsidiaries. At
December 31, 1997, Cecil Federal had $62,900 invested in its subsidiaries.
Cecil Federal's wholly owned subsidiaries, Cecil Service Corporation and
Cecil Financial Services Corporation were each established in 1971. Cecil
Service Corporation's primary business is leasing agent for the North East Plaza
Branch. The dollar amount invested in this business activity was $34,200 for
1997. On September 1, 1997, Cecil Financial Services, a service corporation of
Cecil Federal Savings Bank, began offering a full range of brokerage and
investment services in all our branches, through a partnership with UVEST
Investment Services.
With this expansion, Cecil Federal will now offer convenience in servicing
customer needs. Roger L. Owens, CLU, was hired as an investment representative.
He will provide comprehensive investment products tailored to meet current and
future individual financial needs.
The Company has partnered in this venture with UVEST Investment Services, a
registered broker-dealer and member of both the National Association of
Securities Dealers and the Securities Investment Protection Corporation (SIPC).
Headquartered in Charlotte, North Carolina, UVEST has been providing bank-based
investment services through the Southeast since 1982. The dollar amount
invested in this business activity was $28,700 for 1997.
SAIF-insured savings institutions are required to give the FDIC and the
Director of the OTS 30 days' prior notice before establishing or acquiring a new
subsidiary, or commencing any new activity through an existing subsidiary. Both
the FDIC and the Director of the OTS have authority to order termination of
subsidiary activities determined to pose a risk to the safety or soundness of
the institution. In addition, recently adopted capital requirements require
savings institutions to deduct the amount of their investments in and extensions
of credit to subsidiaries engaged in activities not permissible to national
banks from capital in determining regulatory capital compliance. See
"Regulation of the Bank -- Regulatory Capital Requirements."
COMPETITION
Cecil Federal experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings institutions,
credit unions, regional bank holding companies and commercial banks located in
its primary market area. Significant competition for the Bank's other deposit
products and services comes from money market mutual funds, brokerage
20
<PAGE>
firms, insurance companies and retail stores. The primary factors in competing
for loans are interest rates and loan origination fees and the range of services
offered by various financial institutions. Competition for origination of real
estate loans normally comes from other savings institutions, commercial banks,
mortgage bankers, mortgage brokers and insurance companies.
Cecil Federal is one of 8 financial institutions with offices in Cecil
County, Maryland. Cecil Federal's primary competition comes from those
institutions as well as numerous additional regional commercial banks and thrift
institutions, which have branch offices near Cecil Federal's market area. Many
of these financial institutions have financial resources substantially greater
than Cecil Federal.
Cecil Federal is able to compete effectively in its primary market area by
offering competitive interest rates and loan fees, and a wide variety of deposit
products and by emphasizing personal customer service and cultivating
relationships with the local businesses. Management believes that, as a result
of Cecil Federal's commitment to competitive pricing, varied products and
personal service, Cecil Federal has developed a solid base of core deposits and
Cecil Federal's loan origination activities are an asset to the community.
REGULATION OF THE BANK
As a federally chartered savings institution, Cecil Federal is subject to
extensive regulation by the OTS. The lending activities and other investments
of Cecil Federal must comply with various federal regulatory requirements. The
OTS periodically examines the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations
of the Bank because its deposits are insured by the SAIF. The Bank must file
reports with OTS describing its activities and financial condition. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the protection
of depositors. As a savings institution holding company, the Company is subject
to OTS regulation, examination, supervision and reporting requirements. Certain
of these regulatory requirements are referred to below or appear elsewhere
herein.
Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets. Regulatory tangible, core and total capital are not calculated in
accordance with generally accepted accounting principles. The OTS regulation
defines core capital as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill," less intangible assets other than certain qualifying supervisory
goodwill and certain mortgage servicing rights. At December 31, 1997, Cecil
Federal had no qualifying supervisory goodwill or mortgage servicing rights.
Tangible capital is the same as core capital, except it excludes qualifying
supervisory goodwill and other intangible assets other than certain mortgage
servicing rights.
The OTS capital rule requires that core and tangible capital be further
reduced by an amount equal to a savings institution's debt and equity
investments in any subsidiary engaged in activities not permissible for national
banks, other than a subsidiary engaged in activities undertaken as agent for
customers or in mortgage banking activities and certain subsidiary depository
institutions or their holding companies ("nonincludable subsidiary"). At
December 31, 1997, Cecil Federal had no investments in or extensions of credit
to subsidiaries engaged in activities not permissible for national banks.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require
deduction of its debt and equity investments. Adjusted total assets are reduced
by the amount of assets that have
21
<PAGE>
been deducted from capital, the portion of the savings association's investments
in subsidiaries that must be deducted from capital under the capital rules and,
for purposes of the core capital requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the amount of the savings association's high
loan-to-value ratio land loans and non-residential construction loans and equity
investments other than those deducted from core and tangible capital. At
December 31, 1997, the Bank had no high ratio land or nonresidential
construction loans and had no equity investments for which OTS regulations
require deduction from total capital.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the credit-
equivalent amount of each off-balance-sheet item after being multiplied by an
assigned risk weight. Under the OTS risk-weighting system, cash and securities
backed by the full faith and credit of the U.S. Government are given a 0% risk
weight. Mortgage-backed securities issued, or fully guaranteed as to principal
and interest, by the FNMA or FHLMC are assigned a 20% risk weight. One- to
four-family first mortgages not more than 90 days past due with loan-to-value
ratios under 80%, multi-family mortgages (maximum 36 dwelling units) with loan-
to-value ratios under 80% and average annual occupancy rates over 80%, and
certain qualifying loans for the construction of one- to four-family residences
pre-sold to home purchasers are assigned a risk weight of 50%. Consumer loans,
commercial loans, non-qualifying mortgage loans, most commercial real estate
loans, repossessed assets and assets more than 90 days past due, as well as all
other assets not specifically categorized, are assigned a risk weight of 100%.
The portion of equity investments not deducted from core or supplementary
capital is assigned a 100% risk-weight. OTS capital regulations require savings
institutions to maintain minimum total capital, consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets.
The table below presents the Bank's capital position relative to its
various regulatory capital requirements at December 31, 1997.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ------------
(Dollars in thousands)
<S> <C> <C>
Tangible capital................................ $7,150 11.23%
Tangible capital requirement.................... 955 1.50
------ -----
Excess........................................ $6,195 9.73%
====== =====
Core capital.................................... $7,150 11.23%
Core capital requirement........................ 1,910 3.00
------ -----
Excess........................................ $5,240 8.23%
====== =====
Total capital (i.e., core and
supplementary capital)......................... $7,326 18.08%
Risk-based capital requirement.................. 3,241 8.00
------ -----
Excess........................................ $4,085 10.08%
====== =====
- -------------------------
</TABLE>
(1) Based upon adjusted total assets for purposes of the tangible core capital
requirements, and risk-weighted assets for purposes of the risk-based
capital requirements.
22
<PAGE>
OTS risk-based capital rules require savings institutions with more than a
"normal" level of interest rate risk to maintain additional total capital. A
savings institution's interest rate risk is measured in terms of the sensitivity
of its "net portfolio value" to changes in interest rates. Net portfolio value
is defined, generally, as the present value of expected cash inflows from
existing assets and off-balance sheet contracts less the present value of
expected cash outflows from existing liabilities. A savings institution is
considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Institutions
with less than $300 million in assets and a risk-based capital ratio above 12%,
like the Bank, generally are exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers. Based upon calculations as of December 31, 1997, Cecil
Federal is not required to deduct an interest-rate risk capital component from
total capital.
In addition to requiring generally applicable capital standards for savings
associations, the Director of OTS is authorized to establish the minimum level
of capital for a savings association at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
association in light of the particular circumstances of the association. Such
circumstances would include a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk and certain risks
arising from non-traditional activities. The Director of OTS may treat the
failure of any savings association to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
association which fails to maintain capital at or above the minimum level
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized" institution) may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized
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institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt. In their discretion, the federal banking
regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective action provisions. If an institution's
ratio of tangible capital to total assets falls below a "critical capital
level," the institution will be subject to conservatorship or receivership
within 90 days unless periodic determinations are made that forbearance from
such action would better protect the deposit insurance fund. Unless appropriate
findings and certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized.
The federal banking regulators, including the OTS, have adopted uniform
regulations implementing the prompt corrective action provisions of FDICIA.
Under such regulations, the federal banking regulators measure a depository
institution's capital adequacy on the basis of the institution's total risk-
based capital ratio (the ratio of its total capital to risk-weighted assets),
Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted
assets) and leverage ratio (the ratio of its core capital to adjusted total
assets). Under the regulations, a savings institution that is not subject to an
order or written directive to meet or maintain a specific capital level is
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized"
savings institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the institution has a composite
1 CAMEL rating). An "undercapitalized" savings institution is an institution
that has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0% (or 3.0% if the institution has a composite 1 CAMEL rating). A
"significantly undercapitalized" savings institution is defined as an
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as an institution that has a ratio of "tangible equity" to total assets
of less than 2.0%. Tangible equity is defined as core capital plus cumulative
perpetual preferred stock (and related surplus) less all intangibles other than
qualifying supervisory goodwill and certain purchased mortgage servicing rights.
The OTS may reclassify a well capitalized savings institution as adequately
capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower capital category if the OTS determines, after notice and an
opportunity for a hearing, that the institution is in an unsafe or unsound
condition or that the institution has received and not corrected a less-than-
satisfactory rating for any CAMEL rating category. Cecil Federal is classified
as well capitalized under the prompt corrective action regulations.
24
<PAGE>
The table below presents the Bank's capital position at December 31, 1997
relative to its various minimum regulatory capital requirements under the prompt
corrective regulations.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tangible equity......................... $7,150 11.23%
Tangible equity requirement............. 955 1.50
------ -----
Excess................................ $6,195 9.73%
====== =====
Tier 1 or leverage capital.............. $7,150 11.23%
Tier 1 or leverage capital requirement.. 1,910 3.00
------ -----
Excess................................ $5,240 8.24%
====== =====
Tier 1 risk-based capital............... $7,150 11.23%
Tier 1 risk-based capital requirement... 2,547 4.00
------ -----
Excess................................ $4,603 7.23%
====== =====
Risk-based capital...................... $7,326 18.08%
Risk-based capital requirement.......... 3,241 8.00
------ -----
Excess................................ $4,085 10.08%
====== =====
- -------------------------
</TABLE>
(1) Based upon adjusted total assets for purposes of the tangible equity and
Tier 1 or leverage capital requirements, and risk-weighted assets for
purposes of the Tier 1 risk-based and risk-based capital requirements.
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the federal
banking agencies, including the OTS and the Federal Reserve Board, released
Interagency Guidelines Establishing Standards for Safety and Soundness and
published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans. The final rule and the guidelines went
into effect on August 9, 1995. The guidelines require depository institutions
to maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution's
business. The guidelines also establish certain basic standards for loan
documentation, credit underwriting, interest rate risk exposure, and asset
growth. The guidelines further provide that depository institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the appropriate federal banking agency determines
that a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A depository institution must submit an
acceptable compliance plan to its primary federal regulator within 30 days of
receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Bank already meets substantially all the standards adopted in
the interagency guidelines, and therefore does not believe that implementation
of these regulatory standards will materially affect the operations of the Bank.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS and the Federal Reserve Board,
issued proposed guidelines relating to asset quality and earnings. Under the
proposed guidelines, an FDIC insured depository institution should
25
<PAGE>
maintain systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. Management believes that
the asset quality and earnings standards, in the form proposed by the banking
agencies, would not have a material effect on the operations of the Bank.
