UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF
SECURITIES Pursuant to section 12(b) or (g) of
The Securities Exchange Act of 1934
Maryland 52-1726127
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1919 A West Street, Annapolis, Maryland 21401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-268-4554
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Securities to be registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Securities to be registered pursuant to Section 12(g) of the Act:
(Title of class)
INFORMATION REQUIRED IN REGISTRATION STATEMENT
Table of Contents
Section Page No.
Severn Bancorp Financial Highlights .........................................ii
Part 1
Item 101. Description of the Business .......................................1
Item 102. Properties ........................................................20
Regulation ................................................21
Item 103. Legal Proceedings..................................................32
Item 201. Securities of the Registrant .....................................32
Item 202. Description of Registrant's Securities ............................33
Item 301. Selected Financial Data ...........................................36
Item 302. Supplementary Financial Information ..............................38
Item 303. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................42
Item 304. Changes in and Disagreements with Accountants in Accounting
and Financial Disclosure .................................47
Item 305. Quantitative and Qualitative Disclosures About Market Risk ........47
Item 401. Directors, Executive Officers, Promoters and Control Persons .....50
Item 402. Executive Compensation ...........................................51
Item 403. Securities Ownership of Certain Beneficial Owners and Management .54
Item 404. Certain Relationships and Related Transactions ...................56
Item 509. Interests of Named Experts and Counsel ...........................57
Item 601. Exhibits .........................................................57
Item 701. Percent Sales of Unregistered Securities .........................57
Item 702. Indemnification of Directors and Officers ........................58
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Severn Bancorp Financial Highlights
At the period ended:
December 31,
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(dollars in thousands, except share information)
Balance Sheet Data:
Total assets $ 366,890 $ 293,230 $ 233,724 $ 220,417 $ 174,801
Total loans, net 342,641 274,652 214,066 192,572 155,994
Total nonperforming assets 2,413 1,490 1,597 2,845 2,118
Deposits 286,918 229,312 186,204 175,341 142,101
Short-term borrowings 17,000 18,000 2,000 6,000 12,000
Notes payable 25,000 16,000 22,000 18,000 2,000
Total liabilities 332,059 268,009 211,743 200,849 157,272
Stockholders' equity 34,831 25,221 21,981 19,567 17,529
Book value per share 7.60 6.58 5.59 4.85 4.67
For the period ended December 31,
2001 2000 1999 1998 1997
--------- ----------- ---------- ---------- ----------
Operations Data:
Net interest income $ 13,395 $ 10,884 $ 9,524 $ 8,528 $ 7,041
Net interest income after provision for loan losses
12,687 10,293 9,020 7,976 6,580
Noninterest income 2,570 1,439 1,586 1,607 1,102
Noninterest expense 6,588 5,348 5,477 5,433 4,222
Net earnings 5,256 3,945 3,127 2,538 2,251
Basic earnings per share * 1.38 1.15 0.90 0.72 0.79
Diluted earnings per share * 1.37 1.12 0.84 0.70 0.70
Weighted number of shares outstanding basic * 3,647,451 3,237,888 3,230,940 3,226,545 2,280,036
Weighted number of shares outstanding
diluted * 3,683,346 3,330,915 3,450,831 3,316,992 3,214,830
Performance Ratios:
Return on average assets 1.55% 1.47% 1.38% 1.30% 1.44%
Return on average equity 17.55% 16.73% 14.91% 13.69% 15.03%
Interest rate spread 3.65% 3.75% 3.94% 4.09% 4.31%
Net interest margin 4.05% 4.17% 4.34% 4.50% 4.68%
Noninterest expense to average assets 1.95% 2.00% 2.43% 2.78% 2.70%
Efficiency ratio 41.27% 43.40% 49.30% 53.61% 51.85%
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* Retroactively adjusted to reflect three-for-one stock split declared February 19, 2002.
PART I
Item 101. Description of the Business
General Severn Bancorp, Inc. ("Bancorp") is a savings and loan holding company that was incorporated in Maryland in August 1990. It conducts business through three subsidiaries: Severn Savings Bank, FSB (the "Bank"), its principal subsidiary; Louis Hyatt, Inc., t/a Hyatt Real Estate, a real estate brokerage and property management company, which it acquired in June 2001; and SBI Mortgage Company, which engages in the origination of mortgages not suitable to the Bank, and to a lesser extent, owns investment real estate through subsidiary limited liability companies.
As of December 31, 2001, Bancorp had total assets of $366,890,087, total deposits of $286,917,568, and stockholder's equity of $34,830,882. For the year ended December 31, 2001, net income was $5,255,570, of which $5,181,517 was net income of the Bank.
Business of the Bank
The Bank was organized in 1946 in Baltimore, Maryland as Pompei Permanent Building and Loan Association. It relocated to Annapolis, Maryland in 1980 and its name was changed to Severn Savings Association. Subsequently, the Bank obtained a federal charter and changed its name to Severn Savings Bank, FSB. The Bank operates two full-service branch offices, one administrative office and one accounting and servicing office. The Bank operates as a federally charted savings bank whose principal business is attracting deposits from the general public and investing those funds in mortgage loans. The Bank also uses advances, or loans from the Federal Home Loan Bank of Atlanta, to fund its mortgage activities. The Bank's revenues are derived principally from interest earned on mortgage loans, fees charged in connection with the loans and banking services, and gains realized from the sale of mortgage loans. The Bank's primary sources of funds are deposits, advances from the Federal Home Loan Bank of Atlanta, principal amortization and prepayment of its loans. The principal executive offices of the Bank are maintained at 1919 A West Street, Annapolis Maryland, 21401. Its telephone number is 410-268-4554 and its e-mail address is mailman@severnbank.com. ----------------------- .........In addition to its deposit and lending activities, the Bank offers title insurance and real estate settlement services through its wholly owned subsidiary, Homeowner's Title and Escrow Corporation ("Homeowner's").
The Bank also owns all of the common stock of Severn Preferred Capital Corporation ("Severn Capital"), which was formed in 1997. Severn Capital is a real estate investment trust that issued and has outstanding 200,000 shares of Series A Preferred Stock. This preferred stock has an aggregate outstanding balance of $4,000,040 which qualifies as regulatory capital of the Bank. The Series A Preferred Stock pays a 9% annual non-cumulative dividend and is callable at par, by the Bank, at any time.
Competition
The Annapolis area has a high density of financial institutions, many of which are significantly larger and have greater financial resources than the Bank, and all of which are competitors of the Bank to varying degrees. The Bank's competition for loans comes primarily from savings and loan associations, savings banks, mortgage banking companies, insurance companies, and commercial banks. Its most direct competition for deposits has historically come from savings and loan associations, savings banks, commercial banks, and credit unions. The Bank faces additional competition for deposits from short-term money market funds and other corporate and government securities funds. The Bank also faces increased competition from other financial institutions such as brokerage firms and insurance companies for deposits. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions.
The Bank is a community-oriented financial institution serving its market area with a wide selection of residential loans. Management considers the Bank's reputation for financial strength and customer service as its major competitive advantage in attracting and retaining customers in its market area. The Bank also believes it benefits from its community orientation.
General
The principal business of the Bank is attracting deposits from the general public and investing those deposits, together with other funds, in mortgage and consumer loans, mortgage-backed securities and investment securities. The Bank's revenues are derived principally from interest earned on mortgage, consumer and other loans, fees charged in connection with loans and banking services, interest and dividends earned on other investments. The Bank's primary sources of funds are deposits and loan interest, principal amortization and prepayments.
The primary focus of the Bank's lending activities had been on first mortgage loans secured by real estate for the purpose of purchasing, refinancing, developing and constructing one-to-four family residences and commercial properties in and near Anne Arundel County, Maryland. The Bank is an active participant in the secondary market and sells substantially all fixed rate long-term mortgages that it originates.
The following table illustrates the composition of the Bank's portfolio over the past five years, including loans available for sale by type of loan.
2001 2000 1999 1998 1997
------------------ ------------------ ------------------ ------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(dollars in thousands)
Real Estate Loans
Residential, one to
four family units $ 151,250 36.90% $ 137,498 41.95% $ 101,640 39.89% $ 99,056 43.58% $ 79,871 45.01%
Residential, multifamily 1,065 0.26% 1,026 0.31% 991 0.39% 750 0.33% 707 0.40%
Commercial and industrial
real estate 71,557 17.46% 54,024 16.48% 49,231 19.32% 40,555 17.84% 40,475 22.81%
Construction, land
acquisition and
development loans 163,849 39.98% 117,325 35.80% 90,324 35.45% 78,454 34.51% 48,600 27.39%
Land 16,895 4.12% 11,390 3.48% 7,018 2.76% 6,387 2.81% 4,739 2.67%
---------- ------ -------- ------- ---------- -------- ---------- ------- ---------- -------
Total real estate loans 404,616 98.72% 321,263 98.02% 249,204 97.81% 225,202 99.07% 174,392 98.28%
Other loans:
Business, commercial 3,970 0.97% 5,592 1.71% 170 0.07% 582 0.26% 1,398 0.79%
Consumer 1,257 0.31% 885 0.27% 5,406 2.12% 1,533 0.67% 1,651 0.93%
---------- ------ --------- ------- ---------- -------- ---------- ------- ---------- -------
Total other loans 5,227 1.28% 6,477 1.98% 5,576 2.19% 2,115 0.93% 3,049 1.72%
Total gross loans 409,843 100.00% 327,740 100.00% 254,780 100.00% 227,317 100.00% 177,441 100.00%
======= ======= ======= ======= =======
Unearned fees, premiums
& discounts, net (2,164) (2,149) (1,852) (1,699) (1,398)
Loans in process (61,685) (48,211) (36,715) (31,062) (18,530)
Allowance for loan loss (3,353) (2,728) (2,147) (1,984) (1,519)
----------- ------------ ----------- ----------- -----------
Total Loans net $ 342,641 $ 274,652 $ 214,066 $ 192,572 $ 155,994
=========== ============ =========== =========== ===========
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Loan Origination Procedures
The following table contains information on the activity of Bancorp's loans available for sale and its loans held for investment in its portfolio:
For the year ended December 31,
-------------------------------
2001 2000 1999
---- ---- ----
(dollars in thousands)
Available for Sale:
Beginning balance $ 4,169 $ 2,989 $ 6,174
Originations 63,565 38,024 34,607
Repurchases 41 -- --
Repayments -- (25) (15)
Deferred fees 26 50 (71)
Net sales (60,302) (36,869) (37,706)
Transfers (to) from available for sale -- -- --
------------- ------------- -------------
Ending Balance $ 7,499 $ 4,169 $ 2,989
============= ============= =============
Held for investment:
Beginning balance $ 323,571 $ 251,791 $ 221,143
Originations and purchases 293,195 187,035 155,705
Repurchases -- -- --
Repayments/payoffs (214,295) (115,444) (124,157)
Sales -- -- --
Transfers (to) from repossessed assets (127) 189 (900)
------------- ------------- -------------
Ending balance $ 402,344 $ 323,571 $ 251,791
============= ============= =============
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The Bank originates residential mortgage loans that are intended for sale in the secondary market as well as loans that are to be held in the Bank's investment portfolio. Loans sold in the secondary market are either sold directly to the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") or are sold to other investors with which the Bank maintains a correspondent relationship. These loans are made in conformity with standard underwriting criteria to assure maximum eligibility for possible resale in the secondary market, and are approved either by the Bank's underwriter or the correspondent's underwriter. Loans considered for the Bank's portfolio are approved by the Bank's loan committee, which is comprised of the Executive Vice President and the Senior Vice President. Meetings of the loan committee are open to attendance by any member of the Bank's Board of Directors who wishes to attend. The loan committee reports to and consults with the Board of Directors in interpreting and applying the Bank's lending policy.
The Bank's mortgage loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan, and the adequacy of the value of the property that will secure the loan. The authority of the loan committee to approve loans is established by the Board of Directors and currently is commensurate with the Bank's limitation on loans to one borrower. The Bank's maximum amount of loans to one borrower currently is equal to 15% of the Bank's unimpaired capital or $4,751,000 as of December 31, 2001. Loans greater than this amount require participation by one or more additional lenders. Letters of credit are subject to the same limitations as direct loans. The Bank utilizes independent qualified appraisers approved by the Board of Directors to appraise the properties securing its loans and requires title insurance or title opinions so as to insure that the Bank has a valid lien on the mortgaged real estate. The Bank requires borrowers to maintain fire and casualty insurance on its secured properties.
The procedure for approval of construction loans is the same for residential mortgage loans, except that the appraiser evaluates the building plans, construction specifications, and estimates of construction costs. The Bank also evaluates the feasibility of the proposed construction project and the experience and track record of the developer. In addition, all construction loans generally require a commitment from a third-party lender or from the Bank for a permanent long-term loan to replace the construction loan upon completion of construction.
Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan, and the value of the collateral, if any. A consumer loan officer must approve consumer loans. Consumer loan originations currently are being generated primarily through advertising.
Residential Mortgage Lending
The Bank offers first mortgage loans, secured by one-to-four family residences, for up to 95% of the value of the underlying collateral. Interest rates may be fixed or variable and rates are established by the market. In accordance with the Bank's lending policy, all loans exceeding 90% of the value of the collateral require either the guarantee or insurance of the Veteran's Administration ("VA") or the Federal Housing Administration ("FHA"), respectively, or private mortgage insurance. Fixed-rate and adjustable rate loans are offered by the Bank. Interest rates and origination fees are priced to be competitive in the marketplace. Although the majority of the Bank's residential loan production is sold into the secondary market, some loans are kept for the Bank's loan portfolio. Loans are generally sold with servicing released. However, as of December 31, 2001 the Bank was servicing $7,802,731 in loans for FHLMC and $9,573,744 in loans for other investors.
The following table contains information, as of December 31, 2001, on the percentage of fixed-rate, single family mortgage loans being serviced for others by Bancorp, by interest rate category.
Coupon range Percentage of Portfolio
------------ -----------------------
Less than 6.00% 1.80%
6.01 - 7.00% 47.32%
7.01 - 8.00% 35.95%
8.01 - 9.00% 10.65%
9.01 - 10.00% 4.10%
Over 10.01% 0.18%
-------
100.00%
========
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Upon receipt of a completed loan application from a prospective borrower for a loan secured by residential property, a credit report is ordered, income and certain other information is verified, and, if necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Bank's Board of Directors. It is the Bank's policy to obtain title insurance on all real estate first mortgage loans. Borrowers are also required to obtain hazard insurance prior to closing. Borrowers are generally required to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which the Bank can make disbursements for such items as real estate taxes, hazard insurance premiums, and private mortgage insurance premiums, if any, as they become due.
When credit information has been obtained and an appraisal has been completed all loans are then underwritten in accordance with guidelines set forth and amended from time to time by FHLMC, FNMA, VA, FHA, or the Maryland
Community Development Administration ("CDA").
For the years ending December 31, 2000 and 2001, the Bank originated $213,614,000 and $344,519,000 of mortgage loans, respectively.
Construction Lending
The Bank originates loans to finance the construction of one-to-four family dwellings, and to a lesser extent, commercial real estate. It also originates loans for the acquisition and development of unimproved property to be used for residential and/or commercial purposes in cases where the Bank is to provide the construction funds to improve the properties. As of December 31, 2001, the Bank had 455 construction loans outstanding in the aggregate amount of $102,163,722.
Construction loan amounts are based on the appraised value of the property and, for builder loans, a feasibility study as to the potential marketability and profitability of the project. Construction loans generally have terms of up to one year, with reasonable extensions as needed, and typically have interest rates that float monthly at margins typically ranging 1/2 percent to 2 percent above the prime rate. In addition to builders' projects, the Bank finances the construction of single family, owner-occupied houses where qualified contractors are involved and on the basis of strict written underwriting and construction loan guidelines. Construction loans are structured either to be converted to permanent loans with the Bank upon the expiration of the construction phase or to be paid off by financing from another financial institution.
Construction loans afford the Bank the opportunity to increase the interest rate sensitivity of its loan portfolio and to receive yields higher than those obtainable on loans secured by existing residential properties. These higher yields correspond to the higher risks associated with construction lending. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of the project under construction which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to value accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the ultimate success of the project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank is forced to foreclose on a project prior to or at completion, due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of the loan as well as related foreclosure and holding costs. In addition, the Bank may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time. The Bank has attempted to address these risks through its underwriting procedures and its limited amount of construction lending on multi-family and commercial real estate properties.
It is the policy of the Bank to conduct physical inspections of each property secured by a construction or rehabilitation loan for the purpose of reporting upon the progress of the construction of improvements. These inspections, referred to as "construction draw inspections," are to be performed at the time of a request for an advance of construction funds. If no construction advance has been requested, an inspection is made by a fee inspector or senior officer of the institution on the subject property at least quarterly.
Multi-Family Lending
The Bank occasionally originates multi-family loans with terms up to 30 years, but with rate adjustments or balloon payments generally at three to five years. These loans are made in amounts up to 75% of the appraised value of the secured property. In making these loans, the Bank bases its underwriting decision primarily on the net operating income generated by the real estate to support the debt service, the financial resources and income level of the borrower, the borrower's experience in owning or managing similar property, the marketability of the property and the Bank's lending experience with the borrower. The Bank also typically receives a personal guarantee from the borrower. As of December 31, 2001, $1,065,000, or .26% of the Bank's total loan portfolio, consisted of multi-family residential loans.
Commercial Real Estate Lending
At December 31, 2001, the Bank's commercial real estate loan portfolio totaled $71,557,000, or 17.46% of the Bank's total loan portfolio. All of the Bank's commercial loans are secured by improved property such as office buildings, retail strip shopping centers, industrial condominium units and other small businesses most of which are located in the Bank's primary lending area. The largest commercial real estate loan at December 31, 2001 was a $2,500,000 loan secured by an office building in Annapolis, Maryland, to borrowers with whom the Bank has a longstanding business relationship. The loan is further secured by the personal guarantees of the borrowers, and has consistently performed in accordance with the terms of the debt instrument.
Loans secured by commercial real estate properties generally involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by lending to established customers and currently restricts these loans to its primary market area.
Land and Residential Building Lots
Land loans include loans to developers for the development of residential subdivisions and loans on unimproved lots primarily to individuals. At December 31, 2001 the Bank had land and residential building lot loans totaling $16,895,000, or 4.12% of the Bank's total loan portfolio. The largest of these loans is for $2,560,000, is secured by commercially zoned land in Edgewater, Maryland, and has performed in accordance with the terms of the debt instrument. Land development loans typically are short-term loans; the duration of these loans is typically not greater than three years. The interest rate on land loans is generally at least 1% or 2% over the prime rate. The loan-to-value ratio generally does not exceed 75%. Loans typically are made to customers of the Bank and developers and contractors with whom the Bank has had previous lending experience. In addition to the customary requirements for this type loan, the Bank may also require a clean Phase I environmental study and feasibility study to determine the profit potential of the development.
Other Lending
The Bank also offers other loans, primarily business and commercial loans. At December 31, 2001, $3,970,000 or .97% of the loan portfolio consisted of business and commercial loans. Approximately .31% of the loan portfolio is in consumer loans.
Loan Maturity Table Including Loans Held For Sale
Due Due after
within 1 through Due after
one year 5 years 5 years Total
-------------------------------------------------------
(dollars in thousands)
One to four family residential $10,465 $25,658 $115,127 $151,250
Multifamily 108 771 186 1,065
Commercial and industrial real estate 7,585 23,797 40,175 71,557
Construction and land acquisition
and development loans 145,103 18,746 - 163,849
Land 2,446 14,449 - 16,895
Commercial, non-real estate 525 597 2,848 3,970
Consumer 411 459 387 1,257
-------------------------------------------------------
Total $166,643 $84,477 $158,723 $409,843
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The following table contains certain information as of December 31, 2001 relating to the loan portfolio of the Bank with the dollar amounts of loans due after one year which have fixed and floating rates. All loans are shown maturing based upon contractual maturities and include scheduled payments but not possible prepayments.
[see table on following page]
Fixed Floating Total
--------------------------------------
(dollars in thousands)
One to four family residential $109,759 $31,026 $140,785
Multifamily 659 298 957
Commercial and industrial real estate 37,400 26,572 63,972
Construction and land acquisition
and development loans 13,529 5,217 18,746
Land - 14,449 14,449
Commercial, non-real estate 2,534 911 3,445
Consumer 846 - 846
--------------------------------------
Total $164,727 $78,473 $243,200
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Loans to One Borrower
The aggregate amount of loans that the Bank may make to one borrower is 15% of the Bank's unimpaired capital and unimpaired surplus. The Bank's largest loan is in the amount of $2,560,000 and is secured by commercially zoned land in Edgewater, Maryland. The second largest loan is in the amount of $2,500,000 and is secured by an office building in Annapolis, Maryland. The third largest loan is in the amount of $1,800,000 and is secured by a retail property in Ocean City, Maryland. All of these loans have fully performed since their inception.
Delinquency and Classified Assets
Delinquent Loans
Delinquencies on all loans are reviewed monthly by the Board of Directors. The Bank's collection procedures include sending a past due notice to the borrower on the 17th day of nonpayment, making telephone contact with the borrower between 20 and 30 days after nonpayment, and sending a letter after the 30th day of nonpayment. A notice of intent to foreclose is sent between 60 and 90 days after delinquency. When the borrower is contacted, the Bank attempts to obtain full payment of the amount past due. However, the Bank generally will seek to reach agreement with the borrower on a payment plan to avoid foreclosure.
It is the policy of the Bank to discontinue the accrual of interest on any loan that is 90 days or more past due. The Bank historically has not incurred any significant losses on delinquent mortgage loans.
The following table sets forth information as to non-accrual loans and loans which are 90 days or more delinquent but on which the Bank was accruing interest, as well as to other non-performing assets. The Bank discontinues the accrual of interest on loans 90 days or more past due, at which time all previously accrued but uncollected interest is deducted from income. As of the most recent reported period, $223,188 would have been recorded for the year ended December 31, 2001 if the loans had been current in accordance with their original terms and had been outstanding throughout the year ended December 31, 2001 or since their origination (if held for only part of the fiscal year). For the year ended December 31, 2001, $170,358 in interest income on such loans was actually included in net income.
At December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family real estate $1,801 $ 872 $ 909 $1,591 $ 937
Home equity lines of credit 16 14
Commercial 300 292 1,136 866
Non-mortgage loans:
Consumer 14
Commercial loans - - - - -
--------------------------------------------------------
Total non-accrual loans 2,101 1,178 925 2,741 1,803
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Permanent loans secured by one-to-four family real estate - - - - -
Commercial - - - - -
Non-mortgage loans
Consumer - - - - -
--------------------------------------------------------
Total accruing loans greater than 90 days past due - - - - -
--------------------------------------------------------
Total non-performing loans $2,101 $1,178 $ 925 $2,741 $1,803
========================================================
Foreclosed real-estate 312 312 672 104 315
========================================================
Total nonperforming assets $2,413 $1,490 $1,597 $2,845 $2,118
========================================================
Total non-accrual and accrual loans to net loans 0.63% 0.43% 0.44% 1.47% 1.18%
========================================================
Allowance for loan losses to total non-performing loans,
including loans contractually past due 90 days or more 159.59% 231.58% 232.11% 72.38% 84.25%
========================================================
Total non-accrual and accruing loans greater than
90 days past due to total assets 0.57% 0.40% 0.40% 1.24% 1.03%
========================================================
Total non-performing assets to total assets 0.66% 0.51% 0.68% 1.29% 1.21%
========================================================
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Classified Assets
Federal regulations provide for the classification of loans and other assets, such as debt and equity securities, considered by the Office of Thrift Supervision (OTS) to be of lesser quality as "substandard," "doubtful" or "loss assets." An asset is considered substandard if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss assets are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to a sufficient degree of risk to warrant classification in one of these categories but possess credit deficiencies or potential weakness are required to be designated special mention by management.
When an insured institution classifies problem assets as either substandard or doubtful, it is required to establish general allowance for losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss assets, it is required either to establish a specific allowances for losses equal to the full amount of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets is subject to scrutiny by the OTS, which can require the establishment of additional general or specific loss allowances. The Bank reviews monthly the assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations.
As of December 31, 2001, the Bank had total classified loans of $2,177,154 of which all were classified as substandard.
As of December 31, 2001, the Bank maintained an allowance for loan losses of $3,353,000, or .95% of its net loans receivable and 135% of total nonperforming loans. Bancorp believes that the Bank's allowance for loan losses as of December 31, 2001 was adequate based upon prior experience and facts and circumstances available to it at the time.