Liquidity Requirements. Cecil Federal is required to maintain average
daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, securities of
certain mutual funds, and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable savings deposits plus short-
term borrowings. Monetary penalties may be imposed for failure to meet
liquidity requirements. The average daily liquidity and short-term liquidity
ratios of the Bank at December 31, 1997 were 11.29% and 13.33%, respectively,
substantially all of which qualified as short-term liquidity. A substantial
sustained decline in savings deposits could adversely affect the Bank's
liquidity which could result in restricted operations and additional borrowings
from the FHLB.
Deposit Insurance. The Bank is required to pay assessments based on a
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions at a level necessary to
maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured
deposits or at a higher percentage of estimated insured amounts that the FDIC
determines to be justified for that year by circumstances indicating a
significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, 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 -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
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. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
The Bank's savings deposits are insured by the SAIF, which is administered
by the FDIC. The FDIC also administers the BIF, which has the same designated
reserve ratio as the SAIF. On August 8, 1995, the FDIC lowered the deposit
insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range of from 0.31% of
insured deposits for undercapitalized BIF-insured institutions to 0.04% of
deposits for well-capitalized institutions, which constitute over 90% of BIF-
insured institutions.
For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on institutions with SAIF-assessable deposits based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of
26
<PAGE>
their SAIF-assessable deposits as of March 31, 1995. As a result of the special
assessment the Bank incurred a pre-tax expense of $270,000 during the quarter
ended September 30, 1996 and the year ended December 31, 1997.
The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings have been reduced to zero and institutions in the
lowest risk assessment classification are assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be
assessed for these obligations at the rate of 1.3 basis points. After December
31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO
payments.
Each depository institution participating in a SAIF-to-BIF conversion
transaction is required to pay an exit fee to SAIF equal to 0.90% of the
deposits transferred and an entrance fee to BIF based on the current reserve
ratio of the BIF. A savings institution is not prohibited from adopting a
commercial bank or savings bank charter if the resulting bank remains a SAIF
member.
Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender ("QTL") test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the institution ceases to be a QTL,
it must cease any activity and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. Qualified Thrift Investments consist of (i) loans,
equity positions or securities related to domestic, residential real estate or
manufactured housing and educational, small business and credit card loans; and
(ii) subject to an aggregate 20% of portfolio assets limit, shares of stock in
the FHLMC and the FNMA, loans for personal, family, household purposes, 50% of
the dollar amount of residential mortgage loans originated and sold within 90
days of origination, and 200% of an institution's investments in loans to
finance "starter homes" and loans for construction, development or improvement
of housing and community service facilities or for financing small businesses in
"credit-needy" areas. In order to maintain QTL status, the savings institution
must maintain a weekly average percentage of Qualified Thrift Investments to
portfolio assets equal to 65% on a monthly average basis in nine out of 12
months. A savings institution that fails to maintain QTL status will be
permitted to requalify once, and if it fails the QTL test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired. Failure to qualifying as a QTL results in a number of
sanctions, including the imposition of certain operating restrictions imposed on
national banks and a restriction on obtaining additional advances from the FHLB
system. Upon failure to qualify as a QTL for two years, a savings institution
must convert to a commercial bank.
27
<PAGE>
At December 31, 1997, approximately 95.69% of the Bank's assets were
invested in Qualified Thrift Investments, which was in excess of the percentage
required to qualify the Bank under the QTL test.
Limits on Loans to One Borrower. Savings institutions generally are
subject to the lending limits applicable to national banks. With certain
limited exceptions, a savings institution's loans and extensions of credit
outstanding to any borrower (including certain related entities of the borrower)
at any one time shall not exceed 15% of the unimpaired capital and surplus of
the institution. A savings institution may lend an additional amount, equal to
10% of unimpaired capital and surplus, if such loan is fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 150% of unimpaired capital and
surplus. The lending limits generally do not apply to purchase money mortgage
notes taken from the purchaser of real property acquired by the savings
institution in satisfaction of debts previously contracted if no new funds are
advanced to the borrower and the institution is not placed in a more detrimental
position as a result of the sale. Certain types of loans are excepted from the
lending limits, including loans secured by savings deposits. The loans-to-one
borrower limits have not had a significant impact on the operations of the Bank.
The Bank has no lending relationships in excess of applicable loans-to-one
borrower limits. At December 31, 1997, the Bank's regulatory loan-to-one-
borrower limit was $1,102,850, and the Bank did not have any lending
relationships in excess of this limit.
Dividend Restrictions. Under regulations of the OTS, Cecil Federal may not
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form. In addition, savings institution subsidiaries of savings and
loan holding companies are required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by Cecil Federal. Under these regulations, a savings institution that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Institution") is generally permitted without OTS
approval, after notice, to make capital distributions during a calendar year in
the amount of up to the greater of (i) 100% of its net income to date during the
calendar year plus an amount that would reduce by one-half the amount by which
its capital-to-assets ratio exceeded its fully phased-in capital requirement to
assets ratio at the beginning of the calendar year, or (ii) 75% of its net
income for the previous four quarters. A savings institution with total capital
in excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Institution") is permitted to make capital
distributions without OTS approval of between up to 75% of its net income for
the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Institution") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Institutions that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Institution. Unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
expects to be authorized to pay dividends in accordance with the provisions of
the OTS regulations discussed above as a Tier 1 Institution.
Under the OTS' prompt corrective action regulations, the Bank is also
prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with
28
<PAGE>
the issuance of additional shares in an equivalent amount and the repurchase
will reduce the institution's financial obligations or otherwise improve the
institution's financial condition.
In addition to the foregoing, earnings of Cecil Federal appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation."
Federal Home Loan Bank System. The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs provide a central credit facility primarily for member
institutions. As a member of the FHLB of Atlanta, the Bank is required to
acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at
least equal to 1% of the aggregate unpaid principal of its home mortgage loans,
home purchase contracts, and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLB of Atlanta, whichever is
greater. Cecil Federal was in compliance with this requirement with investment
in FHLB of Atlanta stock at December 31, 1997, of $438,100. The FHLB of Atlanta
serves as a reserve or central bank for its member institutions within its
assigned district. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It offers advances to members
in accordance with policies and procedures established by the FHFB and the Board
of Directors of the FHLB of Atlanta. Long-term advances may only be made for
the purpose of providing funds for residential housing finance. Cecil Federal
utilized short term advances from the FHLB of Atlanta during the year.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves equal to 3% on the first $47.8 million of transaction accounts, plus
10% on all remaining transaction accounts. This percentage is subject to
adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. At December 31, 1997, the
Bank met its reserve requirements.
REGULATION OF THE COMPANY
The Company is registered as a savings and loan holding company with the
OTS and subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank
is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Activities Restrictions. The Board of Directors of the Company presently
operates the Company as a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
holding company. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk and
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a Qualified Thrift Lender within one year
thereafter, register as, and become subject to, the restrictions applicable to a
bank holding company.
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where
29
<PAGE>
each subsidiary savings association meets the QTL test, the activities of the
Company and any of its subsidiaries (other than the Bank or other subsidiary
savings institutions) would thereafter be subject to further restrictions.
Among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity, upon prior notice to, and
no objection by the OTS, other than (i) furnishing or performing management
services for a subsidiary savings association, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the FSLIC by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the Director of
OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of OTS prior to being engaged in by a multiple holding
company.
Transactions with Affiliates. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings association.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution 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. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association. Section 106 of the Bank
Holding Company Act ("BHCA") which also applies to the Bank prohibits the Bank
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 exceptions.
Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an
executive officer and to a greater than 10% stockholder of a savings association
and certain affiliated entities of either, may not exceed, together with all
other outstanding loans to such person and affiliated entities the association's
loan to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus and an additional 10% of such capital and surplus
for loans fully secured by certain readily marketable collateral). Section
22(h) also prohibits loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater than 10%
stockholders of a savings association, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
association with any "interested" director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval if required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, the Federal Reserve Board pursuant to
Section 22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval for such extensions of
credit
30
<PAGE>
by the board of directors of the institution, and imposes reporting requirements
for and additional restrictions on the type, amount and terms of credits to such
officers. In addition, Section 106 of the BHCA prohibits extensions of credit
to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
Restrictions on Acquisitions. Savings and loan holding companies are
generally prohibited from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings association or savings and loan holding
company or substantially all the assets thereof or (ii) more than 5% of the
voting shares of a savings association or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings association, other than a subsidiary savings association,
or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
The OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may only establish an out-of-state branch under
such OTS regulation if (i) the federal association qualifies as a Qualified
Thrift Lender or a "domestic building and loan association" under (S)7701(a)(19)
of the Internal Revenue Code of 1986, as amended (the "Code") and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a Qualified Thrift
Lender or for treatment as a domestic building and loan association and (ii)
such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings association subsidiaries of
banking holding companies. Federal associations generally may not establish new
branches unless the association meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.
The BHCA specifically authorizes the Federal Reserve Board to approve an
application by a bank holding company to acquire control of any savings
association. Pursuant to rules promulgated by the Federal Reserve Board,
owning, controlling or operating a savings association is a permissible activity
for bank holding companies, if the savings association engages only in deposit-
taking activities and lending and other activities that are permissible for bank
holding companies.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the BHCA.
31
<PAGE>
TAXATION
General. The Company and its subsidiaries file a consolidated federal
income tax return on a fiscal year basis. Consolidated returns have the effect
of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
Thrift institutions are subject to the provisions of the Code in the same
general manner as other corporations. Prior to recent legislation, institutions
such as Cecil Federal which met certain definitional tests and other conditions
prescribed by the Code benefitted from certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. For purposes of the bad debt reserve deduction, loans were separated
into "qualifying real property loans," which generally are loans secured by
interests in certain real property, and nonqualifying loans, which are all other
loans. The bad debt reserve deduction with respect to nonqualifying loans was
based on actual loss experience, however, the amount of the bad debt reserve
deduction with respect to qualifying real property loans could be based upon
actual loss experience (the "experience method") or a percentage of taxable
income determined without regard to such deduction (the "percentage of taxable
income method"). Legislation recently signed by the President repealed the
percentage of taxable income method of calculating the bad debt reserve. Cecil
Federal historically has elected to use the percentage of taxable income method.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with
less than $500 million in assets will still be permitted to make deductible bad
debt additions to reserves, but only using the experience method.
The Bank's federal income tax returns have not been examined since 1991.
For further information regarding federal income taxes, see Note 10 of the Notes
to Consolidated Financial Statements in the Annual Report.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted
on August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed
on taxable income over $15.0 million. Also under provisions of RRA, a separate
depreciation calculation requirement has been eliminated in the determination of
adjusted current earnings for purposes of determining alternative minimum
taxable income, rules relating to payment of estimated corporate income taxes
were revised, and certain acquired intangible assets such as goodwill and
customer-based intangibles were allowed a 15-year amortization period.
Beginning with tax years ending on or after January 1, 1993, RRA also provides
that securities dealers must use mark-to-market accounting and generally reflect
changes in value during the year or upon sale as taxable gains or losses. The
IRS has indicated that financial institutions which originate and sell loans
will be subject to the rule.
STATE INCOME TAXATION. The State of Maryland imposes an income tax of
approximately 7% on income measured substantially the same as federally taxable
income. The Bank's state income tax returns have not been audited during the
past five fiscal years. For additional information, see Note 10 of the Notes to
Consolidated Financial Statements in the Annual Report.
32
<PAGE>
EMPLOYEES
Cecil Federal had 21 full-time employees and two part-time employees as of
December 31, 1997, none of whom was represented by a collective bargaining
agreement. Cecil Federal believes that it enjoys excellent relations with its
personnel.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth the location and certain additional
information regarding Cecil Federal's offices at December 31, 1997. Cecil
Federal owns the Elkton office and currently leases the North East office.
<TABLE>
<CAPTION>
Year Square
Opened Footage Deposits Net Book Value
--------- ------- ----------- --------------
<S> <C> <C> <C> <C>
MAIN OFFICE:
127 North Street
Elkton, Maryland 1969 3,500 $41,202,453 $297,166
LOAN CENTER
135 North Street
Elkton, MD 21922 1995 (2) 3,000 -- 78,032
BRANCH OFFICE:
108 North East Plaza
North East, Maryland 1975 (1) 2,000 12,334,520 49,996
----------- --------------
$53,536,973 $425,194
=========== ==============
- -------------
</TABLE>
(1) Original lease signed 11/74 for 20 years with five year renewals.
Currently paying $1,365 per month. A lease extension was signed 1/16/95
for 10 years with 5 year renewals.
(2) Original lease signed 5/23/95 for five years with three successive five
year renewals. Currently paying $1,700 per month.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are currently no pending legal proceedings to which Cecil Federal is
a party or to which any of its property is subject, although from time to time
Cecil Federal is involved in routine legal proceedings occurring in the ordinary
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The information contained under the section captioned "Market and Dividend
Information" in the Annual Report is incorporated herein by reference.
33
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The Independent Auditor's Report and Related Consolidated Financial
Statements and Notes thereto contained in the Annual Report are incorporated
herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- -------------------------------------------------
Information concerning the directors and executive officers of the Company
is incorporated herein by reference to the section captioned "Proposal I --
Election of Directors" in the Proxy Statement.
Based solely on a review of reports of beneficial ownership filed on Forms
3, 4 and 5, there were no delinquent filers of such reports for the fiscal year
ended December 31, 1997.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Executive
Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(b) SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
Information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities and Principal Holders
Thereof" and "Proposal I -- Election of Directors."
34
<PAGE>
(c) CHANGES IN CONTROL
------------------
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Transactions
with Management" in the Proxy Statement.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS REPORT
--------------------------------------
(1) FINANCIAL STATEMENTS. The following financial statements contained in
--------------------
the Annual Report, Exhibit 13 hereto, are incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Condition as of December 31, 1997
and 1996
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES. All schedules for which provision is
-----------------------------
made in the applicable accounting regulations of the SEC are omitted because of
the absence of conditions under which they are required or because the required
information is included in the consolidated financial statements and related
notes thereto.
(3) EXHIBITS. The following is a list of exhibits filed as part of this
--------
Annual Report on Form 10-KSB with an index to their location in the sequentially
numbered copy of this Annual Report on Form 10-KSB.
No. Description
--- -----------
3.1 Articles of Incorporation of Cecil Bancorp, Inc. *
3.2 Bylaws of Cecil Bancorp, Inc. *
4 Form of Common Stock Certificate *
10.2 Employment Agreement between Cecil Bancorp, Inc., Cecil Federal
Savings Bank and Mary Halsey *
35
<PAGE>
10.3 Cecil Bancorp, Inc. Stock Option and Incentive Plan **
10.4 Cecil Bancorp, Inc. Management Recognition Plan **
10.5 Cecil Federal Savings Bank Retirement Plan for Non-Employee
Directors ***
13 Annual Report to Stockholders for the year ended December 31, 1997
21 Subsidiaries
23 Independent Auditor's Consent
27 Financial Data Schedule
- -----------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-81374).
** Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of May 25, 1995 (File No. 0-24926).
*** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994 (File No. 0-24926).
(b) No reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this report.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CECIL BANCORP, INC.
Date: March 17, 1998 By: /s/ Mary B. Halsey
-------------------------------------
Mary B. Halsey
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By: /s/ Mary B. Halsey Date: March 17, 1998
-------------------------------------
Mary B. Halsey
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mary B. Halsey Date: March 17, 1998
-------------------------------------
Mary B. Halsey
President and Chief Executive Officer
(Principal Financial and Accounting Officer)
By: /s/ Bernard L. Siegel Date: March 17, 1998
-------------------------------------
Bernard L. Siegel
Chairman of the Board
By: /s/ Thomas L. Foard Date: March 17, 1998
-------------------------------------
Thomas L. Foard
Secretary and Director
By: /s/ William F. Burkley Date: March 17, 1998
-------------------------------------
William F. Burkley
Director
By: /s/ Howard J. Neff Date: March 17, 1998
-------------------------------------
Howard J. Neff
Director
By: /s/ Michael J. Scibinico Date: March 17, 1998
-------------------------------------
Michael J. Scibinico
Director
By: /s/ Doris P. Scott Date: March 17, 1998
-------------------------------------
Doris P. Scott
Director
By: /s/ Howard B. Tome Date: March 17, 1998
-------------------------------------
Howard B. Tome
Director
</TABLE>
37
<PAGE>
ANNEX D
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
- --------------------------------------------------------------------------------
FORM 10-QSB
[_] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from ____________ to ______________.
Commission File Number 0-24926
-------
CECIL BANCORP, INC.
-------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1883546
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
127 North Street
Elkton, Maryland 21921
---------------- -----
(Address of principal (Zip Code)
executive office)
410 398-1650
------------
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X NO
---- ----
Number of shares outstanding of common stock
as of March 31, 1998
$0.01 par value common stock 470,182 shares
- ---------------------------- --------------
class outstanding
1
<PAGE>
CECIL BANCORP, INC., AND SUBSIDIARIES
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements (Unaudited)
Consolidated Condensed Statements of
Financial Condition - March 31, 1998
and December 31, 1997 3-4
Consolidated Condensed Statements of
Operations for Three Months Ended
March 31, 1998 and 1997 5
Consolidated Condensed Statement of
Cash Flows for Three Months Ended
March 31, 1998 and 1997 6-7
Notes to Consolidated Condensed
Financial Statements 8
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-19
PART II. OTHER INFORMATION 20-22
ITEM 4. Submission of Matters to a Vote of
Security Holders
2
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Cash $ 1,912,441 $ 961,993
Cash - interest-bearing 2,913,960 880,809
Investment securities
Securities held-to-maturity 3,007,940 2,997,516
Securities available-for-sale at
estimated market value 535,217 528,043
Mortgage backed securities
Securities held to maturity 377,810 411,641
Securities available for sale at
estimated market value 1,248,749 1,405,483
Loans held for sale 1,094,031 1,362,969
Loans receivable, net 53,962,286 53,211,517
Real estate owned 317,300 171,229
Office properties, equipment and leasehold
improvements at cost, less accumulated
depreciation and amortization 642,461 659,464
Stock in Federal Home Loan Bank of
Atlanta - at cost 457,700 438,100
Accrued interest receivable 433,747 466,610
Mortgage servicing rights 102,768 103,605
Prepaid expenses 58,405 37,455
Other assets 6,964 23,796
----------- -----------
TOTAL ASSETS $67,071,779 $63,660,230
=========== ===========
</TABLE>
3
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES
Savings deposits $56,133,639 $52,953,698
Advance payments by borrowers for
property taxes and insurance 913,326 665,734
Employee stock ownership debt 269,556 269,556
Other liabilities 409,768 517,604
Deferred taxes 3,517 20,055
Advances from Federal Home Loan
Bank of Atlanta 1,750,000 1,750,000
----------- -----------
TOTAL LIABILITIES 59,479,806 56,176,647
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized: 4,000,000 shares
Issued and outstanding: 470,182
shares 4,702 4,702
Additional paid in capital 4,000,351 4,000,351
Employee stock ownership debt (269,556) (269,556)
Deferred compensation - Management
Recognition Plan (118,361) (118,361)
Retained earnings, substantially
restricted 3,963,501 3,847,661
Accumulated other comprehensive income 11,336 18,786
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,591,973 7,483,583
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $67,071,779 $63,660,230
=========== ===========
</TABLE>
4
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------
1998 1997
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
INTEREST INCOME
Loans receivable $1,169,550 $1,096,702
Mortgage-backed securities 28,611 35,582
Investment securities 39,925 29,210
Other interest-earning assets 46,424 28,207
---------- ----------
Total interest income 1,284,510 1,189,701
---------- ----------
INTEREST EXPENSE
Deposits
NOW accounts 30,633 17,244
Passbook accounts and statement savings 68,259 71,476
Money market deposit accounts 17,781 17,760
Certificates 491,978 411,304
---------- ----------
Interest expense on deposits 608,651 517,784
Borrowings 31,024 59,917
---------- ----------
Total interest expense 639,675 577,701
---------- ----------
Net interest income 644,835 612,000
Provision for loan losses 22,500 10,500
---------- ----------
Net interest income after
provision for loan losses 622,335 601,500
---------- ----------
NONINTEREST INCOME (LOSS)
Loan service charges 7,424 8,820
Dividends on FHLB stock 8,006 7,707
Gain on sale of loans 12,885 4,736
Checking account fees 34,907 27,348
Commission income 22,584
Other 12,259 21,857
---------- ----------
Total noninterest income 98,065 70,468
---------- ----------
NONINTEREST EXPENSE
Compensation and benefits 266,119 238,149
Occupancy expense 26,542 29,548
Equipment and data processing expense 52,418 46,271
SAIF deposit insurance premium 13,861 6,744
Other 117,617 111,118
---------- ----------
Total noninterest expense 476,557 431,830
---------- ----------
Income before income taxes 243,843 240,138
---------- ----------
INCOME TAXES
Current 105,179 98,976
Deferred (21,499) (11,121)
---------- ----------
Total income taxes 83,680 87,855
---------- ----------
NET INCOME $ 160,163 $ 152,283
========== ==========
OTHER COMPREHENSIVE LOSS
Unrealized losses on investment
securities, net of deferred taxes (7,450) (16,279)
---------- ----------
COMPREHENSIVE INCOME $ 152,713 $ 136,004
========== ==========
Basic earnings per common share $ .36 $ .35
========== ==========
Diluted earnings per common share $ .36 $ .35
========== ==========
Cash dividends paid per common share $ .10 $ .10
========== ==========
</TABLE>
5
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31,
---------------------------
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received on
loans and investments $ 1,394,001 $ 1,269,659
Cash paid to suppliers and employees (496,637) (414,793)
Proceeds from sale of loans 444,206 624,719
Origination of loans held for sale (323,000) (608,500)
Interest paid (639,675) (577,701)
Income taxes paid (180,050) (75,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 198,845 218,384
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturities of
investment securities 2,000,000 2,000,000
Proceeds from maturities of
mortgage-backed securities 188,617 63,624
Purchases of investment securities (2,008,750) (1,501,484)
Loans originated (4,909,425) (3,772,745)
Principal collected on loans 4,296,773 3,325,694
Purchase of real estate owned (146,071)
Purchases of office properties, equipment
and leasehold improvements (22,572)
Purchase of stock in Federal Home Loan Bank
of Atlanta (19,600) (15,200)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (598,456) 77,317
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Nets increase in demand deposits,
NOW accounts, and savings accounts 13,588,642 7,105,950
Proceeds from sales of certificates 2,374,606 2,430,776
Payments of maturing certificates of deposits (12,783,307) (8,200,617)
Increase in advance payments by
borrowers for property taxes and insurance 247,592 282,593
Dividends paid (44,323) (46,936)
Repayments to Federal Home Loan Bank of
Atlanta (1,250,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,383,210 321,766
----------- -----------
NET INCREASE IN CASH 2,983,599 617,467
CASH
Beginning of period 1,842,802 2,180,622
----------- -----------
End of period $ 4,826,401 $ 2,798,089
=========== ===========
</TABLE>
6
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Income $160,163 $152,283
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 17,003 11,430
Provision for loan losses 22,500 10,500
Amortization of investment security
premiums and discounts (1,685) (5,008)
Stock dividends (7,704) (7,380)
Decrease in loans held for sale 108,321 11,483
Decrease in accrued interest receivable 32,863 26,614
Decrease in mortgage servicing rights 837
Increase in prepaid expenses (20,950) (14,760)
(Increase) decrease in other assets 16,832 (7,314)
Increase (decrease) in other liabilities (107,836) 48,991
Decrease in deferred taxes (21,499) (8,455)
-------- --------
38,682 66,101
-------- --------
$198,845 $218,384
======== ========
</TABLE>
7
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
MARCH 31, 1998
--------------
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with instructions for Form 10-QSB and therefore, do not include
all disclosures necessary for a complete presentation of the statements of
condition, statements of operations and statements of cash flows in
conformity with GAAP. However, all adjustments which are in the opinion of
management necessary for the fair presentation of the interim financial
statements have been included. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the entire year.