[see table on following page]
2001 2000 1999 1998 1997
--------------------- -------------------- ------------------- --------------------- ---------------------
Percentage Percentage Percentage Percentage Percentage
of of of of of
Loans in Loans Loans Loans Loans
Allow- each Allow- in each Allow- in each Allow- in each Allow- in each
ance Category to ance Category to ance Category to ance Category to ance Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
---------------------- --------------------- -------------------- --------------------- --------------------
(dollars in thousands)
Residential,
one to four family $ 1,081 36.90% $ 995 41.95% $ 776 39.89% $ 826 43.58% $ 669 45.01%
Multifamily 24 0.26% 18 0.31% 10 0.39% 9 0.33% 8 0.40%
Commercial and
industrial real
estate 850 17.46% 658 16.48% 567 19.32% 560 17.84% 517 22.81%
Construction and
land acquisition
and development loans 917 39.98% 662 35.80% 428 35.45% 323 34.51% 134 27.39%
Land 413 4.12% 308 3.48% 292 2.76% 241 2.81% 154 2.67%
Business, commercial 52 0.97% 75 1.71% 4 0.07% 8 0.26% 19 0.79%
Other 16 0.31% 12 0.27% 70 2.12% 17 0.67% 18 0.93%
--------------------- ----------------------- --------------------- -------------------- ------------------
Total $ 3,353 100.00% $ 2,728 100.00% $ 2,147 100.00% $ 1,984 100.00% $ 1,519 100.00%
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The following table contains information with respect to Severn Bancorp's allowance for loan losses for the periods indicated:
At or for the Year Ended
December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in thousands)
Average loans
outstanding, net $313,798 $246,631 $203,237 $176,223 $138,891
================== ================== ================== ================ ==================
Total gross loans
outstanding at end
of period $409,844 $327,740 $254,780 $227,317 $177,441
================== ================== ================== ================ ==================
Allowance balance
at beginning of period $2,728 $2,147 $ 1,984 $1,519 $1,310
Provision for loan losses 709 591 504 552 461
Actual charge-offs
1-4 family residential
real estate 74 30 89 62 59
Other 10 263 35 193
------------------ ------------------ ------------------ ---------------- ------------------
Total charge-offs 84 30 352 97 252
------------------ ------------------ ------------------ ---------------- ------------------
Recoveries
Total recoveries -- 20 11 10 --
------------------ ------------------ ------------------ ---------------- ------------------
Net chargeoffs 84 10 341 87 252
------------------ ------------------ ------------------ ---------------- ------------------
Allowance balance at end of period $3,353 $2,728 $ 2,147 $1,984 $1,519
================== ================== ================== ================ ==================
Net chargeoffs as a percent
of average loans 0.03% 0.00% 0.17% 0.05% 0.18%
Allowance for loan losses to
total gross loans at end of period 0.82% 0.83% 0.84% 0.87% 0.86%
================== ================== ================== ================ ==================
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Investment Portfolio
Bancorp currently invests a portion of its assets in a variety of interest earning assets and equity securities. Bancorp primarily utilizes investments in securities for liquidity management and as a method of deploying excess funding not utilized for investment in loans. As required by Statement of Financial Accounting Standard #115, Bancorp has established an investment portfolio of securities that are categorized as held to maturity or available for sale. Bancorp holds equity securities representing Federal Home Loan Bank of Atlanta stock, which is considered restricted as to its marketability.
The following table contains information on the carrying value of Bancorp's investment portfolio at the dates indicated:
at December 31,
2001 2000 1999
---- ---- ----
(dollars in thousands)
Investment Securities Available for Sale
GNMA Trust $ - $ 858 $ 812
----------------------------------------------------------
Total Investment Securities Available for Sale - 858 812
----------------------------------------------------------
Investment Securities Held to Maturity
U.S Treasury Notes $ 2,001 $ 2,502 $ 4,508
FHLB Notes 5,000 2,997 2,499
FNMA Notes - 3,000 2,000
FFCB Note - 1,000 1,000
----------------------------------------------------------
Total Investment Securities Held to Maturity 7,001 9,499 10,007
----------------------------------------------------------
Interest-bearing deposits in other banks $ 1,059 $ 290 $ 166
Federal funds sold 3,949 239
Mortgage-backed securities held to maturity 212 279 319
FHLB stock 2,500 1,800 1,200
----------------------------------------------------------
7,720 2,369 1,924
----------------------------------------------------------
$14,721 $ 12,726 $ 12,743
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Investment Scheduled Maturity Table
As of December 31, 2001
More than One to More than Five to
One Year or Less Five Years Ten Years More than Ten Years Total Investment Securities
-------------------------------------- ------------------ -------------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Investment
Securities
Held to
Maturity
U.S Treasury
Notes $2,001 6.00% - - - 2,001 6.00% 2,051
FHLB Notes 1,000 6.00% $4,000 4.71% 5,000 4.96% 5,027
FNMA Notes - - - - - -
FFCB Note - - - - - -
Interest-bearing
deposits in
other banks 1,059 1.53% - - - 1,059 1.53% 1,059
Federal funds sold 3,949 1.63% - - - 3,949 1.63% 3,949
Mortgage-backed
securities held
to maturity - - - $ 212 7.12% 212 7.12% 216
FHLB stock 2,500 6.30% 2,500 6.30% 2,500
-------------------------------------- ------------------ -------------------- --------------------------------
Total $ 8,009 3.25% $ 4,000 4.71% - - $ 2,712 6.37% $ 14,721 4.22% $ 14,802
===================================== ================== ===================================================
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Real Estate Owned
As of December 31, 2001, the Bank owned real estate in the amount of $312,000 as a result of foreclosure or a default under its loans. The real estate, representing two properties, is being held by a subsidiary of SBI Mortgage Company. One property is under a pending contract of sale, for $95,000, scheduled to settle in May 2002. The other property is being held for development potential.
Deposits
The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank's deposits principally consist of fixed-term certificates, regular savings, money market, individual retirement accounts, and NOW (checking) accounts. In addition, the Bank offers commercial checking accounts. The flow of deposits is influenced significantly by general economic conditions, the Bank's pricing policies, changes in money market and prevailing interest rates, and competition. The Bank's deposits are typically obtained from the area in which its offices are located. The Bank relies primarily on customer service and long standing relationships with customers to attract and retain these deposits. The Bank has never used brokered deposits.
Deposits in the Bank as of December 31, 2001 and 2000 consisted of savings programs described below.
2001 2000
Category Amount Percent Amount Percent
NOW Accounts $13,458,798 4.68% $11,402,303 4.98%
Money market accounts 61,759,483 21.53 28,007,998 12.21
Passbooks 21,024,223 7.33 12,641,581 5.51
Certificates 190,593,583 66.43 177,169,119 77.26
----------- ----- ----------- -----
286,835,087 99.97 229,221,001 99.96
Accrued interest 82,481 .03 90,926 .04
------------- ----- ----------- ------
Total savings $286,917,568 100.00% $229,311,927 100.00%
============ ======= ============ =======
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The Bank held certificates of deposit totaling $190,593,582 and $177,169,113 at December 31, 2001 and 2000 respectively, maturing as follows:
2001 2000
Amount Percent Amount Percent
One year or less $139,073,988 72.97% $120,232,223 67.86%
More than 1 year to 2 years 23,138,385 12.14 33,765,454 19.06
More than 2 years to 3 years 9,361,585 4.91 7,397,170 4.18
More than 3 years 19,019,625 9.98 15,774,272 8.90
---------- ------ ---------- ------
$190,593,583 100.00% $177,169,119 100.00%
============ ======= ============ =======
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The following table contains information pertaining to Certificates of Deposit held by the Bank in excess of $100,000 (Jumbo CD's) as of December 31, 2001:
Jumbo Certificate
Time Remaining Until Maturity of Deposits
---------------------------------- --------------------------------
(dollars in thousands)
Less than three months $ 10,756
3 months to 6 months 10,111
6 months to 12 months 10,669
Greater than 12 months 13,473
-------------------------
Total $ 45,009
=========================
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Liquidity and Asset/Liability Management.
Two major objectives of asset and liability management are to maintain adequate liquidity and to control the interest sensitivity of the balance sheet.
Liquidity is the measure of a company's ability to maintain sufficient cash flow to fund operations and to meet financial obligations to depositors and borrowers. Liquidity is provided by the ability to attract and retain deposits and by principal and interest payments on loans and maturing securities in the investment portfolio. A strong core deposit base, supplemented by other deposits of varying maturities and rates, contributes to the Bank's liquidity.
Funds available through short-term borrowings and asset maturities are considered adequate to meet all current needs, and Management is continually monitoring the Bank's liquidity position to meet projected needs.
Interest rate sensitivity is maintaining the ability to reprice interest earning assets and interest bearing liabilities in relationship to changes in the general level of interest rates. Management contributes interest rate sensitivity to a steady net interest margin through all phases of interest rate cycles. Management attempts to make the necessary adjustments to constrain adverse savings in net interest income resulting from interest rate movements through GAP analysis and income simulation modeling techniques.
Short Term Borrowings
The Bank has an available line of credit, secured by its residential mortgage portfolio, in the amount of twenty five percent (25%) of its total assets, with the Federal Home Loan Bank of Atlanta. As of year-end the available line of credit with the Federal Home Loan Bank of Atlanta was $92,000,000. The Bank, from time to time, utilizes the line of credit when interest rates are more favorable then obtaining deposits from the public. The following table sets forth short term borrowings with the Federal Home Loan Bank of Atlanta, with original maturities of one year or less.
Year ended December 31,
2001 2000 1999
---- ---- ----
(dollars in thousands)
Short term borrowings and notes payable
Average balance outstanding during the period $21,917 $13,617 $3,250
Maximum amount of outstanding at any 27,000 18,000 5,000
month-end during the period
Weighted Average interest rate during the period 5.38% 6.34% 7.78%
Total short term borrowings at period end 17,000 18,000 2,000
Weighted average interest rate at period end 4.40% 6.83% 6.15%
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Severn Capital
The Bank formed Severn Capital in 1997. Severn Capital was created for the purpose of acquiring, holding and managing mortgage loans. Severn Capital has elected to be subject to tax as a real estate investment trust under the Internal Revenue Code and regulations promulgated thereunder. The Bank owns all of the Common Stock of Severn Capital and administers the day-to-day operations of Severn Capital for a fee. There are 200,002 shares of preferred stock of Severn Capital outstanding. Dividends on the preferred stock are payable quarterly, in an amount equal to $1.80 per annum per preferred share. The preferred stock is redeemable, at $20 per share any time after June 30, 2001, at the option of the Bank.
Hyatt Real Estate
Bancorp acquired Louis Hyatt, Inc. t/a Hyatt Real Estate ("HRE") a real estate brokerage and property management company, in June 2001. HRE is a real estate brokerage company specializing in commercial real estate sales, leasing and property management. It owns the facility within which it is located, at 1919 West Street, and is also the owner of the property known as 1919A West Street, which is leased to the Bank for its administrative offices. As of December 31, 2001 HRE had 20 licensed real estate agents and 12 employees.
SBI Mortgage Company
SBI Mortgage Company ("SBI") is a subsidiary of Bancorp that engages in the origination of mortgages not suitable for the Bank. It owns subsidiary companies that have real estate holdings. As of December 31, 2001, SBI had $499,582 in outstanding mortgage loans and its subsidiary companies had $312,000 invested in the ownership of land, which it acquired as a result of foreclosures initiated by the Bank.
Item 102. Properties.
The Bank leases its executive offices (which also serves as a loan production office) from HRE, a wholly owned subsidiary of Bancorp. Its accounting and loan servicing office located at 1927 West Street, Annapolis, Maryland is leased under a long-term lease with a third party. The Bank owns its retail banking office located 1917 West Street, Annapolis, Maryland and owns it retail banking office at 413 Crain Highway, Glen Burnie, Maryland through a wholly owned subsidiary. Homeowner's leases space at 1923 West Street from a corporation of which Alan J. Hyatt, Bancorp's Chairman and Chief Executive Officer, is a principal, on a month-to-month basis. Currently monthly rent paid by Homeowner's Title is $2,210.
The Bank has recently acquired approximately 44,000 square feet of land located at West Gate Circle, Annapolis, Maryland, through a wholly owned subsidiary. The Bank's intention is to construct an office building at that site for the purpose of relocating its administrative, loan production, accounting and loan servicing offices. A retail branch is expected to be located in this building. Preliminary plans have been prepared and approval of the building requires the grant of a special exception from the City of Annapolis. It is anticipated, but not guaranteed, that special exception approval will be granted by the summer of 2002, with the commencement of construction initiated by the end of 2002. Occupancy of the building is expected to take place in early 2004. The building is expected to contain approximately 75,000 square feet of leasable space of which the Bank expects to initially occupy approximately 25,000 square feet and to lease the remainder to third parties.
Personnel
As of December 31, 2001, the Bank had 67 full time employees and six part-time employees. The employees are not represented by a collective bargaining union, and the Bank considers its relationship with its employees to be excellent.
REGULATION
General
Bancorp, as a savings and loan holding company, and the Bank, as a federally chartered savings association, are subject to extensive regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). The lending activities and other investments of the Bank must comply with various federal regulatory requirements, and the OTS periodically examines the Bank for compliance with various regulatory requirements and for safety and soundness. The FDIC also has the authority to conduct examinations. The Bank must file reports with the OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System. This supervision and regulation is intended primarily for the protection of depositors and the deposit insurance funds and not for the protection of stockholders of Bancorp. Certain of these regulatory requirements are referred to below or appear elsewhere herein.
Recent Legislation
Financial Services Modernization Legislation. The Gramm-Leach-Bliley Act (the "Financial Services Modernization Act") became effective March 11, 2000. The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act of 1956 ("BHCA") framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a "Financial Holding Company." "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
The Financial Services Modernization Act provides that no company may acquire control of an insured savings association, unless that company engages, and continues to engage, only in the financial activities permissible for a Financial Holding Company, unless grandfathered as a unitary savings and loan holding company. The Financial Institution Modernization Act grandfathers any company that was a unitary savings and loan holding company on May 4, 1999 (or becomes a unitary savings and loan holding company pursuant to an application pending on that date). Such a company may continue to operate under laws prior to the Financial Services Modernization Act as long as the company continues to meet the two tests: it can control only one savings institution, excluding supervisory acquisitions, and each such institution must meet the Qualified Thrift Lender ("QTL") test. It further requires that a grandfathered unitary savings and loan holding company must continue to control at least one savings association, or a successor institution, that is controlled on May 4, 1999.
The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the BHCA or permitted by regulation.
Bancorp and the Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on the operations of Bancorp and the Bank in the near-term. However, to the extent that the Financial Services Modernization Act permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis and which unitary savings and loan holding companies already possess. Nevertheless, the Financial Services Modernization Act may have the result of increasing the amount of competition that Bancorp and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than Bancorp and the Bank. In addition, because Bancorp may only be acquired by other unitary savings and loan holding companies or Financial Holding Companies, the legislation may have an anti-takeover effect by limiting the number of potential acquirers or by increasing the costs of an acquisition transaction by a bank holding company that has not made the election to be a Financial Holding Company under new legislation.
Regulation of Bancorp
General. Bancorp is a savings and loan holding company as defined by the Home Owners' Loan Act, as amended (the "HOLA"). As such, Bancorp is registered with the OTS and is subject to OTS regulation, examination, 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 Bancorp and affiliates thereof. Bancorp also is required to file certain reports, and otherwise comply, with the rules and regulations of the SEC under the federal securities law.
Activities Restrictions. There are generally no restrictions on the activities of a savings and loan holding company. The broad latitude to engage in activities under current law can be restricted if the 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 institution, the OTS may impose such restrictions as deemed necessary to address such risk including limiting: (i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings institution subsidiary of such a holding company fails to meet the QTL test, then such unitary holding company shall also become subject to the activities restrictions applicable to multiple holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, register as, and become subject to, the restrictions applicable to a bank holding company. See "Regulation of the Bank - QTL Test."
Restrictions on Acquisitions. Savings and loan holding companies are prohibited from acquiring, without prior approval of the OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Under certain circumstances, a registered savings and loan holding company is permitted to acquire with the approval of the OTS, up to 15% of the voting shares of an undercapitalized savings institution pursuant to a "qualified stock issuance" without that savings institution being deemed controlled by the holding company. In order for the shares acquired to constitute a "qualified stock issuance," the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the savings and loan holding company's other subsidiaries must have tangible capital of at least 6-1/2% of total assets, there must not be more than one common director or officer between the savings and loan holding company and the issuing savings institution, and transactions between the savings institution and the savings and loan holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company.
Regulation of the Bank
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank ("FHLB") System, which consists of 12 district Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The FHLB provides 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 (i.e., borrowings) from the FHLB of Atlanta, whichever is greater. The Bank was in compliance with this requirement with an investment in FHLB of Atlanta stock at December 31, 2001 of $2,500,000.
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 makes advances to members secured by certain prescribed collateral in accordance with policies and procedures established by the FHLB 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. Members must meet standards of community investment or service established by the FHLB of Atlanta in order to maintain continued access to long-term advances. As of December 31, 2001, the Bank had advances totaling $42,000,000 outstanding.
QTL Test. Savings institutions must meet a QTL test, which test may be met either by maintaining a specified level of assets in qualified thrift investments as specified in HOLA or by meeting the definition of a "domestic building and loan association" in section 7701 of the Internal Revenue Code of 1986, as amended (the "Code"). If the Bank maintains an appropriate level of certain specified investments (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualifies as a QTL or a domestic building and loan association, it will continue to enjoy full borrowing privileges from the FHLB. The required percentage of investments under HOLA is 65% of assets while the Code requires investments of 60% of assets. An association must be in compliance with the QTL test or definition of domestic building and loan association on a monthly basis in nine out of every 12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings association. As of December 31, 2001, the Bank was in compliance with its QTL requirements and met the definition of a domestic building and loan association.
Branching. Subject to certain limitations, the HOLA and the OTS regulations currently permit federally chartered savings institutions such as the Bank to establish branches in any state of the United States. Federal savings associations with branches in more than one state must satisfy either the QTL or the DBLA test on a state-by-state basis. The authority for a federal savings institution to establish an interstate branch network would facilitate a geographic diversification of the institution's activities. This authority under the HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings institutions.
Regulatory Capital Requirements. Under OTS capital regulations, 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 the risk-weighted assets. In addition, OTS regulations which impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS examination rating system).
The OTS has adopted an amendment to its risk-based capital requirements that requires savings institutions with more than a "normal" level of interest rate risk to maintain additional total capital (the OTS is delaying implementation of this requirement). A savings institution's interest rate risk will be 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 will be 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 2% of the current estimated economic value of its assets. A savings institution with a greater than normal interest rate risk will be 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.
On December 1, 1998, the OTS issued Thrift Bulletin 13a ("TB 13a"), which replaced previous thrift bulletins and certain other guidance on interest rate risk to assist institutions in interpreting the rules governing interest rate risk. TB 13a sets forth a definition and sources of interest rate risk and directs the Board of Directors of a savings association to set interest rate risk limits for the savings association and to adopt a system for measuring interest rate risk. TB 13a also describes certain due diligence management should undertake before taking a position in investment securities or financial derivatives, requires certain record-keeping of such investment, and states that the savings association's activities in this area will be subject to assessment by examiners. TB 13a discusses the two elements to an examiner's assessment of interest rate risk: the level of market risk as measured by a net portfolio value model, and the quality of the savings association's practices for managing interest rate risk. In the event the OTS believes supervisory action is required to address interest rate risk at a savings association, TB 13a outlines the range of agency responses, from written plans from the board to reduce risk to formal enforcement action, including supervisory agreements or cease and desist orders.
The OTS will calculate 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 interest rate risk component, if any, to be deducted from a savings institution's total capital will be based on the institution's Thrift Financial Report filed two quarters earlier. In general, savings institutions with less than $300 million in assets and a risk-based capital ratio above 12% are exempt from this interest rate risk component unless the OTS terminates such exemption. Although the Bank qualifies for the exemption, management believes that based on current financial data, the Bank would not be deemed to have more than a normal level of interest rate risk.
In addition to generally applicable capital standards for savings institutions, the Director of the OTS is authorized to establish the minimum level of capital for a savings institution at such amount or at such ratio of capital-to-assets as the Director determines to be necessary or appropriate for such institution in light of the particular circumstances of the institution. The Director of OTS may treat the failure of any savings institution to maintain capital at or above such level as an unsafe or unsound practice and may issue a directive requiring any savings institution 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 a directive may be enforced in the same manner as an order issued by the OTS.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the Savings Association Insurance Fund ("SAIF") to the maximum amount permitted by law. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. Under this system as of September 30, 2001, SAIF members paid within a range of 0 cents to 23 cents per $100 of domestic deposits, depending upon the institution's risk classification. This risk classification is based on an institution's capital group and supervisory subgroup assignment. Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"), the Bank pays, in addition to its normal deposit insurance premium as a member of the SAIF an amount equal to approximately 6.4 basis points toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery of the savings and loan industry. Members of the Bank Insurance Fund ("BIF"), by contrast, pay in addition to their normal deposit insurance premium, approximately 1.3 basis points. Under the Act, the FDIC also is not permitted to establish SAIF assessment rates that are lower than comparable BIF assessment rates. Effective January 1, 2000, the rate paid to retire the Fico Bonds will be equal for members of the BIF and the SAIF. The Act also provided for the merging of the BIF and the SAIF by January 1, 1999, provided there were no financial institutions still chartered as savings associations at that time. Although legislation to eliminate the savings association charter had been proposed at January 1, 1999, financial institutions such as the Bank were still chartered as savings associations.
Federal Reserve System. Pursuant to regulations of the Federal Reserve Board, a savings institution must maintain average daily reserves equal to 3% on the first $54.0 million of transaction accounts, plus 10% on the remainder. 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 non-interest 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. As of December 31, 2001, the Bank met its reserve requirements.
Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or requirements on the ability of savings institutions to make capital distributions, including cash dividends. A savings institution that is a subsidiary of a savings and loan holding company, such as the Bank, must file an application or a notice with the OTS at 30 days before making a capital distribution. Savings institutions are not required to file an application for permission to make a capital distribution and need only file a notice if the following conditions are met: (1) they are eligible for the expedited treatment under OTS regulations; (2) they would remain adequately capitalized after the distribution; (3) the annual amount of the capital distribution does not exceed net income for that year to date added to retained net income for the two preceding years; and (4) the capital distribution would not violate any agreements between the OTS and the savings institution or any OTS regulations. Any other situation would require an application to the OTS.
In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that the distribution would constitute an unsafe or unsound practice. A federal savings institution is prohibited from making a capital distribution if, after making the distribution, the savings institution would be unable to meet any one of its minimum regulatory capital requirements. Savings institutions cannot distribute regulatory capital that is needed for its liquidation account.
Affiliate Restrictions. Transactions between a savings association and its "affiliates" are subject to quantitative and qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings association include, among other entities, the savings association's holding company and companies that are under common control with the savings association.
In general, Sections 23A and 23B and OTS regulations issued in connection therewith limit the extent to which a savings association or its subsidiaries may engage in certain "covered transactions" with affiliates to an amount equal to 10% of the association's capital and surplus, in the case of covered transactions with any one affiliate, and to an amount equal to 20% of such capital and surplus, in the case of covered transactions with all affiliates. In addition, a savings association and its subsidiaries may engage in covered transactions and certain other transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the savings association or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A "covered transaction" is defined to include a loan or extension of credit to an affiliate; a purchase of investment securities issued by an affiliate; a purchase of assets from an affiliate, with certain exceptions; the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; or the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate.
In addition, under the OTS regulations, a savings association may not make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies; a savings association may not purchase or invest in securities of an affiliate other than shares of a subsidiary; a savings association and its subsidiaries may not purchase a low-quality asset from an affiliate; and covered transactions and certain other transactions between a savings association or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices. With certain exceptions, each loan or extension of credit by a savings association to an affiliate must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings association subsidiaries of savings associations from treatment as affiliates, except to the extent that the OTS or the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") decides to treat such subsidiaries as affiliates. The regulation also requires savings associations to make and retain records that reflect affiliate transactions in reasonable detail, and provides that certain classes of savings associations may be required to give the OTS prior notice of affiliate transactions.
Standards for Safety and Soundness. Under applicable regulatory requirements, the Bank is required to prescribe standards, by regulation or guideline, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, operational and managerial standards as the agencies deem appropriate. The OTS and the federal bank regulatory agencies adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards pursuant to the statute. The safety and soundness guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks associated with each aspect of an institution's operations. The guidelines also prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder.
In addition, on August 27, 1996, the OTS and the federal bank regulatory agencies added guidelines for asset quality and earnings standards. Under the standards, a savings institution would be required to 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.
Prompt Corrective Action. The prompt corrective action regulation of the OTS requires certain mandatory actions and authorizes certain other discretionary actions to be taken by the OTS against a savings bank that falls within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
risk-based capital, leverage capital, and tangible capital ratios are used to
determine an institution's capital classification. At December 31, 2001 the Bank
met the capital requirements of "well capitalized" institutions under applicable
OTS regulations.
In general, the prompt corrective action regulation prohibits an insured depository institution from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may accept brokered deposits only with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll-over brokered deposits.
If the OTS determines that an institution is in unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OTS may, if the institution is well capitalized, reclassify it as adequately capitalized; if the institution is adequately capitalized but not well capitalized, require it to comply with restrictions applicable to undercapitalized institutions; and if, the institution is undercapitalized, require it to comply with certain restrictions applicable to significantly undercapitalized institutions.
Real Estate Lending Standards. Under joint regulations of the federal banking agencies, including the OTS, savings institutions must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards, including loan-to-value limits that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. An institution's real estate lending policy must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the "Interagency Guidelines") that have been adopted by the federal banking agencies. The Interagency Guidelines, among other things, call upon depository institutions to establish internal loan-to-value limits specified in the Interagency Guidelines for the various types of real estate loans. The Interagency Guidelines state that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits not exceeding those specified, but require that the aggregate amount of loans with loan-to-value ratios in excess of certain specified levels may not exceed the amount of the savings association's total capital. (Amounts in excess of core capital must be deducted on a dollar-for-dollar basis from this capital).
Federal Consumer Credit and Non-Discrimination Legislation. The Bank's mortgage lending activities are subject to the provisions of various federal and state statutes, including, among others, the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Act, the Fair Housing Act and the regulations promulgated thereunder. These statutes and regulations, among other things, prohibit discrimination on the basis of race, gender or other designated characteristics, prohibit unfair and deceptive trade practices, require the disclosure of certain basic information to mortgage borrowers concerning credit terms and settlement costs, and disclosure of certain basic information to mortgage borrowers concerning credit terms and settlement costs, and otherwise regulate terms and conditions of credit and the procedures by which credit is offered and administered. Each of the foregoing statutes provides for various administrative, civil and, in limited circumstances, criminal enforcement procedures, and violations thereof may also lead to class actions seeking actual and/or punitive damages.
Community Reinvestment Act and Fair Lending Developments. The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low- and moderate-income neighborhoods. A savings association may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and CRA obligations into account when regulating and supervising other activities.
A savings association's compliance with its CRA obligations is based on a performance-based evaluation system that bases CRA ratings on an institution's lending service and investment performance. When a holding company applies for approval to acquire another financial institution or financial institution holding company, the OTS will review the assessment of each subsidiary savings association of the applicant; and such records may be the basis for denying the application. As of the latest CRA Examinations, the Bank received a rating of "superior" in complying with its CRA obligations.
Item 103. Legal Proceedings
As of December 31, 2001 there were no lawsuits pending against the Bank or Bancorp.
Item 201. Securities of the Registrant
Market price of and Dividends of the Registrants Common Equity and Related Matters
Market Information
There is no organized trading market for Bancorp's shares of common stock. The shares trade from time to time on the over-the-counter bulletin board. Bancorp intends to apply to list its common stock on the Nasdaq Small Cap Market subsequent to the time that it becomes a publicly registered company. The high and low prices reported to Bancorp and dividends paid for each quarterly period during the past two years are as follows:
2001 Price Cash Quarter Ended High Low Dividends Paid Per Share December 31 $9 $7 .046 September 30 7.83 6.16 .046 June 30 8 7.33 .046 March 31 8 6.5 .046 2000 Price Cash Quarter Ended High Low Dividend Paid Per Share December 31 $7.16 $6.16 .0416 September 30 6.66 5.5 .0416 June 30 6.33 6.16 .0416 March 31 8.08 6.16 .0416 |
The above stock prices and dividends paid have been adjusted after giving effect to a three-for-one stock split. Bancorp acted as its own transfer agent until September 17, 2001, when Registrar and Transfer Company began serving in that capacity.
Holders
As of December 31, 2001 there were 505 holders of record of Bancorp's common stock.
Dividends
There are no contractual restrictions that currently limit Bancorp's ability to pay dividends or that Bancorp reasonably believes are likely to limit materially the future payment of dividends on Bancorp's shares.
Bancorp is dependent upon the Bank's ability to distribute dividends to it so it can in turn distribute dividends to its shareholders. The Bank may not pay dividends or distribute any of its capital to its parent, Bancorp, while it remains in default on any assessment due the FDIC. The Bank currently is not in default of any of its obligations to the FDIC. In addition, FDIC regulations also impose certain minimum capital requirements which affect the amount of cash available for the payment of dividends by a regulated financial institution such as the Bank.
Distributions paid by Bancorp to stockholders will be taxable to the stockholders as dividends, to the extent of Bancorp's accumulated or current earnings and profits. There can be no assurance that Bancorp will declare or pay cash dividend at any particular time.
Bancorp has declared a three-for-one split of its stock in the form of a 200% stock dividend that was effective on March 1, 2002. This means that effective March 1, 2002 each stockholder of Bancorp owned three times as many shares of Bancorp as such stockholder owned immediately prior to March 1, 2002.
Item 202. Description of Registrant's Securities
Capital Stock
Bancorp has 20,000,000 shares of common stock authorized, par value $.01 per share. At December 31, 2001 Bancorp had 505 stockholders and 4,057,092 shares were issued and outstanding, after giving effect to the three-for-one stock split. Bancorp also has 1,000,000 shares of preferred stock authorized. As of December 31, 2001, there were no shares of preferred stock issued and outstanding. Preferred stock may only be issued upon approval of the Board of Directors of Bancorp.
The outstanding shares of common stock are fully paid and nonassessable. In the event of voluntary or involuntary liquidation, dissolution or winding up of the affairs of Bancorp, the assets of Bancorp available for distribution to its stockholders will be distributed pro rata to the holders of common stock.
Voting Rights
Each share of common stock is entitled to one vote on all matters requiring the approval of stockholders.
Special Meetings of Stockholders
The Articles of Incorporation of Bancorp provide that special meetings of the stockholders may be called by the Chairman of the Board, the President, by a majority of the Board of Directors or upon the written request of holders of shares of common stock representing not less than 25% of all votes entitled to be cast at the meeting.
Cumulative Voting
The Articles of Incorporation do not provide for cumulative voting.
Vacancies on the Board of Directors
The Bylaws of Bancorp provide that vacancies on the board and newly created directorships may be filled by a majority vote of the directors then in office, provided that no more than two additional directorships may be created in this manner during any one year. Directors appointed to fill a vacancy may serve until the next annual meeting of the stockholders.
Number and Terms of Directors
Bancorp's Articles of Incorporation provide that its Board of Directors shall consist of not less than seven nor more than 11 members. There are currently eight members of the Board of Directors of Bancorp. The Articles of Incorporation provide for a classified Board of Directors, and Bancorp currently has a classified board consisting of three substantially equal classes of directors, each serving for a 3-year term, with the term of each class of directors ending in successive years.
Removal of Directors
The Articles of Incorporation of Bancorp provide that any director or the entire Board of Directors may be removed for cause by the affirmative vote of the holders of at least 75% of the outstanding shares of the capital stock entitled to vote generally in the election of directors at a meeting of the stockholders called for that purpose. Whenever the holders of any one or more series of preferred stock of Bancorp shall have the right, voting separately as a class, to elect one or more directors, the preceding provision does not apply with respect to the director or directors elected by such preferred stock.
Approval of Mergers, Consolidations and Sale of Substantially All Assets
Under Maryland law, an agreement providing for the merger (other than a merger of a corporation with its 90% owned subsidiary) or consolidation, the sale of substantially all of the assets, or the dissolution of Bancorp, must generally be approved by the holders of two-thirds of the outstanding shares of the corporation, except that no stockholder approval is required if the company is the corporation surviving any merger involving, among other things, the issuance of shares of the company amounting to 15% or less of the shares of the company's common stock outstanding immediately prior to the transaction.
Advance Notice Requirements for Nominations of Directors and Presentation of New Business at Meetings of Stockholders
Bancorp'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 to the Company 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.
Amendment of Charter, Articles of Incorporation and Bylaws
Bancorp's Articles of Incorporation do not require OTS approval prior to its amendment and may be amended by the vote of the holders of a majority of the Board of Directors. The Bylaws of Bancorp 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 Bancorp's Common Stock.
Anti-Takeover Provisions
Certain corporate takeover practices could be highly disruptive to a company and could result in inequitable treatment among the company's shareholders. These practices typically involve a purchaser's acquisition of a substantial portion of a company's capital stock and attempt to replace incumbent management and board of directors. Provisions in Bancorp's Articles of Incorporation and Bylaws relating to the calling of a special meeting of stockholders, advance director nomination and new business provisions, removal of directors, staggered board of directors' terms and the amendment of Bancorp's Articles of Incorporation and Bylaws, all of which are discussed above, may make it difficult to gain control of Bancorp or replace all of the incumbent management.
Restrictions on Acquisition of the Holding Company
OTS regulations require that, prior to obtaining control of a savings association, a person (under the Control Act) must give 60 days notice to the OTS and have received no OTS objection to such acquisition of control, and a company (under the Control Act) must give 60 days notice to the OTS and have received no OTS objection to such acquisition of control, and a company (under the Holding Company Provisions) must apply for and receive OTS approval of the acquisition. Control, for purposes of this regulation, involves a 25% voting stock test, control in any manner of the election of a majority of the institution's directors, or a determination by the OTS that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of an institution's voting stock, if the acquiror also is subject to any one of the eight "control factors," constitutes a rebuttable determination of control under the revised regulations. There determination of control may be rebutted by submission to the OTS, prior to the acquisition of stock or the occurrence of any other circumstances giving rise to such determination, of a statement setting forth facts and circumstances which would support a finding that no control relationship will exist and containing certain undertakings. The regulations provide that persons or companies which acquire beneficial ownership exceeding 10% or more of any class of an insured institution's stock must file with the OTS a certification that the holder is not in control of such institution, is not subject to a rebuttable determination of control and will take no action which would result in a determination or rebuttable determination of control without prior notice to or approval of the OTS, as applicable.
Item 301. Selected Financial Data
The following financial information is presented from the audited financial statements of Bancorp. The information is a summary and should be read in conjunction with Management's Discussions and Analysis of Financial Condition and Results of Operations appearing in Item 303 below.
[see table on following page]
Summary Financial and Other Data
at December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in thousands, except per share information)
Balance Sheet Data
Total assets $366,890 $293,230 $233,724 $220,417 $174,801
Cash and cash equivalents 3,949 1,007 2,430 12,896 4,537
Total loans, net 342,641 274,652 214,066 192,572 155,994
Securities available for sale - 858 812 891 888
Mortgage backed securities and securities
held to maturity 7,213 9,779 10,326 8,455 8,120
Nonperforming loans 2,101 1,178 925 2,741 1,803
Real estate acquired through foreclosure 312 312 672 104 315
Total nonperforming assets 2,413 1,490 1,597 2,845 2,118
Deposits 286,918 229,312 186,204 175,341 142,101
Short-term borrowings 17,000 18,000 2,000 6,000 12,000
Notes payable 25,000 16,000 22,000 18,000 2,000
Total liabilities 332,059 268,009 211,743 200,849 157,272
Stockholders equity 34,831 25,221 21,981 19,567 17,529
Common shares outstanding * 4,057,092 3,239,316 3,234,492 3,229,086 2,291,292
Book value per common shares * 7.60 6.58 5.59 4.85 4.67
Other Data:
Number of:
Full service retail banking facilities 2 2 2 2 2
Full-time equivalent employees 67 66 63 63 63
|
* Retroactively adjusted to reflect three-for-one stock split declared February 19, 2002
Summary of Operations
For the Year Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in thousands, except share data)
Interest and dividend income $ 29,489 $ 24,271 $ 20,047 $ 17,927 $ 14,435
Interest expense 16,094 13,387 10,523 9,399 7,394
----------------------------------------------------------------------
Net interest income
13,395 10,884 9,524 8,528 7,041
Provision for loan losses 708 591 504 552 461
----------------------------------------------------------------------
Net interest income after provision for loan
losses 12,687 10,293 9,020 7,976 6,580
Noninterest income 2,570 1,439 1,586 1,607 1,102
Noninterest expense 6,588 5,348 5,477 5,433 4,222
----------------------------------------------------------------------
Earnings before income tax provision
8,669 6,384 5,129 4,150 3,460
Provision for income taxes 3,413 2,439 2,002 1,612 1,209
----------------------------------------------------------------------
Net income 5,256 3,945 3,127 2,538 2,251
======================================================================
Per Share Data:
Basic earnings per share * 1.38 1.15 0.90 0.72 0.79
Diluted earnings per share * 1.37 1.12 0.84 0.70 0.70
Weighted number of shares outstanding basic * 3,647,451 3,237,888 3,230,940 3,226,545 2,280,036
Weighted number of shares outstanding
diluted* 3,683,346 3,330,915 3,450,831 3,316,992 3,214,830
|
* Retroactively adjusted to reflect three-for one stock split declared February 19, 2002.
Key Operating Ratios
For the Year Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in thousands)
Performance Ratios:
Return on average assets 1.55% 1.47% 1.38% 1.30% 1.44%
Return on average equity 17.55% 16.73% 14.91% 13.69% 15.03%
Net interest margin 4.05% 4.17% 4.34% 4.50% 4.68%
Interest rate spread 3.65% 3.75% 3.94% 4.09% 4.31%
Noninterest expense to average assets 1.95% 2.00% 2.43% 2.78% 2.70%
Efficiency ratio 41.27% 43.40% 49.30% 53.61% 51.85%
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period 0.66% 0.51% 0.68% 1.29% 1.21%
Nonperforming loans to total gross
loans at end of period 0.52% 0.36% 0.37% 1.24% 1.04%
Allowance for loan losses to total
gross loans at end of period 0.82% 0.83% 0.84% 0.87% 0.86%
Allowance for loan losses to
nonperforming loans at end of period 159.59% 231.58% 232.11% 72.38% 84.25%
Mortgage Origination and Servicing Data:
Mortgage loans originated or purchased 342,915 213,614 180,782 177,979 117,910
Mortgage loans sold 60,302 36,869 37,706 44,211 25,868
Mortgage loans serviced for others 17,376 21,648 23,186 23,425 23,101
Capitalized value of mortgage
servicing rights 26 33 39 49 52
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Item 302. Supplementary Financial Information
Average Balance Sheet. The following tables contain for the periods indicated
information regarding the total dollar amounts of interest income from
interest-earning assets and the resulting average yields, the total dollar
amount of interest expense on interest-bearing liabilities and the resulting
average costs, net interest income, and the net yield on interest-earning
assets.
Years Ended December 31,
--------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------------------------------
Average Average Average
Volume Interest Yield/Cost Volume Interest Yield/Cost Volume Interest Yield/Cost
------ ------- ---------- ------ -------- ---------- ------ -------- ----------
(dollars in thousands)
ASSETS
Loans $313,798 $ 28,61 9.12% $246,631 $ 23,320 9.46% $203,237 $ 19,122 9.41%
Investments 7,671 45 5.86% 10,879 651 5.98% 10,021 600 5.98%
Mortgage-backed
securities 255 1 7.09% 299 21 7.06% 361 25 7.04%
Other interest-
earning assets (1) 8,773 40 4.60% 3,427 279 8.13% 5,995 300 5.01%
--------------------------------------------------------------------------------------------------------
Total interest-
earning assets 330,497 29,48 8.92% 261,236 24,271 9.29% 219,614 20,047 9.13%
Non-interest earning assets 7,800 6,651 6,205
------------- ----------- ------------
Total Assets $338,297 $267,887 $225,819
============= =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Savings and
checking deposits $ 69,846 2,422 3.47% $ 49,694 2,309 4.65% $ 41,989 $ 1,785 4.25%
Certificates
of deposits 190,391 11,170 5.87% 159,482 9,158 5.74% 138,129 7,500 5.43%
Borrowings 45,250 2,502 5.53% 32,667 1,920 5.88% 22,750 1,238 5.44%
--------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 305,487 16,094 5.27% 241,843 13,387 5.54% 202,868 10,523 5.19%
Non-interest
bearing liabilities 2,866 2,463 1,977
Stockholders' equity 29,944 23,581 20,974
------------ ----------- ---------------
Total liabilities and
stockholders' equity $338,297 $267,887 $225,819
============= =========== ===============
Net interest income and
interest rate spread $ 13,395 3.65% $ 10,884 3.75% $ 9,524 3.94%
========== =============== ==============
Net interest margin 4.05% 4.17% 4.34%
Average interest-
earning assets to
average interest-
bearing liabilities 108.19% 108.02% 108.25%
|
(1) Other interest earning assets includes interest bearing deposits in other banks, federal funds, and FHLB stock investments.
Rate/Volume Analysis Changes in net interest income are attributable to three
factors: (1) a change in volume of interest-earning assets or interest bearing
liabilities; (2) a change in interest rates; or (3) a change attributable to a
combination of changes in volume and rate. The following table contains certain
information regarding changes in interest income and interest expense of Bancorp
for the periods indicated. For each category of interest-earning assets and
interest-bearing liability, information is provided on changes attributable to:
(a) changes in volume (changes in volume multiplied by the old interest rate);
and (b) changes in rates (changes in interest rates multiplied by the old
average volume).
Rate Volume Table
Year ended December 31, 2001 Year ended December 31, 2000
vs. vs.
Year ended December 31, 2000 Year ended December 31, 1999
------------------------------------------ -----------------------------------------
Total Changes Due to Total Changes Due to
---------------------------- ---------------------------
Change Volume (1) Rate (1) Change Volume (1) Rate (1)
------ ---------- -------- ------ ---------- --------
(dollars in thousands)
Interest-earning assets
Loans $ 5,297 $ 6,162 $ (865) $ 4,198 $ 4,095 $ 103
Investments (201) (188) (13) 51 51 -
Mortgage-backed securities (3) (3) - (4) (4) -
Other interest-earning assets 125 287 (162) (21) (161) 140
------------------------------------------ -----------------------------------------
Total interest income $ 5,218 $ 6,258 $ (1,040) $ 4,224 $ 3,981 $ 243
Interest-bearing liabilities
Savings and checking deposits $ 113 $ 791 $ (678) $ 524 $ 346 $ 178
Certificates of deposits 2,012 1,803 209 1,658 1,212 446
Borrowings 582 701 (119) 682 575 107
------------------------------------------ -----------------------------------------
Total interest expense $ 2,707 $ 3,295 $ (588) $ 2,864 $ 2,133 $ 731
------------------------------------------ -----------------------------------------
Net change in interest income $ 2,511 $ 2,963 $ (452) $ 1,360 $ 1,848 $ (488)
========================================== =========================================
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(1) Changes in interest income/expense not arising from volume or rate variances are allocated proportionately to rate and volume.
Item 303. Management's Discussion and Analysis of Financial Condition and Results of Operations
In addition to the historical information contained herein the following discussion contains forward-looking statements that involve risks and uncertainties. Bancorp's operations and actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and Bancorp's general market area. The forward-looking statements contained herein include, but are not limited to, those with respect to the following matters:
1. Management's determination of the amount of loan loss allowance;
2. The effect of changes in interest rates; and
3. Changes in deposit insurance premiums.
Financial Condition
At December 31, 2001 total assets were $366,890,000 compared to $293,230,000 at December 31, 2000 which represents an increase of $73,660,000 or 25.1%. Management is committed to growing the balance sheet with quality assets that provide appropriate yields. The following is a discussion of the significant fluctuations between the December 31, 2001 and 2000 balance sheets.
Loans
Loans Held for Sale
At December 31, 2001 loans held for sale was $7,499,000 compared to $4,169,000 at December 31, 2000. This increase of $3,330,000 or 79.9% was caused by an increase in loan production that was intended to be sold to investors.
Loans Receivable
Total net portfolio loans were $335,142,000 at December 31, 2001, an increase of $64,659,000 or 23.9% from $270,483,000 at December 31, 2000. This increase resulted primarily from increases in loan demand, including permanent residential mortgage loans, residential construction mortgages and commercial mortgages.
Liabilities
Deposits
Total deposits were $286,918,000 at December 31, 2001 compared to $229,312,000 at December 31, 2000 which represents an increase of $57,606,000 or 25.1%. The increase was due to the attempt to generate new deposits to fund loan growth. Money Market accounts increased from $28,008,000 to $61,759,000 representing an increase of $33,751,00 or 12.1%. The increase was a result of the implementation of a plan by the Bank to maintain its short term assets, primarily construction loans, to short term liabilities.
FHLB Advances
FHLB advances were $42,000,000 at December 31, 2001 compared to $34,000,000 at December 31, 2000. This increase of $8,000,000 or 23.5% was due to the need to obtain additional funding to support the growth of the Bank's loan portfolio.
Stockholders' Equity
Total stockholders' equity was $34,831,000 as of December 31, 2001 which compared to $25,221,000 as of December 31, 2000. This is an increase of $9,610,000 or 38.1%. The increase in stockholders' equity resulted from earnings, from the exercise of outstanding warrants to purchase Bancorp shares in the amount of $3,393,000 in 2001 and the acquisition of HRE which was accomplished via a stock exchange valued at $1,600,000.
Comparison of Results of Operation for the Years Ended December 31, 2001 and 2000
General.
Bancorp's net income for the year ended December 31, 2001 was $5,256,000 or $1.37 per share, diluted, compared to $3,945,000 or $1.12 per share, diluted, for the year ended December 31, 2000. The increase of $1,311,000 or 33.2% was primarily the result of increases in loan origination volume and the increase in interest income.
Net Interest Income
Net interest income (interest earned net of interest charges) totaled $13,395,000 for the year ended December 31, 2001, as compared to $10,284,000 for the year ended December 31, 2000, or an increase of $3,111,000 or 30.3%. The change was primarily due to growth in the loan portfolio. The net interest margin decreased to 4.05% at December 31, 2001 from 4.17% at December 31, 2000.
Provision for Loan Losses
Bancorp's loan portfolio is subject to varying degrees of credit risk and an allowance for loan losses is maintained to absorb losses inherent in its loan portfolio. Credit risk includes, but is not limited to, the potential for borrower default and the failure of collateral to be worth what Bancorp determined it was worth at the time of the granting of the loan. Management believes that the allowance for loan losses is adequate. During the year ended December 31, 2001, the provision for loan losses was $709,000 compared to $591,000 for the year ended December 31, 2000. This increase of $118,000 or 19.9%, was a result of increases in loans contained in the loan portfolio that Management determined contained a greater inherent risk than in the prior year, and as a result of an increase in nonperforming loans as of December 31, 2001 compared to December 31, 2000. As of December 31, 2001 the allowance for loan losses was $3,353,000 compared to $2,728,000 as of December 31, 2000 which is an increase of $625,000 or 22.9%.
Other Income and Non Interest Expense
Gain on sale of loans was $983,000 for the year ended December 31, 2001 compared to $610,000 for the year ended December 31, 2000. The increase of $373,000 or 61.1% was a result of increased loan originations primarily from a lower interest rate environment which resulted in significant residential mortgage loan refinancings. Should loan originations decrease in the future, gain on sale of loans will also likely decrease. Loan originations may decrease as a result of greater competition, increases in general interest rates or a loss of personnel experienced in loan origination. A reduction in loan originations will also cause a reduction in mortgage processing fees.
Real estate commissions and real estate management fees for the year ended December 31, 2001 were $499,000 and $213,000, respectively. These were earned as a result of the acquisition of HRE in 2001.
Mortgage processing and servicing fees for the year ended December 31, 2001 were $607,000 compared to $384,000 for the year ended December 31, 2000. This increase of $223,000 or 58.1% was a result of increase in loan originations.
Compensation and related expenses totaled $4,572,000 for the year ended December 31, 2001 compared to $3,552,000 for the year ended December 31, 2000, or an increase of $1,020,000 or 28.7%. The increase during 2001 was primarily attributable to the increase in operations and staffing and compensation levels of the Bank caused by the increase in loan production.
Other non-interest expense totaled $1,520,000 for the year ended December 31, 2001 compared to $1,337,000 for the year ended December 31, 2000 or an increase of $183,000 or 13.7%. Other non-interest expense consists primarily of office and computer supplies, mail expenses, telephone and other expenses. The increase during 2001 was primarily attributable to the increase in operations caused by an increase in loan production.
Income taxes for the year ended December 31, 2001 were $3,413,000 compared to $2,439,000 for the year ended December 31, 2000. This increase of $974,000 or 39.9% was a result of an increase in income before income tax provision to $8,669,000 for the year ended December 31, 2001 compared to $6,384,000 for the year ended December 31, 2000, being an increase of $2,285,000 or 35.8%. The effective tax rate for the years ended December 31, 2001 and 2000 were 39.37% and 38.2%, respectively.
Liquidity and Capital Resources.