(2) Earnings per Share
------------------
Earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
quarter. The weighted average number of shares of common stock outstanding
was 443,227 and 438,552 in 1998 and 1997, respectively. The weighted
average number of shares of common stock for computation of diluted
earnings per common share was 449,577 and 440,582, respectively.
(3) Other Financial Information
---------------------------
Simon, Master & Sidlow, P.A., Cecil Bancorp's independent certified public
accountants, performed a limited review of the financial data presented on
pages 1 through 5 inclusive. The review was performed in accordance with
standards for such reviews established by the American Institute of
Certified Public Accountants. The review did not constitute an audit;
accordingly, Simon, Master & Sidlow, P.A. did not express an opinion on the
aforementioned data. The financial data include any material adjustments or
disclosures proposed by Simon, Master & Sidlow, P.A. as a result of their
review.
8
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Cecil Bancorp, Inc. ("the Company") was incorporated under the laws of the State
of Maryland in July 1994 at the direction of the Board of Directors of Cecil
Federal Savings Bank (the "Bank" or "Cecil Federal") for the purpose of serving
as a savings institution holding company of Cecil Federal upon the acquisition
of all of the capital stock issued by Cecil Federal in its conversion from
mutual to stock (the "Conversion"). Substantially all of the company's assets
consist of the outstanding capital stock of Cecil Federal. The Company's
principal business is the business of Cecil Federal and its wholly owned
subsidiaries. As a result of the conversion and reorganization, the Company
issued and sold 481,361 shares of its common stock at a price of $10.00 per
share to its depositors, borrowers, stock benefit plans and the public, thereby
recognizing net proceeds of $4,315,057. The Company's common stock is registered
with the Securities and Exchange Commission ("SEC") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is classified
as a unitary savings institution holding company subject to regulation by the
Office of Thrift Supervision ("OTS") of the Department of the Treasury.
The Company is primarily engaged in the business of directing, planning and
coordinating the business activities of Cecil Federal. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Bank and its subsidiaries. In the future, the
Company may become an operating company or acquire or organize other operating
subsidiaries, including other financial institutions. Currently, the Company
does not maintain offices separate from those of Cecil Federal or employ any
persons other than its officers who are not separately compensated for such
service.
Cecil Federal is principally engaged in the business of attracting savings
deposits from the general public and investing those funds in loans for the
purchase and construction of one-to-four family residential real estate,
primarily located in Cecil County, Maryland, and in originating to a lessor
extent, land loans, commercial real estate loans, equity loans, consumer loans
and student loans. Also, during periods of reduced loan demand, the Bank invests
excess funds in mortgage-backed securities and other investment securities, such
as U.S. Treasury obligations and overnight funds in the Federal Home Loan Bank
of Atlanta.
Cecil Federal's profitability is primarily dependent upon its net interest
income, which is the difference between interest earned on its loan and
investment portfolios and the cost of funds or interest paid on deposits. Net
interest income is directly affected by the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rates earned or paid on
these balances.
To a lesser extent, the Bank's profitability is also affected by the level of
noninterest income and expense. Noninterest income consists primarily of service
fees and gains on sales of investments. Noninterest expenses include salaries
and
9
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
benefits, occupancy expenses, equipment and data processing expenses, deposit
insurance expenses and other operating expenses.
The most significant outside factors influencing the operations of Cecil Federal
and other banks include general economic conditions, competition in the local
marketplace and related monetary and fiscal policies of agencies that regulate
financial institutions. More specifically, lending activities are influenced by
the demand for real estate financing and other types of loans, which in turn are
affected by the interest rates at which such loans may be offered and other
factors affecting loan demand and funds availability, while the cost of funds
(deposits) are influenced by interest rates on competing deposits and general
market rates of interest.
FINANCIAL SERVICES
- ------------------
On September 1, 1997, Cecil Financial Services, a service corporation of Cecil
Federal Savings Bank, began offering a full range of brokerage and investment
services in all our branches, through a partnership with UVEST Investment
Services.
With this expansion, Cecil Federal will now offer maximum convenience in
servicing customer needs. Mr. Roger L. Owens, CLU, has been hired as investment
representative. He will seek to provide comprehensive investment products
tailored to meet current and future individual financial needs.
Cecil Financial, Inc. has partnered in this venture with UVEST Investment
Services, a registered broker-dealer and member of both the National Association
of Securities Dealers (NASD) and the Securities Investment Protection
Corporation (SIPC). Headquartered in Charlotte, NC, UVEST has been providing
bank-based investment services throughout the Southeast since 1982.
Year 2000 Issues
- ----------------
As the Year 2000 approaches, there is growing concern that many computers and
computer systems could malfunction. Banks, as with many other industries, could
be faced with errors in their account processing, payment systems, ATM systems,
security systems, or virtually any system controlled by a computer.
The cause is rooted in the programming of the date field within computer systems
and software. For many years, computer systems were designed to record only the
last two digits of the year in the date field in order to save costly data
storage space. This programming concept works well while we are still in the
1900's. This concept does not work well for the Year 2000, as that year could be
read by a computer to mean 1900.
Bank regulators and computer system experts are emphasizing systems and software
products be implemented and tested for Year 2000 readiness. This task is a
monumental undertaking for all parties involved from vendor service providers,
computer systems manufacturers, software providers, and finally the Bank. Cecil
Federal Savings Bank stands ready to prepare itself for the millennium.
10
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
In June 1997, the Bank prepared an action plan to begin evaluating our systems
and software products. The Bank has implemented a strategy to arrive at a
solution to meet the Year 2000 requirements.
The Bank's plan consists of the following:
Problem Awareness: The Bank is aware of the problems that could potentially
arise with the year 2000 problem. As of June 1997, the Bank began to analyze
what systems and software needed to be reviewed to prepare well in advance.
Assessment Phase: The Bank assessed and implemented a program needed to meet
system and software requirements prior to December 31, 1997. The Bank has
implemented plans that will limit its exposure to the Year 2000 problem. The
Bank has made contacts with all its third party vendors to assess the Bank's
exposure to the problem. These include those that provide Account & Item
Processing; System Hardware Setup and ATM Software; General Ledger Software; ATM
Transaction Processing; the ATM Service Provider; ATM Software; Financial
Reporting Software; Fed-Line Software; On-Line Bank Service Software; Loan Sales
Software; Loan Documentation Software; HMDA/Geocoding Software; Payroll
Processing; Computer Hardware; Spreadsheet Software; and Word Processing
Software.
All of the Bank's vendors have been proactive to the Year 2000 problem. The
Bank's vendors have in place or will have in place procedures to minimize the
Bank's risk to the Year 2000 problem by December 31, 1998.
Renovation Phase: The Bank will review the status of its vendor's systems and
software as of February 1998 and determine the processes that need to be
updated. The assessment phase will be reviewed and problem areas will be
identified.
Solutions to the problems will be discussed and procedures to eliminate the
problems will be established and reviewed with the Board of Directors and
management of the Bank. This process will be completed by March 31, 1998.
Initial steps have been completed to assure compliance with the Year 2000
problem. The Bank has contracted with its major vendor to implement a new front-
end processing system to be installed in the third quarter of 1998. This system
is already Year 2000 compliant. This system replaces our previous teller system
which was not compliant. In addition, the Bank plans to install 20 new personal
computers and two file server computers, which are also Year 2000 compliant.
These two major investments along with continued evaluation of our existing
systems and software products will provide some assurances as to compliance to
Year 2000 issues.
Validation Phase: The Bank will validate any decision making by thoroughly
assessing the systems compatibleness with the Year 2000 issues. Validations will
be recorded and presented to the Board of Directors. The target date for the
validation phase is December 31, 1998. Software and system testing will be done
on an ongoing basis through the end of 1998.
In March 1998, a Year 2000 Users' Group was established. The first meeting of
the users' group was held on April 7, 1998. The meeting outlined the efforts of
our processor to date and our processor's future plans for Year 2000
qualification. Documentation of efforts and plans are on file. On April 14,
1998, the Users' Group
11
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
met again to establish testing plans for the May 4th - May 15th customer
acceptance testing. Planned testing transactions were developed and will be
implemented at both the customer acceptance testing and the August individual
bank testing. The testing plan is very detailed and complete as to system
applications. Cecil Federal was present at both meetings and plans to take an
active role in future meetings.
During March and April 1998, our processor completed a four-week Integration
Test and a four-week System Test. Our processor completed system testing using
three customers' system files. Plans and test results will be available for
review by its customers of their testing. Although our processor and its
customers both realize that every aspect of system processing is important,
every customer will not be able to test the entire system. The bank customers
will have to rely on each others' test results. Proxy testing is a must to
complete the testing process.