Bancorp's liquidity is determined by its ability to raise funds through loan payments, maturing investments, deposits, borrowed funds, capital, or the sale of loans. Based on the internal and external sources available, Bancorp's liquidity position exceeded anticipated short-term and long-term needs at December 31, 2001. Core deposits, considered to be stable funding sources and defined to include all deposits except time deposits of $100,000 or more, equaled 84.3% of total deposits at December 31, 2001. The Bank's experience is that a substantial portion of certificates of deposit will renew at time of maturity and will remain on deposit with the bank. Additionally, loan payments, maturities, deposit growth and earnings contribute a flow of funds available to meet liquidity requirements. In assessing its liquidity the management of Bancorp considers operating requirements, anticipated deposit flows, expected funding of loans, deposit maturities and borrowing availability, so that sufficient funds may be available on short notice to meet obligations as they arise so that Bancorp may take advantage of business opportunities. As of December 31, 2001 Bancorp had $788,000 outstanding in loan commitments which Bancorp expects to fund from liquidity. This amount does not include undisbursed lines of credit, home equity loans and standby letters of credit, in the aggregate amount of $24,000,000, which Bancorp anticipates it will be able to fund, if required, from its liquidity sources in the regular course of business.
In addition to its ability to generate deposits, Bancorp has external
sources of funds which may be drawn upon, when desired. The primary source of
external liquidity is an available line of credit equal to 25% of the Bank's
assets with the Federal Home Loan Bank of Atlanta. The available line of credit
with the Federal Home Loan Bank of Atlanta was $92,000,000 at December 31, 2001,
of which $42,000,000 was outstanding at that time.
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
General
Bancorp's net income for the year ended December 31, 2000 was $3,945,000 or $1.12 per share, diluted, compared to $3,127,000 or $.84 per share, diluted, for the year ended December 31, 1999. The increase of $818,000 or 26.2% was primarily the result of increases in loan origination volume as a result of refinancing demand, the reduction in overall non-interest expense and an increase in interest income.
Net Interest Income
Net interest income (interest earned net of interest charges) totaled $10,884,000 for the year ended December 31, 2000, as compared to $9,524,000 for the year ended December 31, 1999, or an increase of $1,360,000 or 14.3%. The change was primarily due to an increase in the loan portfolio. The net interest margin was 4.17% at December 31, 2000 and 4.34% at December 31, 1999.
Provision for Loan Losses
The provision for loan losses is charged to earnings to bring the allowance for loan losses to a level deemed appropriate by management. During the year ended December 31, 2000 the provision for loan losses was $591,000 compared to $504,000 for the year ended December 31, 1999. This increase of $87,000 or 17.3% was a result of maintaining an allowance that reflected the inherent risk in the overall loan portfolio. As of December 31, 2000 the total allowance for loan losses was $2,728,000 compared to $2,147,000 as of December 31, 1999 which was an increase of $581,000 or 21.3%.
Other Income and Non Interest Expense
Gain on sale of loans was $610,000 for the year ended December 31, 2000 compared to $679,000 for the year ended December 31, 1999. The decrease of $69,000 or 10.2% was a result of fewer loan originations intended for sale in the secondary market.
Mortgage processing and servicing fees for the year ended December 31, 2000 were $384,000 compared to $460,000 for the year ended December 31, 1999. This decrease of $76,000 or 16.5% was a result of a decrease in loans originated for secondary market sale.
Compensation and related expenses totaled $3,552,000 for the year ended December 31, 2000 compared to $3,557,000 for the year ended December 31, 1999, or a decrease of $5,000 or .1%. The minor decrease during 2000 was primarily attributable to staffing and compensation levels of the Bank remaining approximately the same in both years.
For the year ended December 31, 2000 net expense of foreclosed real estate was $15,000, compared to $221,000 for the year ended December 31, 1999. This was a decrease of 93%, as a result of several properties acquired by the Bank being sold at losses in 1999.
Other non-interest expense totaled $1,337,000 for the year ended December 31, 2000 compared to $1,233,000 for the year ended December 31, 1999 or an increase of $104,000 or 8.4%. Other non-interest expense consists primarily of office and computer supplies, mail expenses, telephone and other expenses. The increase during 2000 was primarily attributable to the increase in operations caused by comparable levels of loan production in the two years.
Income taxes for the year ended December 31, 2000 were $2,439,000 compared to $2,002,000 for the year ended December 31, 1999. This increase of $437,000 or 21.8% was a result of an increase in income before income tax provision to $6,384,000 for the year ended December 31, 2000 compared to $5,129,000 for the year ended December 31, 1999 being an increase of $1,255,000 or 24.5%. The effective tax rate for the years ended December 31, 2000 and 1999 were 38.2% and 39.03%, respectively.
Item 304. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure
None.
Item 305. Quantitative and Qualitative Disclosures About Market Risk
Qualitative Information About Market Risk
The principal objective of Bancorp's interest rate risk management is to evaluate the interest rate risk included in balance sheet accounts, determine the level of risks appropriate given Bancorp's business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with Bancorp's interest rate risk management policy. Through this management, Bancorp seeks to reduce the vulnerability of its operations to changes in interest rates. The Board of Directors of Bancorp is responsible for reviewing assets/liability policies and interest rate risk position. The Board of Directors reviews the interest rate risk position on a quarterly basis. In connection with this review, the Board of Directors evaluates Bancorp's business activities and strategies, the effect of those strategies on Bancorp's net interest margin and the effect that changes in interest rates will have on Bancorp's loan portfolio. Continuous movement of interest rates is certain, however, the extent and timing of these movements is not always predictable. Any movements in interest rates has an effect on Bancorp's profitability. Bancorp faces the risk that rising interest rates could cause the cost of interest bearing liabilities, such as deposits and borrowings, to rise faster than the yield on interest earning assets, such as loans and investments. Bancorp's interest rate spread and interest rate margin may be negatively impacted in a declining interest rate environment even though Bancorp generally borrows at short term interest rates and lends at longer term interest rates. This is because loans and other interest earning assets may be prepaid and replaced with lower yielding assets before the supporting interest bearing liabilities reprice downward. Bancorp's interest rate margin may also be negatively impacted in a flat or inverse-yield curve environment. Mortgage origination activity tends to increase when interest rates trend lower and decrease when interest rates rise.
Bancorp's primary strategy to control interest rate risk is to sell substantially all long term fixed rate loans in the secondary market. To further control interest rate risk related to its loan servicing portfolio, Bancorp originates a substantial amount of construction loans which typically have terms of one year or less. The turnover in construction loan portfolio assists Bancorp in maintaining a reasonable level of interest rate risk.
Quantitative Information About Market Risk
The primary market risk facing Bancorp is interest rate risk. From an enterprise prospective, Bancorp manages this risk by striving to balance its loan origination activities with the interest rate market. Bancorp attempts to maintain a substantial portion of its loan portfolio in short term loans such as construction loans. This has proven to be an effective hedge against rapid increases in interest rates as the construction loan portfolio reprices rapidly.
The matching of maturity or repricing of interest earning assets and interest bearing liabilities may be analyzed by examining the extent to which these assets and liabilities are interest rate sensitive and by monitoring the Bank's interest rate sensitivity gap. An interest earning asset or interest bearing liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. The difference between rate sensitive assets and rate sensitive liabilities represents the Bank's interest sensitivity gap.
Exposure to interest rate risk is actively monitored by Bancorp's management. Its objective is to maintain a consistent level of profitability within acceptable risk tolerances across a board range of potential interest rate environments. Bancorp uses the OTS Net Portfolio Value (NPV) model to monitor its exposure to interest rate risk, which calculates changes in NPV. The following table represents Bancorp's NPV at December 31, 2001. The NPV was calculated by the OTS, based upon information provided to the OTS.
[see table on following page]
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
Change Net Portfolio Value NPV as % of PV of Assets In Rates $ Amount $ Change % Change NPV Ratio Change -------- -------- -------- -------- --------- ------ +300 bp 30,312 -11,087 -27% 8.37% -250 bp +200 bp 34,639 - 6,760 -16% 9.39% -148 bp +100 bp 38,643 - 2,756 - 7% 10.30% -57 bp 0 bp 41,399 10.87% -100 bp 43,765 2,366 + 6% 11.35% + 48 bp -200 bp --- 0 0% 0.00% 0 bp -300 bp --- 0 0% 0.00% 0 bp |
12/31/2001 09/30/2001 12/31/2000
---------- ---------- ----------
RISK MEASURES: FOR GIVE RATE SHOCK
Pre-Shock NPV Ratio: NPV as % of PV of Assets . . . . 10.87% 11.81% 9.80%
Post-Shock NPV Ratio . . . . . . . . . . . . . . . . 9.39% 10.53% 8.13%
Sensitivity Measure: Decline in NPV Ratio . . . . . . 148 bp 128 bp 167 bp
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Note: Calculations of 2/15/2002 using CMR data edited 02/12/2002. CMR Report filing required. For the current reporting cycle, we have suppressed all model outputs associated with the -300 and -200 bps scenario because of the abnormally low prevailing interest rate environment.
As with any method of measuring interest rate risk, certain short comings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate loans, have features which restrict changes in interest rates on a short term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdraws from certificates would likely deviate significantly from those assumed in calculating the table.
Item 401. Directors, Executive Officers, Promoters and Control Persons
Directors and Executive Officers of Bancorp
Term of
DirectorOffice
Name Age Since Expires
Alan J. Hyatt 48 1978 2003
Chairman and
President
Melvin E. Meekins, 60 1983 2003
Jr., Executive Vice-
President
S. Scott Kirkley, 50 1980 2004
Senior Vice President
Secretary and Treasurer
Cecilia Lowman 58 1984 ----
Comptroller
Louis DiPasquale, Jr. 79 1946 2003
Melvin Hyatt 69 1978 2004
Ronald P. Pennington 62 1980 2002
T. Theodore Schultz 62 1986 2002
Dimitri Sfakiyanudis 59 1993 2002
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The principal occupation of each director and executive officer of Bancorp is set forth below. Unless otherwise noted, all directors have held the position described below for at least the past five years.
Alan J. Hyatt has been Chairman of the Board and President of the Bank since 1982, having previously served as an officer and director since 1978. He is also the Chairman of the Board and President of Bancorp. Mr. Hyatt has been a partner in the law firm of Hyatt, Peters & Weber, LLP, Annapolis, Maryland since 1978 and is a real estate broker with Arundel Realty Services, LLC, Annapolis, Maryland.
Melvin E. Meekins, Jr. joined the Bank as a Director and Executive Vice President in April 1983, and he serves in the same capacity for Bancorp. Mr. Meekins is the Bank's Principal Operating Officer. Mr. Meekins has been employed in the savings and loan industry since 1962. He is a graduate of the Institution of Financial Education's Executive Development School, University of Connecticut and the Graduate School of Savings & Loan, Indiana University.
S. Scott Kirkley has been a Director and Secretary/Treasurer of the Bank since 1980 and Senior Vice President since 1989. He serves in the same capacities for Bancorp. He has been employed by the Bank on a full-time basis since 1987 and has primary responsibility for the Bank's residential loan operations.
Cecelia M. Lowman, has been Controller and Chief Financial Officer since 1984. Prior to joining the Bank, she was associated with the accounting firm of Naron & Wagner, Chartered.
Louis DiPasquale, Jr. has been a Director since the inception of the Bank. Mr. DiPasquale has been the owner/operator of the Motel Carlton in Baltimore, Maryland since 1964. Mr. DiPasquale served as Secretary/Treasurer of the Bank from 1964 to 1978.
Melvin Hyatt has been a Director and of the Bank since 1978. He is employed by the Housing Authority, City of Annapolis. Mr. Hyatt is the uncle of Alan J. Hyatt.
Ronald P. Pennington has been a Director since 1980. Mr. Pennington has been the President of an independent tool distributorship since 1985.
T. Theodore Schultz has been a Director of the Bank since 1986. Mr. Schultz is an enrolled agent, accredited tax advisor with an accounting and tax practice in the Annapolis area since 1971.
Dimitri Sfakiyanudis has served as a Director of the Bank since 1993. He is a self-employed civil engineer and real estate developer and investor.
There are no family relationships existing among the Officers, and none are employed under employment contracts.
Item 402. Executive Compensation
REMUNERATION AND OTHER TRANSACTIONS WITH
MANAGEMENT AND OTHERS
Bancorp has no employees so compensation relates to the employees of the Bank. The following table sets forth for the fiscal year ended December 31, 2001, certain information as to the remuneration received by Directors and Officers whose aggregate direct remuneration exceed $100,000 and for all Directors and Officers as a group for services in all capacities to the Bank:
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Name Other Restricted Securities
and Annual Stock Underlying LTIP All Other
Principal Compen- Award(s) Options/ Payouts Compen-
Position Year Salary ($) Bonus ($) sation ($)1 ($) SARs (#) ($) sation($)2
--------- ------ ---------- --------- ---------- ------------ -------- ------- ---------
Alan J. Hyatt
CEO
2001 162,430 94,400 1,200 --- --- --- $2,938.33
2000 150,400 78,660 1,200 --- --- --- $2,938.33
1999 134,300 68,400 1,200 --- --- --- $2,938.33
Melvin E. Meekins, Jr.
Executive Vice-President
2001 193,100 69,500 1,200 --- --- --- $2,938.33
2000 178,800 60,490 1,200 --- --- --- $2,938.33
1999 159,660 52,600 1,200 --- --- --- $2,938.33
S. Scott Kirkley
Senior Vice- President
2001 134,350 41,300 1,200 --- --- --- $2,938.33
2000 124,400 35,715 1,200 --- --- --- $2,938.33
1999 111,120 31,055 1,200 --- --- --- $2,938.33
Cecelia Lowman
Principal Financial and
Accounting Officer
2001 95,362 24,883 1,200 --- --- --- $2,938.33
2000 88,298 21,637 1,200 --- --- --- $2,938.33
1999 78,848 18,814 1,200 --- --- --- $2,938.33
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1 SBI Mortgage Company directors' fees
2 Payment for premiums on life insurance polices insuring each of the
aforementioned officers under a supplemental executive retirement plan where the
Bank owns life insurance policies for the above named individuals with a death
benefit and cash values under each such insurance policy payable to the Bank.
Upon retirement from the Bank and the attainment of age 62, each of the above
officers shall be entitled to annual "retirement income" benefit for ten years
in an amount which will be calculated at the time of retirement, based on
available assets within the applicable insurance policy insuring each executive,
and existing market conditions.
OPTION/SAR GRANTS TABLE
Potential
Realizable Value at
Assumed Annual Alternative
Rates of Stock Price to (f) and (g):
Appreciation Grant Date
Individual Grants for Option Term Value
Percentage
Number of of Total
Securities Options/
Underlying SARs
Options/ Granted to Exercise Grant
SARs Employees of Base Date
Granted in Fiscal Price Expiration Present
Name (#) Year (#/Sh) Date 5% ($) 10%($) Value ($)
---- ------------------ ------- ------ --------- ------ ------ ---------
CEO
A
B No options granted in last 4 years
C
D
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Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-END (%) FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise ($) Value Realized ($) Unexercisable Unexercisable
---- ------------------ ------------------ ----------------- -------------
Alan J. Hyatt ----- ---- ---- ----
Melvin E. Meekins, Jr. ----- ---- ---- ----
S. Scott Kirkley 2,000 ---- ---- ----
Cecelia Lowman 2,000 ---- ---- ----
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Compensation of Directors
During 2001, members of the Board of Directors of the Bank received fees of $12,600 per year. In addition, fees ranging from $275 to $425 per meeting are paid to members of the Audit Committee, Executive Committee, Loan Committee, and other committees formed from time-to-time. Messrs. Alan Hyatt, Melvin E. Meekins, Jr. and S. Scott Kirkley received no directors or committee fees for their participation. No director's fees are paid to Bancorp Directors.
Board Compensation Committee Report on Executive Compensation
The Bank maintains an Executive Compensation Committee consisting of Board Members that are not officers or employees. The Executive Compensation Committee meets annually to evaluate the compensation of senior management. There are no employment contracts and annually compensation of the senior management of the Bank is determined based upon the following factors: financial condition of the Bank, which includes an analysis of asset quality, net income, interest rate exposure and capital adequacy. The complexity of the job, qualifications of the particular officer and compensation packages paid to officers of comparable institutions is considered. A base salary is then determined and an award of a bonus is considered after measuring the Bank's net income, historical trends, general business prospects and other criteria determined by the members of the Executive Compensation Committee.
Item 403. Securities Ownership of Certain Beneficial Owners and Management
The following information is furnished with respect to each Executive Officer, director, and person or entity known to Bancorp to be the beneficial owner of more than five percent of the outstanding shares of Bancorp common stock and Severn Preferred Capital Corporation preferred stock as of December 31, 2001. The number of shares of common stock have been adjusted for the three for one stock split. Each of their addresses is c/o Severn Bancorp, Inc., 1919 A West Street, Annapolis, Maryland 21401.
[see table on following page]
Name Amount and Amount and Nature Percent of Preferred
Nature Percent of of Beneficial Stock of Severn
of Beneficial Common Stock Ownership of Severn Preferred Preferred
Ownership Capital Corporation Capital Corporation
Alan J. Hyatt 610,9953 15.06% 7,5004 3.75%
Melvin E. Meekins, Jr. 184,7105 4.55% 3,070 1.54%
S. Scott Kirkley 126,5526 3.12% 3,1007 1.55%
Louis DiPasquale, Jr. 90,0818 2.22% 3,500 1.75%
Melvin Hyatt 79,617910 1.96% 1,250 *
Ronald P. Pennington 47,46611 1.17% 250 *
T. Theodore Schultz 16,50012 * 50013 *
Dimitri Sfakiyanudis 30,000 * 5,000 2.50%
Louis Hyatt 431,10014 10.63% 4,50015 2.25%
Employee Stock Ownership Plan (ESOP) 382,86616 9.44% NONE NONE
All directors, executives officers and 1,999,887 49.3% 28,670 14.34%
beneficial owners of more then 5% of
the outstanding shares of Bancorp common
stock and Severn Preferred Capital Corporation
Preferred Stock as a group (10 persons and 1
entity)
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1 577,995 such shares are owned by Mr. Hyatt and his wife. He controls 9,000
shares as custodian for his children. The ESOP holds an additional 44,091
shares for the benefit of Mr. Hyatt. The number of shares indicated does
not include the shares which Mr. Hyatt can vote as a trustee of the
Company's ESOP.
2 7,000 such shares are owned by a limited partnership of which Mr. Hyatt is
the general partner.
3 151,500 such shares are owned by Mr. Meekins and his wife. the ESOP holds
an additional 45,888 shares for Mr. Meekins. The number of shares indicated
does not include the shares which Mr. Meekins can vote as a trustee of the
Company's ESOP.
4 119,175 such shares are owned by Mr. Kirkley and his wife. The ESOP holds
an additional 30,237 shares for Mr. Kirkley.
5 100 such shares are owned Mr. Kirkley for the benefit of his children.
6 61,380 such shares are owned by Mr. DiPasquale for the benefit of his
children.
7 16,500 such shares are owned by Mr. Hyatt and his wife.
8 Melvin Hyatt is the uncle of Alan J. Hyatt.
9 All such shares are owned by Mr. Pennington and his wife.
10 7,500 such shares are owned by Mr. Schultz and his wife.
11 All such shares are owned by Mr. Schultz and his wife.
12 21,690 such shares are owned by Mr. Hyatt and his wife.
13 1,000 such shares are owned by Mr. Hyatt and his wife.
14 Employees cannot vote or control the stock held for their benefit in the
ESOP and the number of such shares are, therefore, not included on their
behalf in this chart in the number of shares held by such individual. The
shares of stock in the ESOP are voted by the trustees of the plan; the
trustees are Alan J. Hyatt and Melvin E. Meekins, Jr. * Less than 1%.
Description of Change in Control
During a routine safety and soundness examination of the Bank in 2000, the OTS determined that Alan J. Hyatt, Chairman and President of Bancorp and the Bank, and certain relatives of Mr. Hyatt, were "control parties" as defined by OTS regulations. It was discovered that although Mr. Hyatt and his relatives had been control parties for many years, there had never been an application filed with the OTS for approval of this arrangement. As a result, an application for "change in control" on behalf of Mr. Hyatt and his relatives was filed with the OTS in 2001. The application was approved, having the effect of allowing Mr. Hyatt and his relatives to own up to 32.32 percent of the total issued and outstanding common shares of Bancorp, provided that the purchase of any additional shares must be consummated by April 16, 2002. Mr. Hyatt and his relatives may not purchase any additional shares of Bancorp after April 16, 2002 unless another notice of "change in control" application is filed with the OTS.
Item 404. Certain Relationships and Related Transactions
Relationship of Hyatt, Peters & Weber, LLP
Alan J. Hyatt, Chairman of the Board of Directors and president of Bancorp and the Bank, is a partner in the law firm of Hyatt, Peters & Weber, LLP, which serves as general counsel to Bancorp and the Bank. That law firm received fees in the amount of $80,866 for services rendered to Bancorp and to the Bank and its subsidiaries for the year ended December 31, 2001. The law firm also received $220,064 in fees from borrowers who obtained loans from the Bank and/or who closed loans through Homeowners Title and Escrow Corporation ("Homeowners"), a subsidiary of the Bank, for the year ended December 31, 2001. Additionally, that law firm received $11,992 in fees for other matters performed on behalf of the Bank but paid by others.
Homeowner's leases space at 1923 West Street from Hyatt, Peters & Weber, LLP. The lease is dated November 1990 with an original term of 3 years, and it has continued as a month to month tenancy since that time. The rent paid in 2001 was $26,010 subject to increases annually based upon the consumer price index.
Acquisition of HRE
Bancorp acquired the shares of HRE in June, 2001 for the purchase price of $1,600,000. Louis Hyatt, Inc. was wholly owned by HRE, father of Alan J. Hyatt. Prior to the acquisition of HRE appraisals of the real property and the business assets of Louis Hyatt, Inc. were obtained and a disinterested majority of the Board of Directors of Bancorp approved the acquisition.
Tenancy with Hyatt Family Limited Liability Limited Partnership
When Bancorp acquired HRE, it did so subject to a month to month tenancy between Louis Hyatt, Inc., and Hyatt Family Limited Liability Limited Partnership ("HFLLLP") in the monthly amount of $1,000 for space currently being used by Louis Hyatt, Inc. Neither party is obligated to continue such month to month tenancy, but it is anticipated that they will. Louis Hyatt is the general partner of HFLLLP and Alan J. Hyatt is a limited partner.
Item 509. Interests of Named Experts and Counsel
Dyer Ellis & Joseph, Eleventh Floor, 600 New Hampshire Ave., NW, Washington, DC 20037 has acted as special counsel to Bancorp and the Bank regarding this Registration Statement.
The financial statements of Severn Bancorp, Inc. as of December 31, 2001 and 2000 and for the years then ended have been included herein in reliance upon the report of Anderson Associates, LLP, independent certified public accountants, appearing elsewhere herein, and upon authority of said firm as experts in accounting and auditing.
Item 601. Exhibits
The following exhibits are attached at the end of this document:
3(i)(a). Articles of Incorporation of Severn Bancorp, Inc.
3(i)(b). Articles of Amendment of Severn Bancorp, Inc.
3(ii). By-Laws of Severn Bancorp, Inc.
10. Louis Hyatt, Inc. Employment Agreement
21. List of Severn Bancorp Inc.'s Subsidiaries
99. Articles of Incorporation Severn Preferred Capital Corporation
99 Articles of Supplementary of 9% Noncumulative Exchangeable
Preferred Stock, Series A of Severn Preferred Capital
Corporation
99. Severn Bancorp, Inc. Stock Option and Incentive Plan
Item 701. Recent Sales of Unregistered Securities
Warrants
In 1997 Severn Capital sold 200,002 "units" at a price of $20 per unit. Each unit consisted of one share of series "A" preferred stock of Severn Capital, par value of $1.00 per share with liquidation preference of $20 per share and one warrant to purchase one share of common stock of Bancorp. Each warrant entitled the holder to purchase one share of common stock of Bancorp, at a price of $17 per share if exercised on or before June 30, 2001. All 200,002 warrants were exercised, with substantially all of them exercised in 2001. Bancorp received net proceeds of $3,400,000 from the exercise of warrants. Of those proceeds $200,000 was retained by Bancorp, and the remaining $3,200,000 was infused as additional capital into the Bank.
Options
Bancorp adopted a stock option plan on October 30, 1997, (the "Plan"). Pursuant to the Plan 225,000 shares were made available to certain employees and directors of the Bank. Since the date of the Plan through December 31, 2001, 159,000 options have been awarded under the plan and out of the options awarded 51,000 options have been exercised, resulting in $280,500 to Bancorp. Substantially all of these proceeds have been infused into the Bank.