On May 4, 1998 through May 15, 1998, our processor has setup customer acceptance
testing at its home office. This testing will be completed by a test group of 20
of data center customers who will test the system. Two local banks using our
data center will be present for the testing. Using the same three customers'
files that our processor used during the Integration Test and System Test, the
customer group will run online and offline processing, beginning with the date
of December 31, 1999. Depending on the progress of the testing, the group will
continue processing, concentrating on the following dates:
. Monday, January 3, 2000
. Thursday, January 15, 2000
. Monday, January 31, 2000
. Tuesday, February 1, 2000
. Tuesday, February 29, 2000
. Friday, March 31, 2000
These bank customers will be testing all aspects of the system. As test results
are completed and reviewed, any necessary changes will be corrected.
Individual banks will be testing for their processing systems in August 1998.
Testing will be done one Sunday in August. The final testing phase will be the
testing which customers must perform to be able to validate their platform
systems, teller terminals and other ancillary systems. This testing will include
suggested transactions from our processor plus any other transaction suggested
by the individual banks. The suggested transaction set is only for customer
planning purposes. The banks should develop their own transaction set to be used
in conjunction with our processor's transaction set. The bank will test
transactions against their own customer files. All test results will be
documented and distributed to customers. The documentation for all testing days
from each Data Center will be combined into a Year 2000 reporting document which
will detail all processing and reporting processes and sent to all bank
customers.
Due to the fact that Cecil Federal Savings Bank is installing and implementing
new hardware and teller platform, the Bank will have to do additional testing
after the installation at the end of the third quarter. Our processor will be
setting a future testing date for customers who will be converting to Year 2000
system upgrades after the August 1998 training dates.
In addition to our processor's system testing, ongoing testing of less critical
systems will be completed through the end of 1998. With the help of our vendors,
12
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
the Bank is upgrading and implementing many software changes that will bring
software and systems into Year 2000 compliance. This testing will be ongoing
throughout 1998.
Implementation Phase: The Bank will monitor the implementation of the Year 2000
assessment and report results to the Board of Directors. The Bank will continue
to stress with its vendors the importance of this project. The Bank will keep in
continual contact with its vendors until a final solution and implementation has
been completed. All plans are to be completed as outlined above. The
implementation phase is to be completed by December 31, 1998.
The Bank has budgeted $150,000 for the Year 2000 issues which consists of
expenditures for computer systems, computer hardware, software updates, and
installation. In addition, compliance assessment and compliance testing will be
budgeted. The impact of these expenditures are expected to have a minor effect
upon the company's results of operations, liquidity, and capital resources. The
majority of the expenditures will capital expenditures that will be depreciated
over a five-year period.
Contingency Plan: The Bank's contingency plan is to provide for a system change
to our processor's new windows based processing system. The new windows based
processing system will replace the processing system presently in use.
Presently, this system is available to the Bank. The new windows based
processing system is already Year 2000 compliant. All documentation points to
our processor bringing the present processing system into Year 2000 compliance
before the third quarter of 1998. If it looks like our processor will not bring
the present processing system into Year 2000 compliance by the end of 1998,
the Bank will decide to upgrade to the new windows based processing system. By
July 31, 1998, the conversion process will be supported by written notification
from our processor and what type of timetable will be required to perform the
conversion. The Bank has decided to remain with the present processing system
due to cost restraints and ease of implementation with the new teller system.
The move from our present processing system to the new windows based processing
system would be a conversion from what we are presently performing. The Bank
would like to take this conversion process in small steps. The new teller system
and new computer hardware is the first step in the Year 2000 compliance process.
The new windows based processing system is our processing system for the future.
ASSET/LIABILITY MANAGEMENT
- --------------------------
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread (the difference between the
weighted average interest yields earned on interest-earning assets and the
weighted average interest rates paid on interest-bearing liabilities) that can
be sustained during fluctuations in prevailing interest rates. Cecil Federal's
asset/liability management policies are designed to reduce the impact of changes
in interest rates
13
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
on its net interest income by achieving a more favorable match between the
maturities or repricing dates of its interest-earning assets and interest-
bearing liabilities. The Bank has implemented these policies by generally
emphasizing the origination of one-year, three-year and five-year adjustable
rate mortgage loans and short-term consumer lending. The bank now offers an
adjustable rate product which remains fixed for the first ten years and then
converts to a one-year adjustable. Prior to June 1994, most fixed-rate mortgage
loans offered by the Bank were originated for sale in the secondary market. From
July 1, 1994 through June 30, 1995 the bank elected to not sell fixed rate
mortgages that were originated, but chose to maintain them in its portfolio.
Management has been monitoring the retention of fixed rate loans through its
asset/liability management policy. Beginning July 1, 1995, the bank began
originating fixed rate mortgages for sale in the secondary market.
Management intends to continue to concentrate on maintaining its interest rate
spread in a manner consistent with its lending policies, which are principally
the origination of adjustable-rate mortgages, with an appropriate blend of
fixed-rate mortgage loans in its primary market area.
Comparison of Financial Condition at March 31, 1998 and December 31, 1997
- --------------------------------------------------------------------------------
The Company's assets increased by $3,411,549, or 5.4% to $67,071,779 at March
31, 1998 from $63,660,230 at December 31, 1997. The Company's emphasis on
expanding the loans receivable portfolio continued. In addition, strong deposit
growth enabled the Bank to increase its cash positions. The loans receivable
portfolio increased by $750,769, or 1.4% to $53,962,286 at March 31, 1998 from
$53,211,517 at December 31, 1997. The remainder of the Company's interest
earning assets, primarily invested for liquidity, remained constant. Cash and
interest-earning cash increased as a result of the sale of mortgage loans,
prepayments of the loan portfolio, and increased savings deposits. The Company's
stock investment in Federal Home Loan Bank of Atlanta increased by $19,600, or
4.5% to $457,700 at March 31, 1998 from $438,100 at December 31, 1997, as a
result of requirements imposed by the Federal Home Loan Bank of Atlanta. Federal
Home Loan Bank of Atlanta stock is currently paying an annualized dividend rate
of 7.25%.
The Company's liabilities increased $3,303,159, or 5.9% to $59,479,806 at March
31, 1998 from $56,176,647 at December 31, 1997. During the three months ended
March 31, 1998, the Company was able to increase savings deposits as a result of
additional marketing campaigns. Savings Deposits increased $3,179,941, or 6.0%
to $56,133,639 at March 31, 1998 from $52,953,698 at December 31, 1997. Advances
from the Federal Home Loan Bank of Atlanta remained at $1,750,000. Escrow
payments received in advance for the payment of taxes and insurance on loans
receivable increased $247,592, or 37.2% to $913,326 at March 31, 1998 from
$665,734 at December 31, 1997. Other liabilities decreased $107,836 or 20.8%
from $517,604 at December 31, 1997 to $409,768 at March 31, 1998.
The Company's stockholder's equity increased by $108,390 or 1.5% to $7,591,973
at March 31, 1998 from $7,483,583 at December 31, 1997. The increase was
primarily due to an increase in retained earnings of $115,840, or 3.0% and a
decrease in the
14
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
unrealized net holding losses on available for sale investment securities. The
Company paid its regular dividend of $.10 per share for the quarter ended March
31, 1998.
Results of Operations
- ---------------------
Three Months Ended March 31, 1998
- ---------------------------------
Net income increased $7,880, or 5.2% to $160,163 for the three months ended
March 31, 1998, from $152,283 for the same period in 1997. The annualized return
on average assets and annualized return on average equity were 0.97% and 8.45%
respectively, for the three months ended March 31, 1998. This compares to an
annualized return on average assets of 1.01% and 8.53% respectively for the same
period in 1997.
Net interest income, the Company's primary source of income, increased $32,835,
or 5.4% to $644,835 for the three months ended March 31, 1998, from $612,000 for
the three months ended March 31, 1997. The weighted average yield on all
interest earning assets decreased from 8.31% for the three months ended March
31, 1997, to 8.23% for the three months ended March 31, 1998. The weighted
average rate paid on interest bearing liabilities increased from 4.40% for the
three months ended March 31, 1997 to 4.42% for the three months ended March 31,
1998. The increase was a result of an increase in the average rate paid on
deposits along with an increase in the average balance outstanding.
Interest on loans receivable increased by $72,848, or 6.6% to $1,169,550 for the
three months ended March 31, 1998 from $1,096,702 for the three months ended
March 31, 1997. The increase is attributable to both an increase in the weighted
average yield and an increase in the average balance outstanding. The weighted
average yield increased from 8.45% for the three months ended March 31, 1997 to
8.49% for the three months ended March 31, 1998. The average balance outstanding
increased $3,216,191, or 6.2% to $55,112,974 for the three months ended March
31, 1998 from $51,896,784 for the three months ended March 31, 1997.
Interest on mortgage backed securities decreased $6,971, or 19.6% to $28,611 for
the three months ended March 31, 1998 from $35,582 for the three months ended
March 31, 1997. The decrease is a result of a decrease in the average balance
outstanding. Since September 1996, there have been no new purchases of mortgage
backed securities.
Interest on investment securities increased $10,715, or 36.7% to $39,925 for the
three months ended March 31, 1998 from $29,210 for the three months ended March
31, 1997. The increase is a result of an increase the average balance
outstanding. Interest on other investment securities increased as a result of an
increase in the average balance outstanding for the quarter. Interest on other
investments increased $1,682 or 22.8% to $9,062 for the three months ended March
31, 1998 from $7,380 for the three months ended March 31, 1997. Other
investments primarily are short term liquidity accounts with variable rates.
Interest on other interest
15
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
earning assets (primarily earnings on monies held at the Federal Home Loan Bank
and daily time deposit accounts) increased $16,535 or 79.4% to $37,362 for the
three months ended March 31, 1998 from $20,827 for the three months ended March
31, 1997.
Interest paid on savings deposits increased $90,867, or 17.5% to $608,651 for
the three months ended March 31, 1998 from $517,784 for the three months ended
March 31, 1997. The increase was the result of an increase in the average
balance outstanding along with an increase in the weighted average yield on
deposits. The average balance outstanding increased $7,150,206, or 15.0% to
$54,887,559 for the three months ended March 31, 1998 from $47,737,353 for the
same period in 1997. The weighted average yield increased from 4.32% for the
three months ended March 31, 1997 to 4.42% for the three months ended March 31,
1998. Interest expense paid on borrowings decreased $28,893, or 48.2% to $31,024
for the three months ending March 31, 1998 from $59,917 for the three months
ended March 31, 1997. The decrease was a result of a decrease in the average
balance outstanding and a slight decrease in the average cost of funds.
Provisions for loan losses increased $12,000, or 114.3% to $22,500 for the three
months ended March 31, 1998 from $10,500 for the three month period ending March
31, 1997. The Bank reported a voluntary increase in general reserves as a result
of the reassessment of reserve balances needed to provide for increased exposure
in outstanding loan categories other than one-to-four residential loans.
Noninterest income. Noninterest income increased $27,597, or 39.2% to $98,065
for the three months ended March 31, 1998 from $70,468 for the three months
ended March 31, 1997. Loan servicing fees decreased 15.8%, down $1,396 for the
three months ended March 31, 1998 over the same period in 1997. This was a
result of the decrease in balances of the servicing portfolio. Gains on sale of
loans increased $8,149, or 172.1% to $12,885 for the three month period ending
March 31, 1998 from $4,736 for the three months ended March 31, 1997. The
increase was attributable to a decrease in the secondary market rates on long-
term fixed rate loans. Commission income increased $22,584 or 100.0% for the
three months ended March 31, 1998 over the same period in 1997. The increase is
the result of the establishment of Cecil Financial Services in September 1997.