Item 702. Indemnification of Directors and Officers
The Annotated Code of Maryland permits corporations, such as Bancorp, to limit the personal liability of directors, officers, employees and agents for a breach of fiduciary duty. The Articles of Incorporation and Bylaws of Bancorp contain provisions which limit the liability of directors to the fullest extent under Maryland law. Bancorp's Bylaws also provide that to the extent permitted by Maryland law, no director or officer of Bancorp shall be liable to Bancorp or its stockholders for money damages. Bancorp believes that such actions will assist Bancorp in continuing to attract and retain talented directors and officers in light of the growing risk of litigation against directors and officers of publicly held corporations.
The provisions of the Maryland Code permit a corporation to indemnify any director made a party to any proceeding by reason of services in that capacity if the director acted in good faith and reasonably believed that (i) in the case of conduct in the director's official capacity with the corporation, such conduct was in the best interest of the corporation; and (ii) in all other cases, such conduct was at least not opposed to the best interest of the corporation. In the case of any criminal proceedings, the director must have had no reasonable cause to believe that the conduct was unlawful.
Indemnification may be against judgments, penalties, fines, settlements and reasonable expenses, including attorney's fees, actually incurred by the director in connection with the proceeding. However, if the proceeding was won by or in the right of Bancorp, indemnification may be made only against reasonable expenses and may not be made in respect of any proceeding in which the director shall have been adjudged liable to Bancorp. In addition, no indemnity is permitted to a director with respect to any proceeding charging improper personal benefit, whether or not involving action in the director's official capacity, in which the director was adjudged to be liable on the basis that personal benefit was improperly received. Maryland law provides that a director who has been successful in the defense of a proceeding shall be indemnified against reasonable expenses incurred in connection with the proceeding. The provision also permits the advancement of reasonable expenses if the director undertakes to repay the amount if it is ultimately determined that the director has not met the standard of conduct necessary for indemnification. Officers, employees and agents of Bancorp may be indemnified by Bancorp to the same extent as directors.
As a result of the inclusion of such provision, the stockholders of Bancorp may be unable to recover monetary damages against directors for actions taken by them. Although the provision would have no effect on certain equitable remedies, such as injunction or rescission, the availability of such equitable remedies may be of limited usefulness.
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.
SEVERN BANCORP, INC.
April 15, 2002 By: /s/ ALAN J. HYATT
--------------------------------------
Alan J. Hyatt, President, Chief Executive
Officer and Director
(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.
Signature Title Date /s/ ALAN J. HYATT President, Chief Executive Officer April 15, 2002 -------------------------------------------- and Chairman of the Board Alan J. Hyatt (Principal Executive Officer) -------------------------------------------- Chief Financial Officer April __, 2002 Cecilia Lowman (Principal Financial and Accounting Officer) /s/ MELVIN E. MEEKINS, JR. Director April 15, 2002 -------------------------------------------- Melvin E. Meekins, Jr. (Executive Vice President and Managing Officer of Severn Savings Bank, FSB) /s/ S. SCOTT KIRKLEY Director April 15, 2002 -------------------------------------------- S. Scott Kirkley (Senior Vice President) /s/ LOUIS DIPASQUALE, JR. Director April 15, 2002 -------------------------------------------- Louis DiPasquale, Jr. /s/ MELVIN HYATT Director April 15, 2002 -------------------------------------------- Melvin Hyatt /s/ RONALD P. PENNINGTON Director April 15, 2002 -------------------------------------------- Ronald P. Pennington /s/ T. THEODORE SCHULTZ Director April 15, 2002 -------------------------------------------- T. Theodore Schultz /s/ DIMITRI SFAKIYANUDIS Director April 15, 2002 -------------------------------------------- Dimitri Sfakiyanudis |
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Severn Bancorp, Inc.
Annapolis, Maryland
We have audited the accompanying statements of consolidated financial condition of Severn Bancorp, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Severn Bancorp, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the consolidated results of its operations and cash flows for each of the years in the three year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
February 15, 2002, except as to Note 20
which is as of February 19, 2002
Baltimore, Maryland
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2001 2000
-------------- ---------------
ASSETS
Cash $ 1,030,867 $ 717,477
Interest bearing deposits in other banks 1,058,692 289,610
Federal funds 3,948,900 -
Securities available for sale - 858,418
Investment securities, held to maturity 7,000,958 9,499,541
Mortgage backed securities held to maturity 212,021 279,367
Loans held for sale, net of unrealized loss of
$ -0- and $26,455 in 2001 and 2000, respectively 7,498,934 4,169,084
Loans receivable, net 335,142,276 270,482,958
Accrued interest receivable - loans 2,094,588 2,075,345
- mortgage backed securities 1,330 1,689
- investments 100,895 189,332
Foreclosed real estate, net 312,118 312,118
Premises and equipment, at cost, less
accumulated depreciation 4,642,481 1,215,840
Mortgage servicing rights 25,940 32,540
Federal Home Loan Bank of Atlanta stock
at cost 2,500,000 1,800,000
Deferred income taxes 813,486 1,020,258
Income taxes receivable 950 22,427
Prepaid expenses and other assets 172,082 263,860
Goodwill 333,569 -
-------------- ---------------
Total assets $ 366,890,087 $ 293,229,864
============== ===============
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The accompanying notes to consolidated financial statements are an integral part of these statements.
December 31,
2001 2000
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 286,917,568 $ 229,311,927
Outstanding checks in excess of bank balance 798,088 3,298,358
Federal Home Loan Bank advances 42,000,000 34,000,000
Advance payments by borrowers for expenses 1,007,068 550,754
Income taxes payable 174,529 94,812
Accounts payable and accrued expenses 1,161,952 753,379
------------- --------------
Total liabilities 332,059,205 268,009,230
Commitments - (Notes 4 and 6)
Stockholders' Equity
Non-cumulative preferred stock $1.00 par value, Series A 500,000 shares
authorized; 200,002 issued
and outstanding in 2001 and 2000 200,002 200,002
Additional paid-in capital 3,800,038 3,691,787
Common stock, $.01 par value, 2,000,000 shares
authorized; 1,352,364 and 1,079,772 issued and
outstanding in 2001 and 2000, respectively 13,524 10,798
Additional paid-in capital 10,816,887 5,720,300
Retained earnings (substantially restricted) 20,000,431 15,684,650
------------- -------------
34,830,882 25,307,537
Accumulated comprehensive income (loss) - (86,903)
------------- -------------
Total stockholders' equity 34,830,882 25,220,634
------------- -------------
Total liabilities and stockholders' equity $ 366,890,087 $ 293,229,864
============= =============
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SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF OPERATIONS
For Years Ended December 31,
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Interest Income
Interest on loans $28,617,342 $23,320,153 $19,121,854
Interest on securities available for sale 43,809 42,988 51,505
Interest on securities held to maturity 406,117 607,713 548,080
Interest on mortgage backed securities 18,042 21,107 25,456
Other interest income 403,914 278,703 300,242
------------ ------------ ------------
Total interest income 29,489,224 24,270,664 20,047,137
Interest Expense
Interest on deposits 13,591,440 11,466,359 9,284,884
Interest on short term borrowings 1,178,202 834,298 1,238,325
Interest on long term borrowings 1,324,368 1,085,767 -
------------ ------------ ------------
Total interest expense 16,094,010 13,386,424 10,523,209
------------ ------------ ------------
Net interest income 13,395,214 10,884,240 9,523,928
Provision for loan losses 708,669 591,000 504,109
------------ ------------ ------------
Net interest income after provision
for loan losses 12,686,545 10,293,240 9,019,819
Other Income
Loss on sale of investments (145,529) - -
Gain on sale of loans 982,778 609,644 678,600
Real estate commissions 499,256 - -
Real estate management fees 213,102 - -
Unrealized loss on loans held for sale - (26,455) (70,499)
Mortgage processing and servicing fees 606,587 384,288 460,293
All other income 414,089 471,133 517,970
------------ ------------ ------------
Net other income 2,570,283 1,438,610 1,586,364
Non-Interest Expenses
Compensation and related expenses 4,572,101 3,552,266 3,557,058
Occupancy 465,628 443,352 466,721
Net expense of foreclosed real estate 30,786 14,685 220,642
Other 1,519,537 1,337,417 1,232,721
------------ ------------ ------------
Total non-interest expenses 6,588,052 5,347,720 5,477,142
------------ ------------ ------------
Income before income tax provision 8,668,776 6,384,130 5,129,041
Income tax provision 3,413,206 2,438,989 2,001,735
------------ ------------ ------------
Net income $ 5,255,570 $ 3,945,141 $ 3,127,306
============ ============ ============
Basic earnings per common share $ 1.38 $ 1.15 $ 0.90
============ ============ ============
Diluted earnings per common share $ 1.37 $ 1.12 $ 0.84
============ ============ ============
|
The accompanying notes to consolidated financial statements are an integral part
of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Non-Cumulative Additional Additional Accumulated Total
Preferred Stock Paid-In Common Paid-In Retained Comprehensive Stockholders'
Series A Capital Stock Capital Earnings Income(Loss) Equity
-------------- ----------- -------- ----------- ----------- ----------- -------------
Balance - January 1, 1999 $200,002 $3,691,787 $10,764 $5,663,864 $10,067,933 $(66,892) $19,567,458
Comprehensive Income
Net income 3,127,306
Unrealized holding losses on
available for sale securities
net of taxes to $30,501 (48,476)
Total comprehensive income 3,078,830
Exercise of 1,800 options - - 18 29,682 - - 29,700
Dividends on preferred stock
($1.80 per share) - - - - (360,004) - (360,004)
Tax effect of preferred
stock dividends - - - - 139,000 - 139,000
Dividends on common stock
($.44 per share) - - - - (473,995) - (473,995)
-------------- ----------- -------- ----------- ----------- ----------- -------------
Balance - December 31, 1999 200,002 3,691,787 10,782 5,693,546 12,500,240 (115,368) 21,980,989
Comprehensive Income
Net income 3,945,141
Unrealized holding gains on
available for sale securities
net of taxes to $17,909 28,465
Total comprehensive income 3,973,606
Exercise of 1,200 options - - 12 19,788 - - 19,800
Exercise of 410 warrants - - 4 6,966 - - 6,970
Dividends on preferred stock
($1.80 per share) - - - - (360,004) - (360,004)
Tax effect of preferred
stock dividends - - - - 139,033 - 139,033
Dividends on common stock
($.50 per share) - - - - (539,760) - (539,760)
-------------- ----------- -------- ----------- ----------- ----------- -------------
Balance - December 31, 2000 200,002 3,691,787 10,798 5,720,300 15,684,650 (86,903) 25,220,634
Comprehensive Income
Net income 5,255,570
Reclassification for gains
included in net income
net of taxes to $54,162 86,903
Total comprehensive income 5,342,473
Exercise of 13,000 options - - 130 214,370 - - 214,500
Exercise of 199,592 warrants - 108,251 1,996 3,282,817 - - 3,393,064
Issuance of 60,000 shares of
common stock - - 600 1,599,400 - - 1,600,000
Dividends on preferred stock
($1.80 per share) - - - - (360,004) - (360,004)
Tax effect of preferred
stock dividends - - - - 139,033 - 139,033
Dividends on common stock
($.56 per share) - - - - (718,818) - (718,818)
-------------- ----------- -------- ----------- ----------- ----------- -------------
Balance - December 31, 2001 $200,002 $3,800,038 $13,524 $10,816,887 $20,000,431 $ - $ 34,830,882
============== =========== ======== =========== =========== =========== =============
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The accompanying notes to consolidated financial statements are an integral part of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended December 31,
2001 2000 1999
---- ---- ----
Operating Activities
Net income $ 5,255,570 $ 3,945,141 $ 3,127,306
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Amortization of deferred loan fees (1,530,021) (1,019,118) (1,071,453)
Loan fees deferred 1,554,151 1,322,452 1,239,063
Accretion of discount on mortgages (8,736) (6,875) (12,926)
Amortization of premium on investment
securities 2,187 7,612 9,420
Accretion of discount on investment securities (1,358) (2,575) (4,233)
Accretion of discount on mortgage backed
securities (161) (161) (161)
Provision for loan losses 708,669 591,000 504,109
Provision for losses on foreclosed real estate 20,000 - 97,000
Provision for depreciation 227,331 210,868 219,980
Loss (gain) on sale of foreclosed real estate 2,769 (2,596) 107,199
Gain on sale of loans (982,778) (609,644) (678,600)
Gain on disposal of premises and equipment (5,656) - -
Loss on sale of available for sale securities 145,529 - -
Proceeds from loans sold to others 61,258,782 37,402,282 38,385,082
Unrealized loss on loans held for sale - 26,455 70,499
Loans originated for sale (63,564,893) (38,024,380) (34,607,521)
Principal collected on loans originated
for sale (40,961) 25,274 15,440
Tax effect of preferred stock dividends 139,033 139,033 139,000
Increase in accrued interest on loans (19,243) (625,024) (98,949)
Decrease (increase) in accrued interest on
investments 88,437 4,688 (25,703)
Decrease in accrued interest on mortgage
backed securities 359 245 754
Decrease in mortgage servicing rights 6,600 6,600 9,600
Increase in deferred taxes (260,702) (225,678) (98,963)
Decrease (increase) in income taxes
receivable 21,477 94,023 (116,450)
Decrease (increase) in prepaid expenses
and other assets 105,349 14,651 (93,793)
(Decrease) increase in accrued interest payable (8,445) 33,591 -
(Decrease) increase in accounts payable
and accrued expenses 408,297 (38,512) (23,843)
Increase in income taxes payable 79,717 57,960 8,463
--------------- -------------- ---------------
Net cash provided by operating activities 3,601,303 3,327,312 7,100,320
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SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended December 31,
2001 2000 1999
---- ---- ----
Cash Flows from Investing Activities
------------------------------------
Cash consideration Louis Hyatt, Inc.
acquisition, net $ (31,340) $ - $ -
Purchase of investment securities (4,000,000) (1,497,250) (3,500,000)
Proceeds from maturing investment securities 6,497,754 2,000,000 1,500,000
Proceeds from sale of available for sale
securities 854,471 - -
Principal collected on mortgage backed
securities 67,507 39,315 123,713
Longer term loans originated (275,799,110) (169,845,620) (139,721,804)
Principal collected on longer term loans 214,211,144 115,422,795 123,815,726
Net decrease (increase) in short-term loans (370,809) 50,722 (3,878,077)
Loans purchased (3,551,316) (5,743,786) (6,453,384)
Proceeds from sale of foreclosed real estate 103,941 185,317 219,793
Investment in foreclosed real estate - - (92,820)
Decrease in investments and loans to
joint ventures - - 433,957
Investment in premises and equipment (2,097,708) (102,004) (117,655)
Proceeds from disposal of premises
and equipment 15,029 - -
Purchase of Federal Home Loan Bank of
Atlanta stock (700,000) (600,000) (200,000)
Redemption of Federal Home Loan Bank of
Atlanta stock - - 200,000
---------------- ----------------- -------------
Net cash used by investing activities (64,800,437) (60,090,511) (27,670,551)
Cash Flows from Financing Activities
------------------------------------
Net increase in demand deposits, money
market, passbook accounts and advances
by borrowers for taxes and insurance 44,777,862 2,046,569 18,086,217
Net increase (decrease) in certificates of
deposit 13,424,172 40,868,310 (7,177,168)
(Decrease) increase in checks outstanding
in excess of bank balance (2,500,270) 3,298,358 -
Additional borrowed funds 47,000,000 45,000,000 -
Repayment of borrowed funds (39,000,000) (35,000,000) -
Cash dividends (1,078,822) (899,764) (833,999)
Proceeds from exercise of options 214,500 19,800 29,700
Proceeds from exercise of warrants 3,393,064 6,970 -
---------------- ----------------- -------------
Net cash provided by financing activities 66,230,506 55,340,243 10,104,750
---------------- ----------------- -------------
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SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended December 31,
2001 2000 1999
---- ---- ----
Increase (decrease) in cash and cash
equivalents $ 5,031,372 $ (1,422,956) $ (10,465,481)
Cash and cash equivalents at beginning of year 1,007,087 2,430,043 12,895,524
-------------- -------------- -------------
Cash and cash equivalents at end of year $ 6,038,459 $ 1,007,087 $ 2,430,043
============== ============== =============
The Following is a Summary of Cash and
Cash Equivalents
Cash $ 1,030,867 $ 717,477 $ 2,025,645
Interest bearing deposits in other banks 1,058,692 289,610 165,736
Federal funds 3,948,900 - 238,662
-------------- -------------- -------------
Cash and cash equivalents reflected on the
statement of cash flows $ 6,038,459 $ 1,007,087 $ 2,430,043
============== ============== =============
Supplemental Disclosure of Cash Flows Information:
Cash Paid During Year For:
Interest $ 16,094,010 $ 13,386,424 $ 10,523,209
============== ============== =============
Income taxes $ 3,282,444 $ 2,330,440 $ 1,952,000
============== ============== =============
Transfer from loans to foreclosed real estate $ 485,210 $ - $ 1,409,902
============== ============== =============
Transfer from foreclosed real estate to loans $ 358,500 $ 189,000 $ 510,000
============== ============== =============
Common stock issued for acquired company $ 1,600,000 $ - $ -
============== ============== =============
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The accompanying notes to consolidated financial statements are an integral part of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 1 - Summary of Significant Accounting Policies
A. Principles of Consolidation - The consolidated financial statements include the accounts of Severn Bancorp, Inc. ("the Corporation"), and its wholly-owned subsidiaries, Louis Hyatt, Inc., SBI Mortgage Company and SBI Mortgage Company's subsidiary, Crownsville Development Corporation, and its subsidiary, Crownsville Holdings I, LLC, and Severn Savings Bank, FSB ("the Bank"), and the Bank's subsidiaries, Homeowners Title and Escrow Corporation, Severn Financial Services Corporation, Creekside Commons, LLC, SSB Realty Holdings, LLC, SSB Realty Holdings II, LLC, HS West, LLC and Severn Preferred Capital Corporation ("the Company"). All intercompany accounts and transactions have been eliminated in the accompanying financial statements.
Severn Preferred Capital Corporation was organized on April 29, 1997 and commenced operations of July 22, 1997. The Company qualifies as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
B. 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.
C. Basis of Financial Statement Presentation - The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. 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 Notes H and K below for a discussion of the determination of that estimate.
D. Investments Available for Sale - Available for sale securities consisted of an investment in the Putnam GNMA Trust. 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. Gains and losses are determined using the specific identification method.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 1 - Summary of Significant Accounting Policies - Continued
E. Investments and Mortgage Backed Securities - 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 recognized in interest income using the interest method over the period to maturity. Gains and losses are determined using the specific identification method.
F. Loans Held for Sale - Loans held for sale are carried at lower of cost or market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income.
G. Loans - Loans are carried at cost since management has the ability and intention to hold them to maturity.
H. 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 adequate. 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. Statement of Financial Accounting Standards ("SFAS") No. 114, as amended by SFAS No. 118, addresses the accounting by creditors for impairment of certain loans. It is generally applicable for all loans except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, including residential mortgage loans and consumer installment loans. It also applies to all loans that are restructured in a troubled debt restructuring involving a modification
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 1 - Summary of Significant Accounting Policies - Continued
H. Allowance for Loan Losses - Continued
of terms. SFAS No. 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.
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.
I. Loan Origination Fees - Loan origination fees and certain direct loan origination costs are deferred and recognized over the contractual life of the related loan as an adjustment of yield using the level-yield method.
J. Discounts or Premiums - Discounts received or premiums paid in connection with loans purchased, investment and mortgage backed securities are amortized into income over an average loan life using the level yield method.
K. 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. Gains on the sale of foreclosed real estate are recognized upon disposition of the property. Sale of the real estate acquired through foreclosure is expected to occur within the next twelve months.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 1 - Summary of Significant Accounting Policies - Continued
L. Investment in Real Estate and Real Estate Joint Ventures - Interest is capitalized on real estate developments and investments accounted for by the equity method in accordance with Statements of Financial Accounting Standards No. 34 and 58.
M. Loan Servicing - The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using pricing sheets from correspondent purchasers. For purposes of measuring impairment, the rights are stratified based on the following predominant risk characteristics of the underlying loans: fixed rate loans with similar terms (i.e.; fifteen years, twenty years or thirty years amortization) all originated within the same fiscal year. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.
N. Premises and Equipment - Premises and equipment are carried at cost less accumulated depreciation. Depreciation and amortization of premises and equipment is accumulated by the use of the straight-line method over the estimated useful lives of the assets. Additions and improvements are capitalized, and charges for repairs and maintenance are expensed when incurred. The related cost and accumulated depreciation are eliminated from the accounts when an asset is sold or retired and the resultant gain or loss is credited or charged to income.
O. 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.
P. Statement of Cash Flows - In the statement of cash flows, cash and equivalents include cash, Federal Home Loan Bank of Atlanta overnight deposits, federal funds and certificates of deposit with an original maturity date less than ninety days.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 1 - Summary of Significant Accounting Policies - Continued
Q. Goodwill - During the year ended December 31, 2001, the Company recorded goodwill in the amount of $333,569 as the result of the purchase of Louis Hyatt, Inc. There were no other changes in the carrying amount of goodwill for the years ended December 31, 2001, 2000 and 1999. The Company will test the goodwill for impairment in accordance with SFAS 142.
R. Earnings Per Share - Basic earnings per share of common stock for the years ended December 31, 2001, 2000 and 1999 is computed by dividing net income less preferred stock dividend net of tax by 3,647,451, 3,237,888 and 3,230,940, respectively, the weighted average number of shares of common stock outstanding for each year. Included in this amount are only the shares that have been allocated to the Employee Stock Ownership Plan. Diluted earnings per share of common stock for the years ended December 31, 2001, 2000 and 1999, is computed by dividing net income for each year by 3,683,346, 3,330,915 and 3,450,831, respectively, the weighted average number of diluted shares of common stock. (See Note 13) The above amounts have been retroactively adjusted to give effect to a 3-for-1 stock split in the form of a 200% stock dividend. (See Note 20)
S. Employee Stock Ownership Plan - The Corporation accounts for its Employee Stock Ownership Plan ("ESOP") in accordance with Statement of Position 93-6 of the Accounting Standards Division of the American Institute of Certified Public Accountants. (See Note 11)
T. Reclassification - Certain prior year's amounts have been reclassified to conform to the current year's method of presentation.
U. Cash Concentrations - The Bank has a demand deposit account with another financial institution in the amount of $3,150,811 at December 31, 2001. The balance exceeds the Federal Deposit Insurance Corporation ("FDIC") insurance level of $100,000 and constitutes a concentration of credit risk.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 2 - Investment Securities
The amortized cost and fair values of investment securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale Securities
December 31, 2000:
Putnam Government National
Mortgage Association
("GNMA") Trust $1,000,000 $ - $ 141,582 $ 858,418
========== ============ =========== ===========
Held to Maturity
December 31, 2001:
U.S. Treasury Notes $2,001,276 $ 49,412 $ - $ 2,050,688
Federal Home Loan Bank
("FHLB") Notes 4,999,682 46,870 19,300 5,027,252
---------- ------------ ----------- -----------
$7,000,958 $ 96,282 $ 19,300 $ 7,077,940
========== ============ =========== ===========
December 31, 2000:
U.S. Treasury Notes $2,502,487 $ 23,947 $ - $ 2,526,434
FHLB Notes 2,997,054 9,192 - 3,006,246
Federal National Mortgage
Association ("FNMA") Notes 3,000,000 6,800 8,090 2,998,710
Federal Farm Credit Banks
Note 1,000,000 - 6,000 994,000
---------- ------------ ----------- -----------
$9,499,541 $ 39,939 $ 14,090 $ 9,525,390
========== ============ =========== ===========
|
U.S. Treasury and FNMA Notes in the amount of $3,500,000 and $1,000,000, respectively, are pledged as collateral for its standby letters of credit issued on behalf of various borrowers and developers in favor of Anne Arundel County.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 2 - Investment Securities - Continued
The scheduled maturities of investment securities are as
follows at December 31, 2001:
Held To
Maturity Securities
Amortized Fair
Cost Value
Due in one year or less $3,000,958 $3,082,240
Due after one year through five years 4,000,000 3,995,700
--------- ---------
$7,000,958 $7,077,940
======== ========
|
Gross losses of $145,529 and no gross gains were realized on proceeds of $854,471 during the year ended December 31, 2001. No gains or losses were realized during the years ended December 31, 2000 and 1999.