Other fees decreased $2,039 or 4.1% to $47,166 for the three months ended March
31, 1998 from $49,205 for the three months ended March 31, 1997. Decreases were
primarily attributable to decreases in fee income.
Noninterest Expense. Noninterest expense increased $44,727, or 10.4% to $476,557
for the three months ended March 31, 1998 from $431,830 for the three months
ended March 31, 1997. The Company experienced an increase in compensation and
benefits of $27,970, or 11.7% to $266,119 for the three months ended March 31,
1998 from $238,149 for the three months ended March 31, 1997. The increase can
be attributable to the hiring of a new employee for Cecil Financial Services and
annual salary increases. The Company also experienced an increase in the amount
paid to the Savings Association Insurance Fund during the three months ended
March 31, 1998. Although lower premium rates became effective January 1, 1997,
the Company's SAIF premium increased $7,117, or 105.5% to $13,861 for the three
months ended March 31,
16
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
1998 as compared to $6,744 for the three months ended March 31, 1997. This
difference is attributable to a one-time credit adjustment of $6,293 received in
the first quarter of 1997. The additional difference is due to the continued
deposit growth at the Bank.
Income Taxes. Income tax expense for the three months ended March 31, 1998 and
March 31, 1997 was $83,680 and $87,855 respectively, which equates to effective
rates of 34.3% and 36.6%, respectively.
17
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Nonperforming Assets and Problem Loans
- --------------------------------------
Management reviews and identifies all loans and investments that require
designation as nonperforming assets. These assets include: (I) loans accounted
for on a nonaccrual basis, consisting of all loans 90 or more days past due;
(ii) troubled debt restructuring; and (iii) assets acquired in settlement of
loans. The following table sets forth certain information with respect to
nonperforming assets at March 31, 1998:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Nonperforming loans:
Residential mortgage $368,552 $381,101
Consumer and other 39,396 6,400
Assets acquired in settlement of loans:
Real estate held for development and sale
Real estate held for investment and sale
Repossessed assets $317,300 $ 0
-------- --------
Total Nonperforming Assets $725,248 $387,501
======== ========
</TABLE>
Residential mortgages classified consisted of 12 loans with balances ranging
from $1,000 to $173,000. Classified consumer loans consisted of 7 loans with
balances ranging from $100 to $27,000 as of March 31, 1998. The Bank acquired
two single-family dwellings that are both under contract and pending settlement.
These assets will be dispossessed in the second quarter of 1998.
The provision for losses on loans is determined based on management's review of
the loan portfolio and analysis of borrower's ability to repay, past collection
experience, and risk characteristics.
18
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
CAPITAL ADEQUACY
- ----------------
The Company Capital adequacy refers to the level of capital required to sustain
asset growth and to absorb losses. There are currently no regulatory capital
guidelines or requirements for the Company.
The Bank, The Office of Thrift Supervision ("OTS"), which is the bank's
principal regulator, has established requirements for tangible, core and risk-
based measures of capital. As a result, the three capital measures mentioned
above were as follows at March 31, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk Based
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Available capital $7,324 $7,324 $7,522
Required capital 1,006 2,684 3,243
------ ------ ------
Excess $6,318 $4,640 $4,279
====== ====== ======
Available capital 10.91% 10.91% 18.56%
Required capital 1.50% 4.00% 8.00%
------ ------ ------
Excess 9.41% 6.91% 10.56%
====== ====== ======
</TABLE>
The Federal Deposit Improvement Act of 1991 ("FDICIA") established five capital
categories which are used to determine the rate of deposit insurance premiums
paid by insured institutions, thus introducing the concept of risk adjusted
premiums. This act has the effect of requiring weaker banks to pay higher
insurance premiums while allowing healthier, well-capitalized banks to pay lower
premiums. The following table summarizes the five capital categories and the
minimum capital requirements for each of the three capital requirements:
<TABLE>
<CAPTION>
Tangible Core Risk Based
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Well capitalized 5+% 6+% 10+%
Adequately capitalized 4%-4.99% 4%-5.99% 8%-9.99%
Undercapitalized 3%-3.99% 3%-3.99% 6%-7.99%
Significantly undercapitalized 2%-2.99% 2%-2.99% 0%-5.99%
Critically undercapitalized 0%-1.99% - -
- --------------------------------------------------------------------------------
</TABLE>
On March 31, 1998, the Bank's capital levels were sufficient to qualify it as a
well-capitalized institution, the most favorable category, allowing the Bank to
pay lower deposit insurance premiums.
19
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
PART II. Other Information: PAGE
----
Item 1. Legal Proceedings -
Not Applicable
Item 2. Changes in Securities -
Not Applicable
Item 3. Defaults Upon Senior Securities -
Not Applicable
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 5. Other Information -
Not Applicable
Item 6. Exhibits and Reports on Form 8-K -
No reports on Form 8-K were filed during the
three months ended March 31, 1998
20
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
PART II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Cecil Bancorp, Inc. Was held in April
15, 1998, at 10:00a.m. at the Swiss Inn, Elkton, Maryland, for the purpose of
electing a board of directors. Proxies for the meeting were solicited pursuant
to Section 14(a) of the Securities Exchange Act of 1934 and there was no
solicitation in opposition to management's solicitations.
All of management's nominee for directors as listed in the proxy statement were
elected with the following vote:
To serve for a three-year term:
<TABLE>
<CAPTION>
Shares Shares
Voted Shares Not
"For" "Withheld" Voted
<S> <C> <C> <C>
Michael J. Scibinico 250,247 1,000 218,935
Thomas L. Foard 248,492 2,755 218,935
</TABLE>
21
<PAGE>
CECIL BANCORP INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CECIL BANCORP, INC.
Date: May 1, 1998 By: /s/ Mary Beyer Halsey
----------------------
Mary Beyer Halsey
President
Chief Executive Officer
22
<PAGE>
[RP FINANCIAL, LC. LETTERHEAD]
__________, 1998
Board of Directors
Columbian Bank, A Federal Savings Bank
303-307 St. John Street
Havre de Grace, Maryland 21078
Members of the Board:
You have requested RP Financial, LC. ("RP Financial") to provide you with
its opinion as to the fairness from a financial point of view to the
stockholders of Columbian Bank, A Federal Savings Bank, Havre de Grace, Maryland
("Columbian"), of the Reorganization and Merger Agreement (the "Agreement"), by
and among Cecil Bancorp, Inc., a Maryland Corporation ("Cecil"), the holding
company for Cecil Federal Savings Bank, Elkton, Maryland ("Cecil Federal") and
Columbian. The Agreement is incorporated herein by reference. Unless otherwise
defined, all capitalized terms incorporated herein have the meanings ascribed to
them in the Agreement.
Summary Description of Consideration
- ------------------------------------
As fully described in the Agreement, at the Effective Date of the Merger,
each share of Columbian's common stock issued and outstanding immediately prior
to the Effective Date of the Merger, except for (i) Perfected Dissenting Shares
and (ii) shares of Columbian's Common Stock which are owned or held by Columbian
(except shares held in any 401(k) plan of Columbian or held in a fiduciary
capacity) or by Cecil or any of Cecil's subsidiaries (other than in a fiduciary
capacity) at the Effective Date shall be cancelled by virtue of the merger,
shall be converted into the Merger Consideration and exchanged for the right to
receive a number of shares of Cecil common stock (the "Exchange Ratio") as
follows: (a) if the Cecil Trading Price (to be determined as described below)
is more than $29.375, the Exchange Ratio shall be 1.5645; (b) if the Cecil
Trading Price is more than $27.00 and equal to or less than $29.375, the
Exchange Ratio shall be determined by dividing $45.96 by the Cecil Trading
Price; (c) if the Cecil Trading Price is equal to or more than $20.00 and equal
to or less than $27.00, the Exchange Ratio shall be 1.7021; or (d) if the Cecil
Trading Price is less than $20.00, the Exchange Ratio shall be determined by
dividing $34.04 by the Cecil Trading Price. The "Cecil Trading Price" shall be
equal to the average of the closing price of a share of Cecil common stock (as
reported by the "Bloomberg Business News" Service) for the last five days on
which shares of Cecil common stock were traded prior to the date of approval of
the Merger by the OTS. In lieu of fractional share interests, any holder of
Columbian common stock who would otherwise be entitled to a fractional share of
Cecil common stock will be paid the applicable cash value of such fractional
share interest, which shall be equal to the product of the fraction of the share
to which such holder would otherwise be entitled, multiplied by the Cecil
Trading Price.
<PAGE>
Board of Directors
____________, 1998
Page 2
At the Effective Date, by virtue of the Merger without any action on the
part of any holder of any option, each option to purchase or other right with
respect to shares of Columbian common stock pursuant to stock options, stock
appreciation rights or other rights, including stock awards ("Columbian
Options") granted by Columbian under its stock option plans, and which are
outstanding at the Effective Date, whether or not exercisable, shall be
converted into and become rights with respect to Cecil common stock, and Cecil
shall assume each Columbian Option, in accordance with the terms of the plan
under which it was issued and the stock option or other agreement by which it is
evidenced, except that from and after the Effective Date, (i) each Columbian
Option assumed by Cecil may be exercised solely for shares of Cecil common stock
(or cash in the case of stock appreciation rights), (ii) the number of shares of
Cecil common stock subject to such Columbian Option shall be equal to the number
of shares of Columbian common stock subject to such Columbian Option immediately
prior to the Effective Date multipled by the Exchange Ratio provided that any
fractional shares so resulting shall be rounded down to the nearest whole share,
and (iii) the per share exercise price under each such Columbian Option shall be
adjusted by dividing the per share exercise price under each such Columbian
Option by the Exchange Ratio and rounding up to the nearest cent.
RP Financial Background and Experience
- --------------------------------------
RP Financial, as part of its financial institution valuation and consulting
practice, is regularly engaged in the valuation of financial institution
securities in connection with mergers and acquisitions of thrift institutions
and commercial banks, initial and secondary offerings by financial institutions,
mutual-to-stock conversions of thrift institutions, and business valuations for
other corporate purposes for financial institutions. As specialists in the
securities of financial institutions, RP Financial has experience in, and
knowledge of, the Maryland and Mid-Atlantic markets for thrift and bank
securities and financial institutions operating therein.
Materials Reviewed
- ------------------
In rendering this fairness opinion, RP Financial reviewed the following
material: (1) the Agreement, including exhibits; (2) unaudited financial and
other information for Columbian, all with regard to balance and off-balance
sheet composition, profitability, interest rates, volumes, maturities,
trends, credit risk, interest rate risk, liquidity risk and operations:
(a) stockholder, regulatory and internal financial and other reports from 1995
through ________, 1998, (b) the most recent proxy statement, and (c) management
and Board comments regarding past and current business, operations, financial
condition, and future prospects; and (3) financial and other information for
Cecil (inclusive of Cecil Federal) including: (a) audited financial statements
reflecting the fiscal years ended December 31, 1995 through 1997, incorporated
in the 1997 Annual Report to Shareholders, (b) Annual Report on Form 10K as of
December 31, 1997, and 10-Q as of ________, 1998, (c) regulatory and internal
financial and other reports through ________, 1998, and (d) management comments
regarding past and current business, operations, financial condition, and future
prospects.