Note 3 - Mortgage Backed Securities
The amortized cost and fair values of mortgage backed securities consisting of FHLMC Gold Certificates are as follows as of December 31:
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
2001
-------------------------------------------------------------------
$212,021 $ 4,241 $ - $216,262
====== ===== ===== ======
2000
-------------------------------------------------------------------
$279,367 $ 643 $ - $280,010
======= ===== ===== ======
|
No gains or losses were realized during the years ended December 31, 2001, 2000 and 1999.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 4 - Loans Receivable
Loans receivable consist of the following:
December 31,
2001 2000
---- ----
Residential mortgage loans $129,777,646 $120,775,297
Construction, land acquisition and
development loans 163,848,657 117,325,103
Land loans 16,895,189 11,389,600
Line of credit 8,776,251 9,486,496
Commercial real estate loans 68,599,149 50,931,539
Commercial non-real estate loans 3,393,331 5,234,912
Second mortgage loans 1,963,026 2,225,142
Home equity loans 7,834,818 5,318,068
Consumer loans 507,815 406,166
Loans secured by deposits 749,069 478,910
------------- -------------
402,344,951 323,571,233
Less
Loans in process (61,684,935) (48,211,299)
Allowance for loan losses (3,353,375) (2,728,004)
Unearned discount on loans purchased (36,961) (45,697)
Deferred loan origination fees (2,127,404) (2,103,275)
------------- -------------
(67,202,675) (53,088,275)
------------ ------------
$335,142,276 $270,482,958
============= =============
|
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. Multifamily residential, commercial, construction and other 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.
A substantial portion 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 90% of the appraised value of a property and
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 4 - Loans Receivable - Continued
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.
The following is a summary of the allowance for loan losses for the two years ended December 31:
2001 2000 1999
---- ---- ----
Balance at beginning of year $2,728,004 $2,146,572 $1,984,287
Provision for loan losses 708,669 591,000 504,109
Recoveries - 20,000 10,646
Charge-offs (83,298) (29,568) (352,470)
----------- ----------- ----------
Balance at end of year $3,353,375 $2,728,004 $2,146,572
======== ======== ========
|
Impaired loans as defined by SFAS No. 114 are summarized as follows for the years ended December 31:
2001 2000 1999
---- ---- ----
Recorded investment $300,000 $292,975 $ -
Average balances 542,628 254,671 250,310
Allowance for loan losses - 30,000 -
|
Impaired loans as defined by SFAS No. 114 for which interest income has been reduced are as follows for the year ended December 31:
2001 2000 1999
---- ---- ----
Interest income that would have been
recorded $32,909 $20,056 $ -
Interest income recognized 25,159 8,318 -
------ -------- -----------
Interest income not recognized $ 7,750 $11,738 $ -
====== ====== ==========
|
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 4 - Loans Receivable - Continued
Nonperforming loans amounted to approximately $1,801,072 and $885,773 at December 31, 2001 and 2000, 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:
2001 2000 1999
---- ---- ----
Interest income that would have
been recorded $190,279 $103,124 $97,344
Interest income recognized 145,199 71,063 49,729
------- -------- ------
Interest income not recognized $ 45,080 $ 32,061 $47,615
======= ======= ======
|
Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at December 31 are summarized as follows:
2001 2000
---- ----
Mortgage Loan Portfolio Serviced For:
FHLMC $ 7,802,731 $ 9,290,068
Other investors 9,573,744 12,358,328
----------- ----------
$17,376,475 $21,648,396
========= =========
|
Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $68,239 and $60,082 at December 31, 2001 and 2000, respectively.
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 standby letters of credit, and home equity loans which 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.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 4 - Loans Receivable - Continued
The Bank's exposure to credit loss from non-performance by the other party to the above mentioned financial instruments is represented by the contractual amount of those 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.
Financial Instruments Whose Contract Contract Amount
Amounts Represent Credit Risk At December 31,
2001 2000
---- ----
Standby letters of credit $ 2,007,857 $ 4,605,967
Home equity loans $ 7,834,818 $ 2,360,762
Loan commitments $ 787,738 $ 3,827,918
Lines of credit $ 13,790,425 $ 12,751,960
Loans sold and serviced with limited
repurchase provisions $ 4,722,848 $ 2,253,700
|
Standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to various municipalities. These guarantees are issued primarily to support performance arrangements, limited to real estate transactions.
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 ten 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.
Mortgage loan commitments not reflected in the accompanying statements at December 31, 2001 includes $787,738 for an adjustable rate loan at prime plus 1.0%.
Lines of credit are loan commitments to individuals and companies as long as there is no violation of any condition established in the contract. Lines of credit have a fixed expiration date. The Bank evaluates each customer's credit worthiness on a case-by-case basis.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 4 - Loans Receivable - Continued
The Bank has entered into several agreements to sell mortgage loans to third parties. These agreements contain provisions that require the Bank to repurchase a loan if the loan becomes delinquent within the terms specified by the agreement.
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 condition at December 31, 2001, as a liability for credit loss.
Note 5 - Investment in Real Estate and Real Estate Joint Ventures
From time to time, subsidiaries of the Bancorp and the Bank enter into joint venture agreements to develop real estate for sale. Profits and losses are shared proportionally with all partners.
In accordance with Statements of Financial Accounting Standards No. 34 and 58, no interest was capitalized for the years ended December 31, 2001, 2000 and 1999. Summary financial statements of the joint ventures are not presented because they are not material in relation to the consolidated financial statements.
Note 6 - Premises and Equipment
Premises and equipment at December 31, 2001 and 2000 are summarized by major classification as follows:
December 31, Estimated
------------ Useful
2001 2000 Lives
---- ---- -----------------
Land $1,923,960 $ 279,991 -
Building 2,073,135 371,889 -
Leasehold improvements 515,272 510,689 15-27.5 Years
Furniture, fixtures and equipment 1,559,512 1,265,358 3-10 Years
--------- ---------
Total at cost 6,071,879 2,427,927
Accumulated depreciation (1,429,398) (1,212,087)
--------- ---------
$4,642,481 $1,215,840
======== ========
|
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 6 - Premises and Equipment - Continued
The Bank is obligated under a long term lease for its administrative offices. The rents adjust with the Consumer Price Index. The lease expires on January 31, 2005. The minimum annual rental payments are as follows:
Homeowners Title and Escrow Corporation and Louis Hyatt, Inc. are also obligated under a month-to-month lease with no obligation to renew, but they anticipate that they will continue to do so.
Total rent expense was $106,868, $140,504 and $138,385 for the years ended December 31, 2001, 2000 and 1999, respectively.
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.
Note 8 - Deposits
Deposits in the Bank as of December 31, 2001 and 2000 consisted of the savings programs described below:
2001 2000
----------------------------------- ------------------------------------
Amount Percent Amount Percent
Category
NOW accounts $ 13,457,798 4.68% $ 11,402,303 4.98%
Money market accounts 61,759,483 21.53 28,007,998 12.21
Passbooks 21,024,223 7.33 12,641,581 5.51
Certificates 190,593,583 66.43 177,169,119 77.26
----------- ------- ----------- -------
286,835,087 99.97 229,221,001 99.96
Accrued interest 82,481 .03 90,926 .04
----------- ------- ----------- -------
Total savings $286,917,568 100.00% $229,311,927 100.00%
========== ===== ========== =====
|
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 8 - Deposits - Continued
At December 31, scheduled maturities of certificates of deposit are as follows:
2001 2000_ ____
---------------------------------- -------------------------------------
Amount % Amount %
------ - ------ -
One year or less $139,073,988 72.97 $120,232,223 67.86
More than 1 year to 2 years 23,138,385 12.14 33,765,454 19.06
More than 2 years to 3 years 9,361,585 4.91 7,397,170 4.18
More than 3 years 19,019,625 9.98 15,774,272 8.90
------------ -------- ------------ --------
$190,593,583 100.00 $177,169,119 100.00
========== ===== ========== =====
|
Interest expense on deposits is summarized as follows:
For Years Ended December 31,
--------------------------------------------------------
2001 2000 1999
---- ---- ----
NOW accounts $ 66,785 $ 69,254 $ 150,332
Money market accounts 1,579,829 1,352,655 871,091
Passbooks 775,017 886,788 764,008
Certificates 11,169,809 9,157,662 7,499,453
---------- ----------- ---------
$13,591,440 $11,466,359 $9,284,884
========= ========= ========
|
The aggregate amount of jumbo certificates of deposit with a minimum denomination of $100,000 was approximately $45,009,000 and $53,580,000 at December 31, 2001 and 2000.
Note 9 - Federal Home Loan Bank Advances and Loan Payable
During 1994, the Federal Home Loan Bank of Atlanta established a Credit Availability Program. The Bank's Credit Availability under the program at December 31, 2001 and 2000 was $91,721,750 and $58,321,800, respectively. The maturities of the advances are as follows:
Description Rate Amount Maturity
----------- ---- ------ --------
FHLB advances 1.83% to 6.89% $25,000,000 2002
FHLB advances 2.59% to 5.79% 10,000,000 2003
FHLB advances 4.41% to 4.48% 7,000,000 2011
-----------
$42,000,000
=========
|
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 9 - Federal Home Loan Bank Advances and Loan Payable Continued
The Bank's stock in the Federal Home Loan Bank of Atlanta is pledged as security for the loan and under a blanket floating lien security agreement with the Federal Home Loan Bank of Atlanta, the Bank is required to maintain as collateral for its advances, qualified home mortgage loans in an amount equal to 175% of the advances. The Bank is also required to maintain an average daily balance with the Federal Reserve Bank in a non-interest bearing account. The amount in such account at December 31, 2001 was $232,000.
Note 10- Pension Plan
The Bank has a Supplemental Executive Retirement Plan covering selected officers which is funded by life insurance policies. The Bank owns the policies and is the beneficiary. However, under agreements signed by the officers and the Bank, the cash value of the insurance belongs to the individuals. The amount of cost recognized for the years ended December 31, 2001, 2000 and 1999 was $26,653, $26,043 and $26,635, respectively.
The Bank has a 401(k) Retirement Savings Plan. Employees may contribute a percentage of their salary up to a maximum of 10%. The Bank is obligated to contribute 50% of the employee's contribution, not to exceed 6% of the employee's annual salary. All employees who have completed one year of service with the Bank are eligible to participate. The Bank's contribution to this plan was $75,174, $70,413 and $62,259 for the years ended December 31, 2001, 2000 and 1999, respectively.
Note 11- Employee Stock Ownership Plan
The Bank has an Employee Stock Ownership Plan ("ESOP") for the exclusive benefit of participating employees. During each of the years ended December 31, 2001, 2000 and 1999, the Bank contributed $120,000 to the ESOP.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 12- Common and Preferred Stock
In 1984, the Bank converted from a state chartered mutual savings and loan to a state chartered stock savings and loan association. At the time of conversion, the Bank established a liquidation account in an amount equal to the Bank's retained earnings as of September 30, 1983. The liquidation account is maintained for the benefit of eligible savings account holders who maintained their savings account in the Bank after conversion. In the event of a complete liquidation (and only in such event), each eligible savings account holder would be entitled to receive a liquidation distribution from the liquidation account in an amount equal to the account holder's then interest in the liquidation account before any liquidation distribution may be made with respect to capital stock. At December 31, 2001 and 2000, the balance of the liquidation account is included in retained earnings.
Severn Preferred Capital Corporation issued 200,002 shares of preferred stock at $20.00 per share, together with warrants to purchase 200,002 shares of the Corporation's common stock at $17.00 per share and 200,000 shares of its common stock for $20 per share, par value of $1 per share for gross proceeds of $8,000,080 and net proceeds of $7,891,829. The Bank purchased all of the outstanding common stock. All of the warrants have been exercised as of December 31, 2001.
The Bank's Stock Option Plan ("Plan") provides for the granting of options to acquire common stock to directors and key employees. Option prices are equal to or greater than fair market value of the common stock at the date of the grant. The Bank granted options to purchase 156,000 shares. The Plan provides for options granted to directors (60,000 shares) to be immediately exercisable for a period of five years from the effective date of November 25, 1997. Additionally, the Plan provides for one-fifth of the remaining options granted to be exercisable on each of the first five anniversaries of the effective date. If the participant in the Plan terminates employment for reasons other than death or disability, he or she forfeits all rights to unvested shares.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 12- Common and Preferred Stock - Continued
The following table summarizes the status of and changes in
the Bank's stock option plan.
Weighted
Average
Exercise
Shares Price
------ ----------
Outstanding at January 1, 1999 153,000 $5.56
Exercised in 1999 5,400 5.50
-------- ----
Outstanding at December 31, 1999 147,600 5.56
Exercised in 2000 3,600 5.50
-------- ----
Outstanding at December 31, 2000 144,000 5.57
Exercised in 2001 39,000 5.50
------- ----
Outstanding at December 31, 2001 105,000 $5.59
====== ====
Exercisable at December 31, 2000 105,600
======
Exercisable at December 31, 2001 85,800
======
|
All share and per share amounts have been retroactively adjusted for a 3-for-1 stock split in the form of a 200% stock dividend. (See Note 20)
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 13- Earnings Per Share
Basic EPS is computed based upon income available to common shareholders and the weighted average number of common shares outstanding for the period. Diluted EPS is to reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
For Years Ended December 31,
----------------------------------------------
2001 2000 1999
---- ---- ----
Net income $5,255,570 $3,945,141 $3,127,306
Less - preferred stock dividends,
net of tax (220,971) (220,971) (221,004)
---------- ---------- ----------
Net income available to shareholders $5,034,599 $3,724,170 $2,906,302
======== ======== ========
Weighted average shares outstanding
basic EPS 3,647,451 3,237,888 3,230,940
Effect of Dilutive Shares
Stock warrants - 73,233 175,002
Stock options 35,895 19,794 44,889
------------ ----------- -----------
Adjusted weighted average shares
used for dilutive EPS 3,683,346 3,330,915 3,450,831
======== ======== ========
|
All share and per share amounts have been retroactively adjusted for a 3-for-1 stock split in the form of a 200% stock dividend. (See Note 20)
Note 14- Retained Earnings
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 14- Retained Earnings - Continued
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) and risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the Office of Thrift Supervision 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 as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios are also presented in the table.
The following table presents the Bank's capital position based on the financial statements.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------ ------------------------- ---------------------------
Amount % Amount % Amount %
------ - -------- - ------ -
December 31, 2001
Tangible (1) $31,675,573 8.7% $ 5,468,226 1.50% $ N/A N/A
Tier I capital (2) 31,675,573 11.8% N/A N/A 16,066,080 6.00%
Core (1) 31,675,573 8.7% 14,581,936 4.00% 18,227,420 5.00%
Risk-weighted (2) 34,926,828 13.0% 21,421,440 8.00% 26,776,800 10.00%
December 31, 2000
Tangible (1) $23,939,378 8.2% $ 4,388,627 1.50% $ N/A N/A
Tier I capital (2) 23,939,378 11.5% N/A N/A 12,452,940 6.00%
Core (1) 23,939,378 8.2% 11,703,005 4.00% 14,628,756 5.00%
Risk-weighted (2) 26,539,025 12.8% 16,603,920 8.00% 20,754,900 10.00%
|
(1) To adjusted total assets.
(2) To risk-weighted assets.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 14- Retained Earnings - Continued
The Corporation has no significant source of income other than dividends from the Bank. As a result, the Corporation's dividends will depend primarily upon receipt of dividends from the Bank.
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 Note 12.
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, 2001 and 2000 include $482,000, for which no provision for federal income tax has been provided. The unrecorded deferred income tax liability on the above amount was approximately $186,000.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 15- Income Taxes
The income tax provision consists of the following for the years ended December 31:
For Years Ended December 31,
-------------------------------------------------
2001 2000 1999
----------- ---------- -----------
Current
Federal $2,891,156 $2,062,586 $1,605,538
State 643,719 463,048 356,159
----------- ---------- -----------
3,534,875 2,525,634 1,961,697
Deferred
Federal (213,450) (184,774) (81,027)
State (47,252) (40,904) (17,936)
----------- ---------- -----------
(260,702) (225,678) (98,963)
Other
Federal 113,833 113,833 113,801
State 25,200 25,200 25,200
----------- ---------- -----------
139,033 139,033 139,001
----------- ---------- -----------
$3,413,206 $2,438,989 $2,001,735
=========== ========== ===========
|
Other income tax provision consists of income tax from preferred stock dividends.
The amount computed by applying the statutory federal income tax rate to income before federal taxes is greater than the taxes provided for the following reasons:
2001 2000 1999
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------ --------- ------ --------- ------ ----------
Statutory federal
income tax rate $2,947,384 34.00% $2,170,604 34.00% $1,743,874 34.00%
State tax net of
federal income
tax benefit 410,300 4.73 295,247 4.62 239,859 4.68
Other adjustments 55,522 .64 (26,862) (.42) 18,002 .35
---------- ------ ---------- ------- ---------- -------
$3,413,206 39.37% $2,438,989 38.20% $2,001,735 39.03%
========== ====== ========== ======= ========== =======
|
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 15- Income Taxes - Continued
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below:
2001 2000
---- ----
Deferred Tax Assets:
Loans held for sale lower of cost or
market adjustment $ - $ 10,217
Allowances for losses 1,295,073 1,063,772
Unrealized loss on investment security - 54,679
Reserve for uncollected interest 4,949 16,702
------------ -------------
Total gross deferred tax assets 1,300,022 1,145,370
Deferred Tax Liabilities:
Federal Home Loan Bank of Atlanta stock dividends (79,976) (79,976)
Tax reserve for bad debt - (29,870)
Mortgage servicing rights (10,018) (12,567)
Accelerated depreciation (396,542) (2,699)
---------- ----------
Total gross deferred tax liabilities (486,536) (125,112)
---------- ----------
Net deferred tax assets $ 813,486 $1,020,258
======== ==========
|
Note 16- Related Party Transactions
During the years ended December 31, 2001, 2000 and 1999, the Bank engaged in the transactions described below with parties that may be deemed affiliated.
The land and building for the office where the Bank's primary operating activities are conducted are leased from a stockholder of the Bank. Rent paid on this property was $32,012, $61,157 and $59,177 for 2001, 2000 and 1999, respectively. Additionally, two subsidiaries rent property from a director of the Bank. Rent paid on these properties was $32,010, $25,170 and $24,524 for 2001, 2000 and 1999, respectively.
A director of the Bank is a member of a law firm that represents the Bank in certain legal matters. The fees for services rendered by that firm were $80,866, $68,852 and $99,835 for the years ended December 31, 2001, 2000 and 1999, respectively.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 16- Related Party Transactions - Continued
A subsidiary uses a related party to perform maintenance work on managed properties. The fees for services rendered by that firm were $9,137 for the year ended December 31, 2001.
The Bank has participation and loan servicing agreements outstanding, totaling $263,823, $276,856 and $313,082 at December 31, 2001, 2000 and 1999, respectively, with various stockholders and related parties.
The Company purchased Louis Hyatt, Inc. (see Note 18) from Louis Hyatt who is a stockholder of the Company and a relative of the Chairman of the Board.
The Company purchased HS West, LLC from Louis Hyatt who is a stockholder of the Company and a relative of the Chairman of the Board. HS West, LLC had no income or expenses and consisted only of land.
Management believes that the terms in the above mentioned transactions were no less favorable to the Bank than the terms that would have been obtained in transactions with non-affiliated persons or entities.
Note 17- 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.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 17- Disclosure About Fair Value of Financial Instruments - Continued
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 loan commitments. The loan commitments were a blended rate based on the relative risk of the properties involved and the lines of credit are at adjustable rates.
The estimated fair values of the Bank's financial instruments are as follows:
December 31, 2001 December 31, 2000
----------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------- -------------- -------------- ---------------
Financial Assets
Cash, interest bearing
deposits in other
banks and federal
funds $ 6,038,459 $ 6,038,459 $ 1,007,087 $ 1,007,087
Investment securities 7,000,958 7,077,940 10,357,959 10,383,808
Mortgage backed
securities 212,021 216,262 279,367 280,010
FHLB of Atlanta stock 2,500,000 2,500,000 1,800,000 1,800,000
Loans held for sale 7,498,934 7,498,934 4,169,084 4,169,084
Loans receivable, net 335,142,276 343,399,000 270,482,958 270,002,000
Financial Liabilities
Deposits $286,917,568 $289,285,000 $229,311,927 $229,816,000
FHLB advances 42,000,000 41,466,634 34,000,000 34,020,413
Commitments - 796,857 - 3,857,333
|
Note 18- Merger
On July 1, 2001, the Company acquired Louis Hyatt, Inc. ("LHI") a real estate sales and management company (see Note 16). "LHI" was 100% owned by Louis Hyatt. The Company issued 60,000 shares new shares and transferred 20,000 shares that were previously owned by "LHI" for all the outstanding stock of "LHI".
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 18- Merger - Continued
The combination was accounted for under the purchase method of accounting, and accordingly, the net assets were recorded at their estimated fair values at the date of acquisition. "LHI's" assets consisted primarily of fixed assets and, accordingly, the fair market value adjustment of $1,415,829 will be depreciated over the estimated lives of the assets. The excess of the purchase price over the estimated fair value of the underlying net assets of $333,569 was allocated to goodwill and will be tested for impairment in accordance with SFAS 142 (see Note 1).
Unaudited proforma condensed financial statements are not presented because the amounts are not material to the consolidated financial statements.
Note 19- Condensed Financial Information (Parent Company Only)
Information as to the financial position of Severn Bancorp, Inc. as of December 31, 2001 and 2000 and results of operations and cash flows for each of the years ended December 31, 2001, 2000 and 1999 is summarized below. During the years ended December 31, 2001, 2000 and 1999, respectively, the parent received dividends in the amount of $718,818, 539,760 and $473,995 from its subsidiary, the Bank.
December 31,
2001 2000
-------------- -------------
Statement of Financial Condition
Cash $ 366,379 $ 156,705
Equity in net assets of subsidiaries 30,651,583 21,386,953
Prepaid expenses and other assets 9,550 24,374
-------------- -------------
$ 31,027,512 $ 21,568,032
============== =============
Taxes payable $ 5,414 $ 14,712
Accounts payable and accrued expenses 191,256 137,572
-------------- -------------
196,670 152,284
Common stock 13,524 10,798
Common stock paid-in surplus 10,816,887 5,720,300
Retained earnings 20,000,431 15,684,650
-------------- -------------
30,830,842 21,415,748
-------------- -------------
$ 31,027,512 $ 21,568,032
============== =============
|
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 19- Condensed Financial Information (Parent Company Only) - Continued
For the Years Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Statement of Operations
Equity in net income of subsidiaries $5,273,766 $3,950,623 $3,131,380
General and administrative expenses 27,569 8,306 5,470
------------ ------------ ------------
Net income before income taxes 5,246,197 3,942,317 3,125,910
Provision for income taxes (benefit) (9,373) (2,824) (1,396)
------------ ------------ ------------
Net income $5,255,570 $3,945,141 $3,127,306
============ ============ ============
|
December 31,
---------------------------------------------------
2001 2000 1999
---- ---- ----
Statement of Cash Flows
Cash Flows from Operating Activities:
Net income $5,255,570 $3,945,141 $3,127,306
Adjustments to Reconcile Net Income Net
Cash Provided by Operating Activities
Equity in net income of subsidiaries (5,273,766) (3,950,623) (3,131,380)
Decrease (increase) in other assets 14,824 (22,749) -
(Decrease) increase in taxes payable (9,298) 13,251 604
Increase in accounts payable and
accrued expenses 53,684 18,976 10,960
--------- --------- ---------
Net cash provided by operating activities 41,014 3,996 7,490
Cash Flows From Investing Activities
Dividends received from subsidiary 718,818 539,760 473,995
Investment in subsidiaries (3,299,313) (26,772) (29,700)
Cash consideration Louis Hyatt, Inc.
acquisition - net (31,340) - -
----------- ---------------- ----------------
Cash (used) provided by investing
activities (2,611,835) 512,988 444,295
Cash Flows from Financing Activities
Dividends paid on capital stock (718,818) (539,760) (473,995)
Proceeds from exercise of options 214,500 19,800 29,700
Proceeds from exercise of warrants 3,284,813 6,970 -
--------- ------------ ---------------
Net cash provided (used) by financing
activities 2,780,495 (512,990) (444,295)
--------- ---------- ----------
|
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 19- Condensed Financial Information (Parent Company Only) - Continued
December 31,
---------------------------------------------------
2001 2000 1999
---- ---- ----
Increase in cash and cash equivalents $ 209,674 $ 3,994 $ 7,490
Cash and cash equivalents at beginning
of year 156,705 152,711 145,221
---------- ---------- ----------
Cash and cash equivalents at end of year $ 366,379 $ 156,705 $ 152,711
======== ======== ========
Supplemental Disclosures of Cash Flows Information:
Common stock issued for
acquired Company $1,600,000 $ - $ -
|
There was no cash paid during the years ended December 31, 2001, 2000 and 1999 for income taxes or interest.
Note 20- Subsequent Events
The shareholders of the Company voted to approve an amendment to the corporate charter to increase the number of Common shares authorized to 20,000,000 and increased the authorized number Serial Preferred shares to 1,000,000.
On February 19, 2002, the Company's Board of Directors declared a 3-for-1 stock split in the form of a 200% stock dividend, which was effective for shares outstanding as of March 1, 2002 to be paid March 15, 2002. All per share data in the accompanying financial statements and all share and per share data in the footnotes have been adjusted to give retroactive effect to this transaction.