<PAGE>
Board of Directors
____________, 1998
Page 3
RP Financial reviewed financial, operational, market area and stock price
and trading characteristics for Columbian and Cecil relative to regional
publicly-traded thrift institutions, respectively, with comparable resources,
financial condition, earnings, operations and markets. RP Financial also
considered the economic and demographic characteristics in the local market
area, and the potential impact of the regulatory, legislative and economic
environments on operations for Columbian and Cecil and the public perception of
the banking industry. RP Financial also considered: (a) the financial terms,
financial and operating condition and market area of other recently completed
acquisitions of thrift institutions both regionally and in Maryland;
(b) discounted cash flow analyses for Columbian on a stand-alone basis
incorporating future prospects; and (c) the pro forma impact on Cecil of the
acquisition of Columbian, which is expected to be accounted for as a pooling of
interests.
In rendering its opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning
Columbian and Cecil furnished by the respective institutions to RP Financial for
review, as well as publicly-available information regarding other financial
institutions and economic and demographic data. Columbian and Cecil did not
restrict RP Financial as to the material it was permitted to review. RP
Financial did not perform or obtain any independent appraisals or evaluations of
the assets and liabilities and potential and/or contingent liabilities of
Columbian or Cecil.
RP Financial expresses no opinion on matters of a legal, regulatory, tax or
accounting nature or the ability of the merger as set forth in the Agreement to
be consummated. In rendering its opinion, RP Financial assumed that, in the
course of obtaining the necessary regulatory and governmental approvals for the
proposed Merger, no restriction will be imposed on Cecil that would have a
material adverse effect on the ability of the Merger to be consummated as set
forth in the Agreement.
Opinion
- -------
It is understood that this letter is directed to the Board of Directors of
Columbian in its consideration of the Agreement, and does not constitute a
recommendation to any stockholder of Columbian as to any action that such
stockholder should take in connection with the Agreement, or otherwise.
It is understood that this opinion is based on market conditions and other
circumstances existing on the date hereof.
It is understood that this opinion may be included in its entirety in any
communication by Columbian or its Board of Directors to the stockholders of
Columbian. It is also understood that this opinion may be included in its
entirety in any regulatory filing by Columbian or Cecil, and that RP Financial
consents to the summary of the opinion in the proxy materials of Columbian, and
any amendments thereto. Except as described above, this opinion may not be
summarized, excerpted from or otherwise publicly referred to without RP
Financial's prior written consent.
<PAGE>
Board of Directors
____________, 1998
Page 4
Based upon and subject to the foregoing, and other such matters considered
relevant, it is RP Financial's opinion that, as of the date hereof, the Merger
Consideration to be received by Columbian's stockholders, as described in the
Agreement, is fair to such stockholders from a financial point of view.
Respectfully submitted,
RP FINANCIAL, LC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification of directors and officers of the Company is provided under
Article VI of the Articles of Incorporation of the Company for judgments, fines,
settlements, and expenses, including attorney fees incurred in connection with
any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative if such director or officer
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Article VI of the Company's Articles of Incorporation provides that an
outside director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of his fiduciary duty as a director
and authorizes the Company to indemnify such outside director against monetary
damages for such breach to the full extent permitted by law. This provision
applies to acts or omissions occurring after the effective date of the
amendment, and does not limit liability for (i) any act or omission not in good
faith which involves intentional misconduct or a knowing violation of law, (ii)
any transaction from which the outside director derived an improper direct or
indirect financial benefit, (iii) paying a dividend or approving a stock
repurchase in violation of the Maryland Business Corporation Act or (iv) any act
or omission which violates a declaratory or injunctive order obtained by the
Company or its stockholders. For purposes of Article VI, "outside director" is
defined as any member of the Board of Directors who is not an officer or a
person who may control the conduct of the Company through management agreements,
voting trusts, directorships in related corporations or any other device or
relationship.
The Company has purchased director and officer liability insurance that
insures directors and officers against certain liabilities in connection with
the performance of their duties as directors and officers, including liabilities
under the Securities Act of 1933, as amended, and provides for payment to the
Company of costs incurred by it in indemnifying its directors and officers.
Under Maryland law, indemnification of directors and officers may be
provided for judgments, fines, settlements, and expenses, including attorney's
fees, incurred in connection with any threatened, pending, or completed action,
suit, or proceeding other than an action by or in the right of the Company. This
applies to any civil, criminal, investigative or administrative action provided
that the director or officer involved acted in good faith, in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Indemnification of directors and officers may be also provided for
judgments, fines, settlements, and expenses, including attorney's fees, incurred
in connection with any threatened, pending, or completed action, or suit by or
in the right of the corporation if such director or officer acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. However, no indemnification shall be made in
respect of any claim, issue or matter in which such person is adjudged to be
liable for negligence or misconduct in the performance of his duties to the
corporation unless the court in which the action is brought deems indemnity
proper.
The grant of indemnification to a director or officer shall be
determined by a majority of a quorum of disinterested directors, by a written
opinion from independent legal counsel, or by the stockholders.
Indemnification shall be provided to any directors and officers for
expenses, including attorney's fees, actually and reasonably incurred in the
defense of any action, suit or proceeding to the extent that he or she has been
successful on the merits.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following are filed as exhibits to this registration statement:
EXHIBIT NO. DESCRIPTION
- ---------- -----------
2/1/ Reorganization and Merger Agreement by and between Cecil
Bancorp, Inc. and Columbian Bank, A Federal Savings Bank dated
May 29, 1998
3.1/2/ Articles of Incorporation of Cecil Bancorp, Inc., as amended and
restated
3.2/2/ Bylaws of Cecil Bancorp, Inc., as amended and restated
4.1/2/ Form of Certificate of Common Stock of Cecil Bancorp, Inc.
5 Opinion of Housley Kantarian & Bronstein, P.C. regarding the
legality of the securities being registered hereby (with
consent)
8 Form of Opinion of Housley Kantarian & Bronstein, P.C. regarding
certain federal tax matters (with consent)
23.1 Consent of Simon, Master & Sidlow (with respect to the Company)
23.2 Consent of Anderson Associates (with respect to Columbian)
23.3 Consent of Housley Kantarian & Bronstein, P.C. (included in
opinions filed as Exhibits 5 and 8)
23.4 Consent of RP Financial, LC.
24 Power of Attorney (See Signature Page)
99 Form of Proxy solicited by Board of Directors of Columbian Bank,
a Federal Savings Bank
- -------------
1 Incorporated by reference to Annex A to the Prospectus/Proxy Statement
included herein.
2 Incorporated by reference to Registrant's Registration Statement on Form
S-1 (File No. 33-81374)
The Exhibit Index immediately precedes the attached exhibits.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS
ITEM 512 OF REGULATION S-K.
Rule 415 Offering. 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: 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.
(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.
Filings Incorporating Subsequent Exchange Act Documents By Reference.
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement 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.
Incorporated Annual and Quarterly Reports. The undersigned registrant
hereby undertakes to deliver or cause to be delivered with the prospectus, to
each person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X is not set
forth in the prospectus, to deliver, or cause to be delivered to each person to
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
financial information.
Registration on Form S-4 of Securities Offered for Resale. The undersigned
registrant hereby undertakes as follows: that prior to any public offering of
the securities registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes 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.
Request for Acceleration of Effective Date. 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 Commission such indemnification
II-3
<PAGE>
is against public policy as expressed in the Act and is, therefore,
unenforceable. If acceleration is requested of the effective date of this
registration statement pursuant to Rule 461 under the Act, 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 to 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.
INSTRUCTIONS TO FORM S-4.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Proxy
Statement pursuant to Items 4, 10(b), 11 or 13 of this form, within one business
day of receipt of such request, and to send the incorporated documents by
first-class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of this
registration statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this registration statement when it became effective.
II-4
<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 Elkton, Maryland as of June 30, 1998.
CECIL BANCORP, INC.
By: /s/ Mary B. Halsey
---------------------------
Mary B. Halsey
President
POWER OF ATTORNEY
We, the undersigned directors and officers of Cecil Bancorp, Inc., do
hereby severally constitute and appoint Mary B. Halsey, our true and lawful
attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute any and all instruments for us and in
our names in the capacities indicated below which said Mary B. Halsey may deem
necessary or advisable to enable Cecil Bancorp, Inc. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the registration
statement on Form S-4 relating to the offering of the Company's Common Stock,
including specifically, but not limited to, power and authority to sign for us
in our names in the capacities indicated below the registration statement and
any and all amendments (including post-effective amendments) thereto; and we
hereby ratify and confirm all that said Mary B. Halsey shall do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Mary B. Halsey Principal Executive Officer June 30, 1998
- ----------------------- Principal Accounting and
Mary B. Halsey President, Chief Executive Officer and
Financial Officer and a Director
Chief Financial and Accounting Officer
/s/ Bernard L. Seigel Director June 30, 1998
- -----------------------
Bernard L. Siegel
Chairman of the Board
/s/ Thomas L. Foard Director June 30, 1998
- -----------------------
Thomas L. Foard
/s/ William F. Burkley Director June 30, 1998
- -----------------------
William F. Burkley
/s/ Howard J. Neff Director June 30, 1998
- -----------------------
Howard J. Neff
/s/ Michael J. Scibinico Director June 30, 1998
- -----------------------
Michael J. Scibinico
/s/ Doris P. Scott Director June 30, 1998
- -----------------------
Doris P. Scott
/s/ Howard B. Tome Director June 30, 1998
- -----------------------
Howard B. Tome
</TABLE>
<PAGE>
CECIL BANCORP, INC.
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ---------- -----------
2/1/ Reorganization and Merger Agreement by and between Cecil
Bancorp, Inc. and Columbian Bank, A Federal Savings Bank dated
May 29, 1998
3.1/2/ Articles of Incorporation of Cecil Bancorp, Inc., as amended and
restated
3.2/2/ Bylaws of Cecil Bancorp, Inc., as amended and restated
4.1/2/ Form of Certificate of Common Stock of Cecil Bancorp, Inc.
5 Opinion of Housley Kantarian & Bronstein, P.C. regarding the
legality of the securities being registered hereby (with
consent)
8 Form of Opinion of Housley Kantarian & Bronstein, P.C. regarding
certain federal tax matters (with consent)
23.1 Consent of Simon, Master & Sidlow (with respect to the Company)
23.2 Consent of Anderson Associates (with respect to Columbian)
23.3 Consent of Housley Kantarian & Bronstein, P.C. (included in
opinions filed as Exhibits 5 and 8)
23.4 Consent of RP Financial, LC.
24 Power of Attorney (See Signature Page)
99 Form of Proxy solicited by Board of Directors of Columbian Bank,
a Federal Savings Bank
- -------------
1 Incorporated by reference to Annex A to the Prospectus/Proxy Statement
included herein.