Note 21- Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board
("FASB") issued Statements of Financial Accounting Standards No.
141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and
Other Intangible Assets" (SFAS 142") which are effective July 1,
2001 and September 1, 2002, respectively, for the Company. SFAS
141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Under
SFAS 142, amortization of goodwill, including goodwill recorded in
past business combinations, will discontinue upon adoption of this
standard. All goodwill and intangible assets will be tested for
impairment in accordance with the provisions of the Statement.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Note 21- Recent Accounting Pronouncements - Continued
In August 2001, FASB issued SFAS No. 144 "Accounting or the Impairment or Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and APB Opinion No. 30. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also requires reporting of discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. The Statement also eliminates the exception to consolidation for a temporarily controlled subsidiary.
ARTICLES OF INCORPORATION
OF
SEVERN BANCORP, INC.
The undersigned, Alan J. Hyatt, whose post office address is 1919A West Street, Annapolis, Maryland 21401, being at least eighteen years of age, acting as incorporator, does hereby form a corporation under the General Laws of the State of Maryland with the following Articles of Incorporation:
ARTICLE I
Name
The name of the Corporation is Severn Bancorp, Inc. (herein the "Corporation").
ARTICLE II
Principal Office
The post office address of the principal office of the Corporation in the State of Maryland is 1919A West Street, Annapolis, Maryland 21401.
ARTICLE III
Powers
The purpose for which the Corporation is organized is to act as a financial institution holding company and to transact all other lawful business for which corporations may be incorporated pursuant to the General Laws of the State of Maryland. The Corporation shall have all the powers of a Corporation organized under the General Laws of the State of Maryland.
ARTICLE IV
Resident Agent
The name and post office address of the resident agent of the Corporation in Maryland is Alan J. Hyatt, 1919 West Street, Annapolis, Maryland, 21401. The resident agent is a citizen of the State of Maryland and actually resides therein.
ARTICLE V
Capital Stock
A. Number. The total number of shares of all classes of stock which the Corporation shall have authority to issue is Three Million (3,000,000) shares of which Two Million (2,000,000) shares shall be common stock of the par value of $0.01 per share, all of one class, and of which One Million (1,000,000) shares shall be Serial Preferred Stock of the par value of $0.01 per share.
Shares, whether now or hereafter authorized, may be issued by the Corporation from time to time upon the approval of the board of directors of the Corporation and without the approval of the stockholders except as otherwise provided in this Article V or the rules of a national securities exchange, if applicable. The consideration for the issuance of the shares shall be paid to or received by the Corporation in full before their issuance and shall not be less than the par value per share.
B. Dividends. The holders of the common stock are entitled at all times to one vote for each share and to such dividends as the Board of Directors may in their discretion legally declare, subject, however, to the voting and dividend rights, if any, of the holders of the Preferred Stock. In the event of any liquidation, dissolution or winding up of the Corporation, the remaining assets of the Corporation after the payment of all debts and necessary expenses, subject, however, to the right of the holders of the Preferred Stock then outstanding, shall be distributed among the holders of the Common Stock pro rata in accordance with their respective holdings. The Common Stock is subject to all of the terms and provisions of the Preferred Stock as fixed by the Board of Directors as hereinafter provided.
C. Preferred Stock. The Board of Directors shall have the authority to
classify and reclassify any unissued shares of Preferred Stock by authorizing
the issuance of the Preferred Stock in one or more series with such distinctive
designations as may be established by the Board of Directors and any such
series: (a) may have such voting powers, full or limited, or may be without
voting powers; (b) may be subject to redemption at such time and at such prices;
(c) may be entitled to receive dividends (which may be cumulative or
noncumulative) at such rate or rates, on such conditions, and at such times and
payable in preference to, or in such relation to, the dividends payable on any
other class or classes or series of stock; (d) may have such rights upon the
dissolution of, or upon distribution of the assets of, the Corporation; (e) may
be made convertible into, or exchangeable for, shares of any other class or
classes or of any other series of the same or any other class or classes of
stock of the Corporation, at such price or prices or at such rates of exchange,
and with such adjustments; and (f) shall have such other preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, terms or conditions of redemption or other rights, as shall
hereafter be authorized by the Board of Directors and stated and expressed in
sections supplementary to this charter document providing for the issuance of
such Preferred Stock.
ARTICLE VI
Preemptive Rights
No holder of any of the shares of any class or series of stock or of options, warrants, or other rights to purchase shares of any class or series of stocks or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series, or any unissued bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of any class or series or carrying the right to purchase stock of any class or series.
ARTICLE VII
Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by the Board of Directors of the Corporation and without action by the stockholders, purchase or otherwise acquire shares of any class, bonds, debentures, or other securities of the Corporation in such manner, upon such terms, and in such amounts as the Board of Directors shall determine; subject, however, to such limitations or restrictions, if any, as are contained in the express terms of any class of shares of the Corporation outstanding at the time of the purchase or acquisition in question or as are imposed by law.
ARTICLE VIII
Meetings of Shareholders; Cumulative Voting
A. Anytime in the interval between annual meetings, a special meeting of stockholders may only be called by the Chairman of the Board, the President, by a majority of the Board of Directors by vote at a meeting or in writing, or by the written request of the holders of a minimum of 25% of the outstanding capital stock entitled to vote at the meeting.
B. Stockholders shall not have cumulative voting rights.
ARTICLE IX
Initial Directors
The Corporation shall be under the direction of a Board of Directors which shall initially consist of eleven (11) directors. The number of directors may be increased or decreased pursuant to the bylaws of the Corporation, but shall never be fewer than the minimum number required by applicable law, nor more than fifteen (15). The names of the directors who shall act until the first meeting or until their successors are duly chosen and qualified are:
Alan J. Hyatt Carroll H. HynsonH. Erle Schafer Melvin E. Meekins S. Scott Kirkley T. Theodore Schultz Louis DiPasquale Ronald Pennington Keith Stock Melvin Hyatt Vincent J. Pompa
ARTICLE X
Directors
A. Classified Board. The Board of Directors shall be divided into three classes, Class I, Class II, and Class III. Each such class shall consist, as nearly as possible, of one-third of the total number of directors and any remaining directors shall be included within such class or classes as the Board of Directors shall designate.
The following persons shall constitute Class I and shall serve as directors until the 1991 annual meeting of stockholders: Alan J. Hyatt, Melvin E. Meekins, Louis DiPasquale, and Melvin Hyatt.
The following persons shall constitute Class II and shall serve as directors until the 1992 annual meeting of stockholders: Carroll H. Hynson, S. Scott Kirkley, Ronald Pennington, and Vincent J. Pompa.
The following persons shall constitute Class III and shall serve as directors until the 1993 annual meeting of stockholders: H. Erle Schafer, Keith Stock, and T. Theodore Schultz.
At each annual meeting of stockholders beginning in 1991, successors to the class of directors whose term expires at that annual meeting shall be elected for a term of three years.
If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. A director shall hold office, subject to any removal, death, resignation, or retirement until the annual meeting for the year in which his term expires and until his successor shall be elected and qualifies.
To the extent that any holders of any class or series of stock other than Common Stock shall have the separate right, voting as a class or series, to elect directors, the directors elected by such class or series shall be deemed to constitute an additional class of directors and shall have a term of office for one year or such other period as may be designated by the provisions of such class or series providing such separate voting rights to the holders of such class or series of stock, and any such class of directors shall be in addition to the classes designated above.
B. Removal. Any director of the Corporation may be removed with cause by the affirmative vote of the holders of 75 percent of all the votes entitled to be cast for the election of directors but no director may be removed by the stockholders without cause.
ARTICLE XI
Indemnification and Limitations on Liability
A. Indemnification. The Corporation shall indemnify: (a) its directors to the full extent provided under the Maryland General Corporation Law now or hereafter in force, including the advance of expenses under the procedures provided by such laws; (b) its officers to the same extent it shall indemnify its directors; and (c) its officers who are not directors to such further extent as shall be authorized by the Board of Directors and be consistent with law. The foregoing shall not limit the authority of the Corporation to indemnify other employees and agents consistent with law.
B. Insurance. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability.
C. Limitations on Liability. To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted, no director or officer of this Corporation shall be personally liable to the Corporation or its shareholders for money damages. No amendment of the Charter of the Corporation or repeal of any of its provisions' shall limit or eliminate the benefits provided to directors and officers under this provision with respect to any act or omission which occurred prior to such amendment or repeal.
ARTICLE XII
Acquisition Proposals
The Board of Directors shall base the response of the Corporation to any "Acquisition Proposal" on the Board of Directors' evaluation of what is in the best interest of the Corporation. In evaluating what is in the best interest of the Corporation, the Board of Directors shall consider:
(a) The best interest of the stockholders. For this purpose, the Board shall consider among other factors, not only the consideration offered in the Acquisition Proposal in relation to the then current market price of the Corporation's stock, but also in relation to the current value of the Corporation in a freely negotiated transaction and in relation to the Board of Directors' then estimate of the future value of the Corporation as an independent entity or as the subject of a future Acquisition Proposal
(b) The best interests of depositors of banks affiliated with the Corporation and of other creditors of the Corporation and its subsidiaries; and
(c) Such other factors as the Board of Directors determines to be relevant, including, among other factors, the social, legal and economic effects upon employees, suppliers, customers and the business of the Corporation and its subsidiaries and on the communities in which the Corporation and its subsidiaries operate or are located.
"Acquisition Proposal" means any proposal for the consolidation or merger of the Corporation with another corporation, any share exchange involving the Corporation's outstanding capital stock, any liquidation or dissolution of the Corporation, any transfer of all or a material portion of the assets of the Corporation, and any tender offer or exchange offer for any of the Corporation's outstanding stock.
ARTICLE XIII
Amendment of Articles of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind any provision contained in these Articles in the manner now or hereafter prescribed by law, and all rights conferred on stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles VI through XIV, inclusively, of these Articles may not be repealed, altered, amended or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (after giving effect to the provisions of Article V) cast at a meeting of the stockholders called for that purpose.
ARTICLE XIV
Duration
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF,I, Alan J. Hyatt, being the hereinabove named incorporator, do hereby acknowledge these Articles of Incorporation to be my act and deed on this day of ---------- , 1990.
SEVERN BANCORP, INC.
ARTICLES OF AMENDMENT
Severn Bancorp, Inc., a Maryland corporation, having its principal office at 1919A West Street, Annapolis, Maryland 21401 (the "Corporation") hereby certifies to the State Department of Assessments and Taxation of Maryland (the "Department") that:
FIRST: Pursuant to Section 2-607(b) of the Corporations and Associations Article of the Annotated Code of Maryland (the "Code"), immediately prior to these Articles of Amendment:
(i) the total number of shares of stock of all classes which the Corporation has authority to issue is 3,000,000 shares, of which 2,000,000 shares are common stock with a par value of $0.01 per share and 1,000,000 shares are preferred shares with a par value of $0.01 per share;
(ii) the aggregate par value of the 3,000,000 shares is $30,000; and
(iii) the information required by Section 2-607(b)(2)(i) is not changed by these Articles of Amendment. As amended, the total number of shares of stock of all classes which the Corporation has authority to issue is 21,000,000 shares, of which 20,000,000 shares are common stock with a par value of $0.01 per share and 1,000,000 shares are preferred stock with a par value of $0.01 per share, and the aggregate par value of the 21,000,000 shares is $210,000.
SECOND: The Articles of Incorporation (the "Articles") of the Corporation are amended as follows:
(i) Article V, Part A of the Articles is deleted in its entirety and replaced with the following: "The total number of shares of all classes of stock which the Corporation shall have authority to issue is Twenty-One Million (21,000,000) shares, of which Twenty Million (20,000,000) shares shall be common stock with a par value of $0.01 per share, all of one class, and of which One Million (1,000,000) shares shall be serial preferred stock with a par value of $0.01 per share. Shares, whether now or hereafter authorized, may be issued by the Corporation from time to time upon the approval of the Board of Directors of the Corporation and without the approval of the stockholders except as otherwise provided in this Article V or the rules of a national securities exchange, if applicable. The consideration for the issuance of the shares shall be paid to or received by the Corporation in full before their issuance and shall not be less than the par value per share."
(ii) Article XIII of the Articles is amended by adding the following to the end of Article XII: "Notwithstanding anything to the contrary contained in these Articles, the Board of Directors, with the approval of a majority of the entire Board of Directors, and without action by the shareholders, may amend these Articles to increase or decrease the aggregate number of shares of stock of the Corporation or the number of shares of any class that the Corporation has authority to issue."
THIRD: These amendments to the Articles were duly advised by the Board of Directors of the Corporation and duly approved by the stockholders of the Corporation in accordance with the Code.
IN WITNESS WHEREOF, Severn Bancorp, Inc. has caused these Articles of Amendment to be signed in its name and on its behalf by its President and its corporate seal to be hereunder affixed and attested by its Secretary on this ___ day of February, 2002, and its President acknowledges that these Articles of Amendment are the act and deed of Severn Bancorp, Inc. and, under the penalties of perjury, that the matters and facts set forth herein with respect to authorization and approval are true in all material respects to the best of his knowledge, information, and belief.
ATTEST: SEVERN BANCORP, INC. ______________________________ By: __________________________ S. Scott Kirkley, Secretary Alan J. Hyatt, President |
BYLAWS
OF
SEVERN BANCORP, INC.
ARTICLE I. HOME OFFICE
The home office of Severn Bancorp, Inc. (the "Corporation") is 1919A West Street, Annapolis, in the County of Anne Arundel, in the State of Maryland.
ARTICLE II. SHAREHOLDERS
Section 1. Place of Meetings. All annual and special meetings of Shareholders shall be held at the home office of the Corporation or at such other place in the State in which the principal place of business of the Corporation is located as the Board of Directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Corporation for the election of directors and for the transaction of any other business of the Corporation shall be held annually within 120 days after the end of the Corporation's fiscal year as the Board of Directors may determine.
Section 3. Special Meetings. Special Meetings for any purpose or purposes may be called at any time by the Chairman of the Board, the President or a majority of the Board of Directors, and shall be called by the Chairman of the Board, the President or the Secretary upon the written request of the holders of no less than 25% of all the outstanding capital stock of the Corporation entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the Corporation addressed to the Chairman of the Board, the President or the Secretary.
Section 4. Conduct of Meetings. Annual and Special Meetings shall be conducted in accordance with the most current edition of Robert's Rules of Order unless otherwise prescribed by regulations of the Board or these Bylaws. The Board of Directors shall designate, when present, either the Chairman of the Board or President to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered no fewer than 10 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the President, or the secretary, or the directors calling the meeting, to each Shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the Shareholder at the address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6 of this Article II, with postage prepaid. When any Shareholders' meeting, either Annual or Special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining Shareholders entitled to notice of or to vote at any meeting of Shareholders or any adjournment , or Shareholders entitled to receive payment of any dividend, or in order to make a determination of Shareholders for any other proper purpose, the Board of Directors shall fix in advance a date as the record date for any such determination of Shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of Shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of Shareholders, is to be taken. When a determination of Shareholders entitled to vote at any meeting of Shareholders has been made as provided in this section, such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the Shareholders, the officer or agent having charge of the stock transfer books for shares of the Corporation shall make a complete list of the Shareholders entitled to vote at such meeting, or any adjournment, arranged in alphabetical order, with the address and the number of shares held by each. This list of Shareholders shall be kept on file at the home office of the Corporation and shall be subject to inspection by any Shareholder at any time during usual business hours, for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any Shareholder during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the Shareholders entitled to examine such list or transfer books or to vote at any meeting of Shareholders.
Section 8. Quorum. A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of Shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The Shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to constitute less than a quorum.
Section 9. Proxies. At all meetings of Shareholders, a Shareholder may vote by proxy executed in writing by the Shareholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the Shareholder or, in the absence of such direction, as determined by a majority of the Board of Directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, at any meeting of the Shareholders of the Corporation any one or more of such Shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the Bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed.
A Shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee and thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.
Section 12. Voting. At each election for directors every shareholder entitled to vote at such election shall be entitled to one vote for each share of stock held by him. Unless otherwise provided by these Bylaws, the Articles of Incorporation, or the General Laws of the State of Maryland, a majority of those votes cast by shareholders at a lawful meeting shall be sufficient to pass on a transaction or matter.
Section 13. Inspectors of Election.In advance of any meeting of Shareholders, the Board of Directors may appoint any persons other than nominees for off ice as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the Chairman of the Board or the President may, or on the request of not fewer than l0% of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the Board of Directors in advance of the meeting, or at the meeting by the Chairman of the Board or the President. Unless otherwise prescribed by regulations of the Board, the duties of such inspectors shall include: determining the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all Shareholders.
Section 14. Nominating Committee. The Board of Directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the Secretary at least 20 days prior to the date of the Annual Meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each off ice of the Corporation. No nominations for directors except those made by the nominating committee shall be voted upon at the Annual Meeting unless other nominations by Shareholders are made in writing and delivered to the Secretary of the Corporation at least 5 days prior to the date of the Annual Meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each off ice of the Corporation. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the Annual Meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the Annual Meeting, nominations for directors may be made at the Annual Meeting by any Shareholder entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the Annual Meeting shall be stated in writing and filed with the Secretary of the Corporation at least 5 days before the date of the Annual Meeting, and all business so stated, proposed, and filed shall be considered at the Annual Meeting but no other proposal shall be acted upon at the Annual Meeting. Any Shareholder may make any other proposal at the Annual Meeting and the same may be discussed and considered, but unless stated in writing and filed with the Secretary at least 5 days before the meeting, such proposal shall be laid over for action at an Adjourned, Special, or Annual Meeting of the Shareholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the Annual Meeting of reports of officers, directors and committees; but in connection with such reports no new business shall be acted upon at such Annual Meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to be taken at a meeting of the Shareholders, or any other action which may be taken at a meeting of the Shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the Shareholders entitled to vote with respect to the subject matter.
ARTICLE III. BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation shall be under the direction of its Board of Directors. The Board of Directors shall annually elect a Chairman of the Board and a President from among its members and shall designate, when present, either the Chairman of the Board or the President to preside at its meetings.
Section 2. Number and Term. The Board of Directors shall consist of seven members. The directors shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually.
Section 3. Regular Meetings.A Regular Meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the Annual Meeting of Shareholders. The Board of Directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution.
Section 4. Special Meetings. Special Meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the President or one-third of the directors. The persons authorized to call Special Meetings of the Board of Directors may fix any place as the place for holding any Special Meeting of the Board of Directors called by such persons.
Members of the Board of Directors may participate in Special Meetings by means of conference telephone, or by means of similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person but shall not constitute attendance for the purpose of compensation pursuant to Section 12 of this Article.
Section 5. Notice. Written notice of any Special Meeting shall be given to each director at least two days prior thereto when delivered personally or by telegram, or at least five days prior thereto when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if mailed, or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the Secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice of waiver of notice of such meeting.
Section 6. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, but if less than such
majority is present at a meeting; a majority of the directors present may
adjourn the meeting from time to time. Notice of any Adjourned Meeting shall be
given in the same manner as prescribed by Section 5 of this Article III.
Section 7. Manner of Acting.The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater number is prescribed by regulation of the Board or by these Bylaws.
Section 8. Action Without a Meeting. Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors.
Section 9. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Corporation addressed to the Chairman of the Board or President. Unless otherwise specified, such resignation shall take effect upon receipt by the Chairman of the Board or President. More than three consecutive absences from regular meetings of the Board of Directors, unless excused by resolution of the Board of Directors, shall automatically constitute a resignation, effective when such resignation is accepted by the Board of Directors.
Section 10. Vacancies. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected to serve until the next election of directors by the Shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the Board of Directors for a term of office continuing only until the next election of directors by the Shareholders.
Section 11. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the Board of Directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each Regular or Special Meeting of the Board of Directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the Board of Directors may determine.
Section 12. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any Corporation matter is taken shall be presumed to have assented to the action taken unless- his dissent or abstention shall be entered in the minutes of the meeting or unless he shall file a written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action.
Section 13. Removal of Directors. At a meeting of Shareholders called expressly for that purpose, any Director may be removed for cause by a vote of the holders of 75% of the shares then entitled to vote at an election of directors. 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 by the provisions of the Charter or supplemental sections thereto, the provisions of this selection shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole.
ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The Board of Directors, by resolution adopted by a majority of the full Board, may designate the President and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the Board of Directors, or any director, of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the Board of Directors is not in session, shall have and may exercise all of the authority of the Board of Directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the Board of Directors with reference to: the declaration of dividends; the amendment of the Articles of Incorporation or Bylaws of the Corporation, or recommending to the Shareholders a plan of merger, consolidation, or conversion; the sale, lease or other, disposition of all or substantially all of the property and assets of the Corporation otherwise than in the usual and regular course of its business; a voluntary dissolution of the Corporation; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next Regular Annual Meeting of the Board of Directors following his or her designation and until a successor is designated as a member of the executive committee.
Section 4. Meetings. Regular Meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special Meetings of the executive committee may be called by any member thereof upon not less than one day's notice stating the place, date and hour of the meting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full Board of Directors.
Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full Board of Directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the President or Secretary of the Corporation. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these Bylaws. It shall keep regular minutes of its proceedings and report the same to the Board of Directors for its information at the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The Board of Directors may by resolution establish an audit, loan, or other committees composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Corporation and may prescribe the duties, constitution and procedures thereof.
ARTICLE V. OFFICERS
Section 1. Positions. The officers of the Corporation shall be a President, one or more Vice Presidents, a Secretary, and a Treasurer, each of whom shall be elected by the Board of Directors. The Board of Directors may also designate the Chairman of the Board as an officer. The Chairman of the Board shall be the Chief Executive officer, and the President will be Chief Operating Officer. The President shall be a director of the Corporation. The offices of the Secretary and Treasurer may be held by the same person and a Vice President may also be either the Secretary of the Treasurer. The Board of Directors may designate one or more Vice Presidents as Executive Vice President or Senior Vice President. The Board of Directors may also elect or authorize the appointment of such other officers as the business of the Corporation may require. The officers shall have such authority and perform such duties as the Board of Directors may from time to time authorize or determine. In the absence of action by the Board of Directors, the officers shall have such powers and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office . The officers of the Corporation shall be elected annually at the first meeting of the Board of Directors held after each annual meeting of the Shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation or removal in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contractual rights. The Board of Directors may authorize the Corporation to enter into an employment contract with any officer in accordance with regulations of the Board; but no such contract shall impair the right of the Board of Directors to remove any officer at any time in accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the Board of Directors.
ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. To the extent permitted by regulations of the Board, and except as otherwise prescribed by these Bylaws with respect to certificates for shares, the Board of Directors may authorize any officer, employee, or agent of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the Board of Directors. Such authority may be general or confined to specific instances.
Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by one or more officers, employees or agents of the Corporation in such manner as shall from time to time be determined by the Board of Directors.
Section 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in any duly authorized depository as the Board of Directors may select.
ARTICLE VII. CERTIFICATES FOR SHARES
AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares of capital stock of the Corporation shall be in such form as shall be determined by the Board of Directors and approved by the Board. Such certificates shall be signed by the chief executive officer or by any other officer of the Corporation authorized by the Board of Directors, attested by the Secretary or an Assistant Secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Corporation itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and cancelled, except that in case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Corporation as the Board of Directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the Corporation shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney authorized by a duly executed power of attorney and filed with the Corporation. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Corporation shall be deemed by the Corporation to be the owner for all purposes.
Section 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost stolen, or destroyed certificate or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.
Section 4. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by law.
ARTICLE VIII. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 31st day of December of each year. The Corporation shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the Board of Directors.
ARTICLE IX. DIVIDENDS
Subject to the terms of the Corporation's Articles of Incorporation and the regulations and orders of the Board, the Board of Directors may, from time to time, declare, and the Corporation may pay, dividends on its outstanding shares of capital stock.
ARTICLE X . CORPORATE SEAL
The Corporate Seal of the Corporation shall be in such form as the Board of Directors shall prescribe.
ARTICLE XI. AMENDMENTS
In accordance with the Corporation's Articles of Incorporation, these Bylaws may be repealed, altered, amended or rescinded by the Shareholders of the Corporation only by vote of not less a majority of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the Shareholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting). In addition, except as expressly reserved for the Shareholders of the Corporation in the Articles of Incorporation, the Board of Directors may repeal, alter, amend or rescind these Bylaws by vote of a majority of the Board of Directors at a legal meeting held in accordance with the provisions of these Bylaws.
LOUIS HYATT, INC.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this day of , 2001, between LOUIS HYATT, INC., a Maryland corporation (the "Corporation"), and LOUIS HYATT ("Hyatt").