2 Incorporated by reference to Registrant's Registration Statement on Form
S-1 (File No. 33-81374)
<PAGE>
EXHIBIT 5
[LETTERHEAD OF HOUSLEY KANTARIAN & BRONSTEIN, P.C.]
July 1, 1998
Board of Directors
Cecil Bancorp, Inc.
127 North Street
Elkton, Maryland 21921
RE: Registration Statement on Form S-4
Ladies and Gentlemen:
This opinion is rendered in connection with the Registration Statement on
Form S-4 (the "Registration Statement") filed by Cecil Bancorp, Inc. (the
"Company") with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, and the Prospectus/Proxy Statement (the "Prospectus"),
relating to the issuance by the Company of up to 156,533 shares of common stock,
par value $0.01 per share (the "Common Stock"), in the manner set forth in the
Registration Statement, and the Prospectus. As counsel, we have reviewed the
Registration Statement, the Prospectus and the Company's Articles of
Incorporation and By-Laws. Records of the Company's corporate proceedings
relative to the issuance of the Common Stock and such other legal matters as we
have deemed appropriate for the purposes of this opinion. We are rendering this
opinion as of the time the Registration Statement becomes effective.
Based upon the foregoing, and having a regard for such legal considerations
as we have deemed relevant, we are of the opinion that the shares of Common
Stock will be, upon issuance, against full payment therefor as contemplated in
the Registration Statement and the Prospectus, legally issued, fully paid and
non-assessable shares of Common Stock of the Company.
We consent to the filing of our opinion as an exhibit to the Registration
Statement and to the reference to our firm and our opinion under the heading
"Legal Matters" in the Registration Statement and all amendments thereto.
Very truly yours,
HOUSLEY KANTARIAN & BRONSTEIN, P.C.
BY: /s/ Howard S. Parris
-------------------------------------
Howard S. Parris
<PAGE>
EXHIBIT 8
_________, 1998
Board of Directors
Cecil Bancorp, Inc.
127 North Street
Elkton, Maryland 21921-5547
Board of Directors
Columbian Bank, A Federal Savings Bank
303 - 307 St. John Street
Havre De Grace, Maryland 21078
Re: Certain Material Federal Income Tax Consequences Relating
to the Acquisition of Columbian Bank, A Federal Savings Bank,
Havre De Grace, Maryland
-------------------------------------------------------------
Ladies and Gentlemen:
We are rendering this opinion to you at your request and in our capacity as
special counsel to Cecil Bancorp, Inc. ("Cecil"), a Maryland corporation
headquartered in Elkton, Maryland in connection with the Reorganization and
Merger Agreement dated as of May 29, 1998 (the "Agreement"), entered into
between Cecil and Columbian Bank, A Federal Savings Bank ("Columbian"), a
federal savings bank headquartered in Havre De Grace, Maryland. Terms used
herein, whether capitalized or not, shall have the meanings given to them in the
Agreement.
The following transactions will occur pursuant to the Agreement:
1. Cecil will organize Columbian Interim Federal Savings Bank ("NewSub")
as a wholly-owned interim federal savings bank subsidiary of Cecil;
2. NewSub will be merged with and into Columbian (the "Merger");
3. Each issued and outstanding share of common stock of Columbian, par
value $1.00 per share ("Columbian Common Stock"), shall automatically be
converted into a number of shares of common stock of Cecil, par value $.01 per
share ("Cecil Common Stock") according to the Exchange Ratio as specified in
Section 1.5(a) of the Agreement, and cash for fractional shares;
<PAGE>
Board of Directors
Cecil Bancorp, Inc.
Board of Directors
Columbian Bank, A Federal
Savings Bank
_______________, 1998
Page 2
4. Each issued and outstanding share of NewSub common stock shall be
converted into an equal number of newly issued shares of Columbian Common Stock,
all of which shall be owned by Cecil; and
5. Columbian will survive the Merger and will operate as a wholly-owned
subsidiary of Cecil under its present name and title with its own board of
directors for a period of at least three years thereafter.
We are rendering this opinion pursuant to Section 5.1(e) of the Agreement.
For purposes of this opinion, we have examined and are familiar with originals
or copies, certified or otherwise identified to our satisfaction, including but
not limited to the Agreement; the Affidavit of Representations dated __________,
1998 provided to us by Cecil; the Affidavit of Representation dated __________,
1998 provided to us by the Columbian; and such other documents as we have deemed
necessary or appropriate in order to enable us to render the opinions below.
In our examination, we have assumed the genuineness of all signatures
where due execution and delivery are requirements to the effectiveness thereof,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such copies.
In rendering our opinions, we have considered applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations,
pertinent judicial authorities, interpretive rulings of the Internal Revenue
Service, and such other authorities as we have considered relevant. We have
also assumed that the transactions contemplated by the Agreement will be
consummated strictly in accordance with the Agreement.
Based solely upon and subject to the foregoing, it is our opinion that,
under presently applicable law:
(i) provided the proposed merger of NewSub with and into
Columbian qualifies under federal law, the Merger will qualify as a
"reorganization" under Section 368(a) of the Code, and Cecil, NewSub,
and Columbian will be parties to the reorganization;
(ii) no gain or loss will be recognized by Cecil, NewSub, or
Columbian by reason of the Merger;
(iii) no gain or loss will be recognized by stockholders of
Columbian in the Merger to the extent they receive solely shares of
Cecil Common Stock in exchange for their shares of Columbian Common
Stock;
<PAGE>
Board of Directors
Cecil Bancorp, Inc.
Board of Directors
Columbian Bank, A Federal
Savings Bank
_______________, 1998
Page 3
(iv) the gain, if any, to be realized by a Columbian stockholder
who receives Cecil Common Stock and cash (in lieu of fractional
shares) in exchange for Columbian Common Stock should be recognized,
but not in excess of the amount of cash received; and
(v) when cash is received by a dissenting stockholder of
Columbian, such cash will be treated as received by the dissenting
stockholder as a distribution in redemption of the stockholder's
Columbian Common Stock, subject to the provisions and limitations of
Section 302 of the Code.
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any state,
local, foreign, or other federal tax considerations. If any of the information
upon which we have relied is incorrect, or if changes in the relevant facts
occur after the date hereof, our opinion could be affected thereby. Moreover,
our opinion is based on the case law, Code, Treasury Regulations thereunder, and
Internal Revenue Service rulings as they now exist. These authorities are all
subject to change, and such change may be made with retroactive effect. We can
give no assurance that, after such change, our opinion would not be different.
We undertake no responsibility to update or supplement our opinion subsequent to
consummation of the Merger. Prior to that time, we undertake to update or
supplement our opinion in the event of a material change in the federal income
tax consequences set forth above and to file such revised opinion as an exhibit
to the Agreement. This opinion is not binding on the Internal Revenue Service
and there can be no assurance, and none is hereby given, that the Internal
Revenue Service will not take a position contrary to one or more of the
positions reflected in the foregoing opinion, or that our opinion will be upheld
by the courts if challenged by the Internal Revenue Service.
We hereby consent to the filing of this opinion with the SEC as an exhibit
to the Registration Statement on Form S-4 of which the Proxy Statement/
Prospectus is a part and the reference to our firm in the Proxy Statement/
Prospectus under the headings "Summary--The Merger--Federal Income Tax
Consequences, "The Merger--Federal Income Tax Consequences, and "Legal Matters".
Very truly yours,
HOUSLEY KANTARIAN & BRONSTEIN, P.C.
By:_________________________________________
Leonard S. Volin
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF SIMON MASTER & SIDLOW, P.A. APPEARS HERE]
BOARD OF DIRECTORS AND STOCKHOLDERS
CECIL BANCORP, INC.
ELKTON, MARYLAND
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the July 1, 1998
Registration Statement on Form S-4 of Cecil Bancorp, Inc. and Subsidiaries of
our report dated January 21, 1998, with respect to the consolidated financial
statements incorporated herein by reference. We also consent to the reference
to our firm under the caption "Experts" in the prospectus.
/s/ Simon, Master & Sidlow, P.A.
Wilmington, Delaware
July 1, 1998
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF ANDERSON ASSOCIATES, LLP APPEARS HERE]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated March 11, 1998 on the
audit of the financial statements described therein of Columbian Bank, A Federal
Savings Bank in Cecil Bancorp, Inc.'s Registration Statement on Form S-4,
relating to shares of common stock of Cecil Bancorp, Inc. to be issued to
shareholders of Columbian Bank, A Federal Savings Bank as filed with the
Securities and Exchange Commission. We also consent to the reference to our
firm under the caption "Experts" in the Prospectus.
ANDERSON ASSOCIATES, LLP
/s/ Anderson Associates, LLP
June 30, 1998
Baltimore, Maryland
<PAGE>
EXHIBIT 23.4
[LETTERHEAD OF RP FINANCIAL, LC. APPEARS HERE]
June 30, 1998
Board of Directors
Columbian Bank, A Federal Savings Bank
303-307 St. John Street
Havre de Grace, Maryland 21078
Members of the Board:
We hereby consent to the use of our firm's name in the Form S-4
Registration Statement of Cecil Bancorp, Inc. and any amendments thereto, and
the inclusion of, summary of and references to our fairness opinion in such
filings including the combined Prospectus/Proxy Statement of Cecil Bancorp,
Inc., and Columbian Bank, A Federal Savings Bank.
Sincerely,
RP FINANCIAL, LC.
/s/ Ronald S. Riggins
Ronald S. Riggins
President and Managing Director
<PAGE>
EXHIBIT 99
REVOCABLE PROXY
COLUMBIAN BANK, A FEDERAL SAVINGS BANK
SPECIAL MEETING, __________, 1998
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned hereby appoints Donald F. Angert and ________________,
and each of them, proxies with power of substitution to vote on behalf of the
stockholders of Columbian Bank, a Federal Savings Bank ("Columbian"), at a
special meeting to be held on __________, 1998 and any adjournment thereof, with
all powers that the undersigned would possess if personally present, with
respect to the following:
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED ON THE
REVERSE HEREOF, BUT IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR
THE APPROVAL OF THE MERGER AND THE MERGER AGREEMENT (DEFINED ON THE REVERSE
SIDE). THE PROXIES MAY VOTE IN THEIR DISCRETION AS TO OTHER MATTERS WHICH MAY
COME BEFORE THE MEETING.
[X] Please mark votes as in this example.
1. To approve the acquisition of Columbian by Cecil
Bancorp, Inc. ("Cecil Bancorp") through the merger of
Columbian with Columbian Interim Savings Bank
("Interim"), a wholly-owned subsidiary of Cecil
Bancorp (the "Merger") and to approve the
Reorganization and Merger Agreement dated as of May
29, 1998 by and among Cecil Bancorp and Columbian
which sets forth the terms and conditions of the
Merger.
FOR AGAINST ABSTAIN
[_] [_] [_]
Please date and sign as name is imprinted hereon, including designation
as executor, etc., if applicable. A corporation must sign in its name
by the president or other authorized officers. All co-owners must sign.
A majority of the proxies or substitutes present at the meeting may exercise
all powers granted hereby.
MARK HERE FOR ADDRESS
CHANGE AND NOTE AT LEFT [_]
Signature Date
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Signature Date
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