WITNESSETH
Hyatt is the President of the Corporation and possesses an intimate knowledge of the business and affairs of the Corporation. The Corporation recognizes Hyatt's contribution to the growth and success of the Corporation and desires to assure to the Corporation the continued benefits of the Hyatt's expertise and knowledge. The Hyatt, in turn, desires to continue in full-time employment with the Corporation on the terms provided herein. Severn Bancorp, Inc. ("Bancorp") intends to acquire the Company as described in an Agreement and Plan of Reorganization (the "Plan") between Hyatt and Bancorp, and a condition of the Plan is that the Company and Hyatt enter into this Agreement.
Accordingly, in consideration of the mutual covenants and representations contained herein, the parties hereto agree as follows:
1. Full-Time Employment of Hyatt.
1.1. Duties and Status.
(a) The Corporation hereby engages Hyatt as a fulltime executive employee for the period (the "Employment Period") specified in Section 4, and the Hyatt accepts such employment, on the terms and conditions set forth in this Agreement. During the Employment Period, Hyatt shall exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by Hyatt for the Corporation immediately prior to the effective date of this Agreement.
(b) During the Employment Period, Hyatt shall (i) devote his full time and efforts to the business of the Corporation and will not engage in consulting work or any trade or business for his own account or for or on behalf of any other person, firm or corporation which competes, conflicts or interferes with the performance of his duties hereunder in any way; and (ii) accept such additional office or offices to which he may be elected by the Board of Directors of the Corporation, provided that the performance of the duties of such office or offices shall be consistent with the scope of the duties provided for in subsection (a) of this Section 1.1.
(c) Hyatt will be required to perform the services and duties provided for in subsection (a) of this Section 1.1 only at the location where Hyatt was employed immediately prior to the effective date of this Agreement or such other location of the principal executive offices of the Corporation in the Annapolis, Maryland metropolitan area as the Board of Directors of the Corporation may designate. Hyatt shall be entitled to vacation, leave of absence, and leave for illness or temporary disability in accordance with the policies of the Corporation in effect, which shall not be less favorable than those in effect at the date immediately prior to this Agreement.
1.2. Compensation and General Benefits. As compensation for his services under this Agreement, Hyatt shall be compensated as follows:
(a) The Corporation shall pay Hyatt a minimum annual base salary of Fifty Thousand Dollars ($50,000). Such salary shall be payable in periodic bi-weekly equal installments. Such base salary shall be subject to normal periodic review at least annually based on the policies of the Corporation and contributions to the enterprises of the Corporation, however, such annual base salary shall not be less than Fifty Thousand Dollars ($50,000) during the term hereof.
(b) In addition to the annual base salary, Hyatt shall receive commission income arising out of properties leased or sold by Hyatt where the Company receives a commission. Hyatt shall receive no less than 25% of the gross commission when acting as the listing agent and no less than 25% of the gross commission when acting as the selling agent. As used herein "gross commission" shall mean the total sum of money paid in the form of a fee or commission arising out of a lease or sale of real estate, received by the Company.
(c) Hyatt shall be entitled to receive employee benefits, including, without limitation, 401K Plan participation, accident and health insurance and other benefits no less favorable than those benefits received by the executive officers of Severn Savings Bank, FSB. Hyatt shall also be entitled to receive the full-time use of a company automobile which shall be a Lincoln Continental, or equivalent, during the period of this Agreement.
2. Competition; Confidential Information. Hyatt and the Corporation recognize that due to the nature of his association with the Corporation and of his engagements hereunder, and the relationship of Hyatt to the Corporation, both in the past as an executive and in the future hereunder, Hyatt has had access to and has acquired, will have access to and will acquire, and has assisted in and may assist in developing, confidential and proprietary information relating to the business and operations of the Corporation and its affiliates, including, without limiting the generality of the foregoing, information with respect to their present and prospective products, systems, customers, agents, processes, and sales and marketing methods. Hyatt acknowledges that such information has been and will continue to be of central importance to the business of the Corporation and its affiliates and that disclosure of it to or its use by others could cause substantial loss to the Corporation. Hyatt and the Corporation also recognize that an important part of Hyatt's duties will be to develop good will for the Corporation and its affiliates through his personal contact with customers, agents and others having business relationships with the Corporation and its affiliates, and that there is a danger that this good will, a proprietary asset of the Corporation and its affiliates, may follow Hyatt if and when his relationship with the Corporation is terminated. Hyatt accordingly agrees as follows:
2.1. Non-Competition.
(a) During the Employment Period and for a period of one year thereafter Hyatt will not, directly or indirectly, either individually or as owner partner, agent, employee, consultant or otherwise, except for the account of and on behalf of the Corporation or its affiliates, engage in any activity competitive with the business of the Corporation, nor will he, in competition with the Corporation, solicit or otherwise attempt to establish for himself or any other person, firm or entity, any business relationships with any person, firm or corporation which was, at any time during the Employment Period, a customer or employee of the Corporation or one of its affiliates and with which Hyatt had direct contact and/or to which Hyatt rendered any services.
(b) Nothing in this Section 2 shall be construed to prevent Hyatt from owning, as an investment, not more than 1 percent of a class of equity securities issued by any competitor of the Corporation, publicly traded and registered under Section 12 of the Securities Exchange Act of 1934.
2.2. Trade Secrets. Hyatt will keep confidential any trade secrets or confidential or proprietary information of the Corporation and its affiliates which are now known to him or which hereafter may become known to him as a result of his employment or association with the Corporation and shall not at any time directly or indirectly disclose any such information to any person, firm or corporation, or use the same in any way other than in connection with the business of the Corporation or its affiliates during and at all times after the expiration of the Employment Period. For purposes of this Agreement, "trade secrets or confidential or proprietary information" means information unique to the Corporation or any of its affiliates which has a significant business purpose and is not known or generally available from sources outside the Corporation or any of its affiliates or typical of industry practice.
3. Corporation's Remedies for Breach. It is recognized that damages in the event of breach of paragraph 2 by Hyatt would be difficult, if not impossible, to ascertain, and it is, therefore, agreed that the Corporation, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction, enjoining any breach, and Hyatt hereby waives any and all defenses he may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right shall not preclude any other rights and remedies at law or in equity which the Corporation may have.
4. Employment Period; Certain Rights
4.1 Duration. The Employment Period shall commence on the date of this Agreement and shall continue until the earlier of close of business on the day immediately preceding the fifth anniversary of the date of this Agreement or death or Total Disability of Hyatt. The Employment Period may be renewed from year to year by agreement executed in writing prior to each such anniversary.
4.2 Definitions. The following words shall have the specified meanings when used in the Sections specified:
(a) In this Section 4, the phrase "termination resulting in rights of Hyatt" means termination (i) by the Corporation of the employment of Hyatt with the Corporation for any reason other than death or total disability of Hyatt or cause; or (ii) by resignation of Hyatt due to a significant diminution in the nature or scope of his authorities or duties from those contemplated in Subsection (a) of Section 1.1, a reduction in total compensation from that provided in Section 1.2, or the breach by the Corporation of any other provision of this Agreement.
(b) In Subsection (a) of this Section 4.2 the term "cause" means (i)
fraud, misappropriation or intentional material damage to the property or
business of the Corporation; commission of a felon; (ii) continuance of failure
by Hyatt to perform his duties in compliance with this Agreement after written
notice to Hyatt by the Board of Directors specifying such failure, provided that
such "cause" shall have been found by a majority vote of the members of the
Board of Directors of the Corporation other than Hyatt; or (iii) a violation of
Section 2 of this Agreement.
4.3 Certain Rights. If a termination resulting in rights of Hyatt (as defined in Section 4.2) occurs, then (a) the Corporation shall be obligated to comply with all the provisions of Section 1.2 until the end of the Employment Period, (b) Hyatt shall not thereafter be obligated to fulfill any of his obligations under Section 1.1, and (c) obligations of Hyatt under Section 2 shall continue. If a termination other than a termination resulting in rights of Hyatt (as defined in Section 4.2) occurs, including voluntary termination by Hyatt not governed by Section 4.2(a)(ii), the Corporation shall cease to have any obligations to Hyatt under this Agreement and Hyatt shall continue to be bound by all of the provisions hereof.
5. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to Hyatt at the last residence address he has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices.
6. Binding Agreement. This Agreement shall be effective as of the date hereof and shall be binding upon and inure to the benefit of Hyatt, his heirs, personal and legal representatives, guardians and permitted assigns. The rights and obligations of the Corporation under this Agreement shall inure to the benefit of and shall be binding upon any successor or assignee of the Corporation.
7. Entire Agreement. This Agreement constitutes the entire understanding of Hyatt and the Corporation with respect to the subject matter hereof and supersedes any and all prior understandings written or oral. This Agreement may not be changed, modified, or discharged orally, but only by an instrument in writing signed by the parties. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Maryland, and the invalidity or unenforceability of any provisions hereof shall in no way affect the validity or enforceability of any other provision.
IN WITNESS WHEREOF, the parties have executed, sealed and delivered this Agreement as of the date first above written.
ATTEST: LOUIS HYATT, INC.
By:
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Jo Ann Hyatt, Modlin, Secretary , Vice President
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WITNESS:
Louis Hyatt
SEVERN BANCORP, INC.
Subsidiaries
Severn Savings Bank, FSB
SBI Mortgage Company
Louis Hyatt, Inc. t/a Hyatt Real Estate
ARTICLES OF INCORPORATION
OF
SEVERN PREFERRED CAPITAL CORPORATION
FIRST: I, Alan J. Hyatt, whose post office address is 1919 West Street, Annapolis, Maryland 21401, being at least eighteen (18) years of age, do hereby form a corporation under the laws of the State of Maryland.
ARTICLE I
NAME
The name of the corporation is Severn Preferred Capital Corporation (hereinafter, the "Corporation").
ARTICLE II
PURPOSE
The purposes for which the Corporation is formed are: (i) to acquire, hold, and manage residential and commercial mortgage loans; (ii) to acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease, transfer, encumber, convey, exchange, and otherwise dispose of or deal with real property; (iii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing; and (iv) to conduct any business for which corporations may be organized under the laws of the State of Maryland, and in general, to possess and exercise all the purposes, powers, rights, and privileges granted to, or conferred upon corporations by the laws of the State of Maryland now of hereafter in force, and to exercise any powers suitable, convenient, or proper for the accomplishment of any of the purposes herein enumerated, implied or incidental to the powers or purposes herein specified, or which at any time may appear conducive to or expedient for the accomplishment of any such purposes.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in the State of Maryland is 1919A West Street, Annapolis, Maryland, 21401. The name and address of the resident agent of the Corporation is Alan J. Hyatt, 1919 West Street, Annapolis, Maryland 21401.
ARTICLE IV
AUTHORIZED STOCK
SECTION 4.1: Total Capitalization
The total number of shares of all classes of capital stock that the Corporation has authority to issue is One Million (1,000,000) shares, consisting of (i) Five Hundred Thousand (500,000) shares of preferred stock, par value $1.00 per share (the "Preferred Stock"); and (ii) Five Hundred Thousand (500,000) shares of common stock, par value $1.00 per share (the "Common Stock"). The aggregate par value of all the authorized shares of all classes of capital stock having par value is One Million Dollars ($1,000,000).
SECTION 4.2: Preferred Stock
The Preferred Stock may be issued from time to time in one or more series as authorized by the Board of Directors. Prior to the issuance of shares of each such series, the Board of Directors, by resolution, shall fix the number of shares to be included in each series and the terms, rights, restrictions and qualifications of the shares of each series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following:
(i) The designation of the series, which may be by distinguishing number, letter or title.
(ii) The dividend rate on the shares of the series, if any, whether any dividends shall be cumulative and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series.
(iii) The redemption rights, including conditions and the price or prices, if any, for shares of the series.
(iv) The terms and amounts of any sinking fund for the purchase or redemption of shares of the series.
(v) The rights of the shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, and the relative rights of priority, if any, of payment of shares of the series.
(vi) Whether the shares of the series shall be convertible into shares of any other class or series, or any other security, of the Corporation or any other corporation or other entity, and, if so, the specification of such other class or series of such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates on which such shares shall be convertible and all other terms and conditions upon which such conversion may be made.
(vii) Restrictions on the issuance of shares of the same series or of any other class or series.
(viii) The voting rights, if any, of the holders of shares of the series; provided, however, that in no event shall any holder of shares of any series of Preferred Stock be entitled to more than one vote for each share of such Preferred Stock held by it.
(ix) Whether the shares of the series shall contain warrants to purchase shares of common stock in the Corporation or any other corporation or entity, and, if so, the purchase price of any such shares of common stock, the dates on which any such warrant rights must be exercised, and all other terms and conditions of any such warrants.
(x) Any other relative rights, preferences and limitations on that series.
Subject to the express provisions of any other series of Preferred Stock then outstanding, and notwithstanding any other provision of these Articles of Incorporation, the Board of Directors may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares, or alter the designation or classify or reclassify any unissued shares of a particular series of Preferred Stock, by fixing or altering, in one or more respects, from time to time before issuing the shares, the terms, rights, restrictions and qualifications of the shares of any such series of Preferred Stock.
SECTION 4.3: Common Stock
(A) Common Stock Subject to Terms of Preferred Stock. Notwithstanding any other provision of these Articles of Incorporation, the Common Stock shall be subject to the express terms of any series of Preferred Stock.
(B) Dividend Rights. The holders of shares of Common Stock shall be entitled to receive such dividends as may be declared by the Board of Directors of the Corporation out of funds legally available therefor.
(C) Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up, or any distribution of the assets of the Corporation, the aggregate assets available for distribution to holders of shares of the Common Stock shall be determined in accordance with applicable law. Each holder of shares of Common Stock shall be entitled to receive, ratably with each other holder of shares of Common Stock, that portion of such aggregate assets available for distribution as the number of shares of the outstanding Common Stock held by such holder bears to the total number of shares of outstanding Common Stock then outstanding.
(D) Voting Rights. Except as may be provided in these Articles of Incorporation, and subject to the express terms of any series of Preferred Stock, the holders of shares of the Common Stock shall have the exclusive right to vote on all matters (as to which a common stockholder shall be entitled to vote pursuant to applicable law) at all meetings of the stockholders of the Corporation, and shall be entitled to one (1) vote for each share of the Common Stock entitled to vote at such meeting.
SECTION 4.4: Restrictions on Ownership, Transfer, and Acquisition of Preferred Stock
(A) Definitions. For purposes of these Articles of Incorporation, the following terms shall have the following meanings:
"Acquire" shall mean the acquisition of Beneficial Ownership of shares of Preferred Stock by any means, including, without limitation, the exercise of any rights under any option, warrant, convertible security, pledge or other security interest or similar right to acquire shares, but shall not include the acquisition of any such rights unless, as a result, the acquirer would be considered a Beneficial Owner. The terms "Acquires" and "Acquisition" shall have correlative meanings.
"Beneficial Ownership" shall mean ownership of shares of Preferred Stock by an Individual, either directly or constructively through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Own," "Beneficially Owns" and "Beneficially Owned" shall have correlative meanings.
"Board of Directors" shall mean the Board of Directors of the Corporation.
"Bylaws" shall mean the Bylaws of the Corporation, as the same are in effect from time to time.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor provision thereto, as interpreted by any applicable regulations as in effect from time to time.
"Individual" shall mean a natural person or any entity considered an individual for purposes of Section 542(a)(2) of the Code.
"Person" shall have the meaning set forth in the Investment Company Act of 1940, as amended.
"Record Holder" shall mean the Person listed in the books of the Corporation as owner of any shares of Preferred Stock.
"REIT" shall mean a real estate investment trust under Sections 856 through 860 of the Code.
"Transfer" shall mean any sale, transfer, gift, hypothecation, assignment, devise or other disposition of a direct or indirect interest in Preferred Stock or the right to vote or receive dividends on Preferred Stock (including (i) the granting of any option( including any option to acquire an option or any series of such options) or entering into any agreement for the sale, transfer or other disposition of Preferred Stock or the right to vote or receive dividends on Preferred Stock or (ii) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Preferred Stock, whether voluntary or involuntary, of record, constructively or beneficially, and whether by operation of law or otherwise. The terms "Transfers," "Transferred" and "Transferable" shall have correlative meanings.
(B) Ownership and Transfer Limitation
(1)Notwithstanding any other provision of these Articles of
Incorporation, no Individual shall Beneficially Own shares of Preferred Stock in
an amount that (in combination with the Beneficial Ownership of the Common Stock
and the other shares of Preferred Stock) would (i) cause the Corporation to fail
to qualify as a REIT by reason of being "closely held" within the meaning of
Section 856(h) of the Code; or (ii) cause the Corporation to fail to qualify as
a REIT by reason of being beneficially owned by fewer than 100 Persons; or (iii)
cause the Corporation to fail to qualify as a REIT for any other reason.
(2) Notwithstanding any other provision of these Articles of Incorporation, any Transfer, Acquisition, change in the capital structure of the Corporation, or other purported change in Beneficial Ownership (including actual ownership) of shares of Preferred Stock or other event or transaction that, if effective, would result in the Preferred Stock being Beneficially Owned by fewer than one hundred (100) Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer, Acquisition, change in the capital structure of the Corporation, or other purported change in Beneficial Ownership (including actual ownership) or other event or transaction with respect to the number of shares of Preferred Stock which otherwise would be owned by the transferee, and the intended transferee or beneficiary thereof shall not be the Record Holder or Beneficial Owner in that number of shares of Preferred Stock nor acquire any interest therein nor be entitled to any of the rights thereof.
(3) Notwithstanding any other provision of these Articles of Incorporation, any Transfer, Acquisition, change in the capital structure of the Corporation, or other purported change in Beneficial Ownership of shares of Preferred Stock or other event or transaction that, if effective, would cause the Corporation to fail to qualify as a REIT by reason of being "closely held" within the meaning of Section 856(h) of the Code, or otherwise would, directly or indirectly, cause the Corporation to fail to qualify as REIT shall be void ab initio as to Transfer, Acquisition, change in the capital structure of the Corporation, or other purported change in Beneficial Ownership or other event or transaction with respect to that number of shares of Preferred Stock which would cause the Corporation to be "closely held" within the meaning of Section 856(h) of the Code, or otherwise would, directly or indirectly, cause the Corporation to fail to qualify as a REIT, and the intended transferee or beneficiary thereof shall not be the Record Holder or Beneficial Owner in that number of shares of Preferred Stock nor acquire any interests therein nor be entitled to any of the rights thereof.
(C)Corporation Approval of Transfer and Acquisition of Preferred Stock.
(1) For the purpose of maintaining the Corporation's status as
a REIT, all Transfers of Preferred Stock shall be subject to the written
approval of the Corporation prior to any Transfer. The Record Owner of the
Preferred Stock must give written notice to the Corporation at least fifteen
(15) days prior to the proposed Transfer and shall promptly provide to the
Corporation such other information as the Corporation, in its sole discretion,
may request in order to determine the effect, if any, of such Transfer on the
Corporation's status as a REIT. Within fifteen (15) days of receiving such
notice and all other requested information, the Corporation shall give written
approval of the proposed Transfer if the Corporation, in its sole discretion,
determines that such a Transfer does not jeopardize the Corporation's status as
a REIT. Any such approval shall be evidenced, at a minimum, by the signature of
the appropriate Corporate officer on the certificate for the shares of Preferred
Stock being Transferred.
(2) For the purpose of maintaining the Corporation's status as a REIT, all Acquisitions of Preferred Stock shall be subject to the written approval of the Corporation prior to any Acquisition. The Person intending to Acquire the Preferred Stock must give written notice to the Corporation at least fifteen (15) days prior to the proposed Acquisition and shall promptly provide to the Corporation such other information as the Corporation, in its sole discretion, may request in order to determine the effect, if any, of such Acquisition on the Corporation's status as a REIT. Within fifteen (15) days of receiving such notice and all other requested information, the Corporation shall give written approval of the proposed Acquisition if the Corporation, in its sole discretion, determines that such an Acquisition does not jeopardize the Corporation's status as a REIT.
(3)Any purported Transfer or Acquisition of shares of Preferred Stock made without the required approval of the Corporation as described in paragraph (C)(1) and (C)(2) of this Section 4.4 shall be void ab initio and the intended transferee or beneficiary thereof shall not be the Record Holder or Beneficial Owner of any such shares, nor acquire any interests therein nor be entitled to any of the rights thereof.
(D) Remedies for Breach. If the Board of Directors or its designee shall at any time determine in good faith that (i) a Transfer, Acquisition, or change in the capital structure of the Corporation or other purported change in Beneficial Ownership or other event or transaction has taken place in violation of paragraph (B) of this Section 4.4; or (ii) that any shares of Preferred Stock have been Transferred or Acquired without the Corporation's approval as required by paragraph (C) of this Section 4.4, the Board of Directors or its designee shall take such action as it deems advisable to refuse to give effect to such Transfer, Acquisition, or change in the capital structure of the Corporation, or other attempt to Acquire Beneficial Ownership of any shares of Preferred Stock or other event or transaction, including, but not limited to refusing to give effect thereto on the books of the Corporation; provided, however, that any Transfer, Acquisition, change in the capital structure of the Corporation, or other attempt to Acquire Beneficial Ownership of any shares of Preferred Stock or other event or transaction in violation of subparagraph (2) or (3) of paragraph (B) of this Section 4.4 (as applicable), or in violation of subparagraph (1) or (2) of paragraph (C) of this Section 4.4 (as applicable) shall be void ab initio.
(1) Every Beneficial Owner of more than nine percent (9%) or such lower percentage or percentages as determined pursuant to regulations under the Code or as may be requested by the Board of Directors in its sole discretion, of the outstanding shares of any series of Preferred Stock of the Corporation annually shall, no later than January 31 of each calendar year, give written notice to the Corporation stating (i) the name and address of such Beneficial Owner; (ii) the number of shares of each series of Preferred Stock Beneficially Owned; and (iii) a description of how such shares are held. Each such Beneficial Owner promptly shall provide to the Corporation such additional information as the Corporation, in its sole discretion, may request in order to determine the effect, if any, of such Beneficial Ownership on the Corporation's status as a REIT and to ensure compliance with the restrictions set forth herein.
(2) Each Individual who is a Beneficial Owner of Preferred Stock and each Person (including the Record Holder) who is holding Preferred Stock for a Beneficial Owner promptly shall provide to the Corporation such information as the Corporation, in its sole discretion, may request in order to determine the Corporation's status as a REIT, to comply with the requirements of any taxing authority or other governmental agency, or to determine any such compliance or to ensure compliance with the restrictions set forth herein.
(F) Remedies Not Limited. Nothing contained in this Article IV shall limit the scope of application of the provisions of this Section 4.4, the ability of the Corporation to implement or enforce compliance with the terms thereof, or the authority of the Board of Directors to take any such other action or actions as it may deem necessary or advisable to protect the Corporation and the interests of its stockholders by preservation of the Corporation's status as a REIT and to ensure compliance with the restrictions set forth herein, including, without limitation, refusal to give effect to a transaction on the books of the Corporation.
(G) Ambiguity. In the case of ambiguity in the application of any of
the provisions of this Section 4.4, including any definition contained in
paragraph (A) hereof, the Board of Directors shall have the power and authority,
in its sole discretion, to determine the application of the provisions of this
Section 4.4 with respect to any situation, based on the facts known to it.
(H) Legend. Each certificate for shares of Preferred Stock shall bear substantially the following legend:
"The securities represented by this certificate are subject to restrictions on transfer and ownership for the purpose of maintenance of the Corporation's status as a real estate investment trust (a "REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). In order to protect the Corporation's status as a REIT, any Transfer or Acquisition of shares of Preferred Stock of the Corporation is subject to the written approval of the Corporation. Written notice of any Transfer or Acquisition must be given to the Corporation at least fifteen (15) days prior to any proposed Transfer or Acquisition, and the Corporation shall promptly be provided such other information as the Corporation, in its sole discretion, may request in order to determine the effect, if any, of such Transfer or Acquisition on the Corporation's status as a REIT. Within fifteen (15) days of receiving such notice and all other requested information, the Corporation shall give written approval of the proposed Transfer or Acquisition if the Corporation, in its sole discretion, determines that such a Transfer or Acquisition does not jeopardize the Corporation's status as a REIT. The signature of the appropriate officer of the Corporation on this certificate shall be evidence of the Corporation's approval of the Transfer or Acquisition of the Preferred Stock represented by this certificate. Any Transfer or Acquisition of shares of Preferred Stock without the required approval of the Corporations or which results in a violation of the ownership or transfer limitations set forth in the Company's Articles of Incorporation shall be void ab initio and the intended transferee or beneficiary shall not have or acquire any rights in such shares of Preferred Stock. All defined terms used in this legend have the meanings identified in the Corporation's Articles of Incorporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer, will be sent without charge to each stockholder who so requests."
SECTION 4.5 Issuance of Rights to Purchase Securities and Other Properties.
Subject to the rights of the Record Holders or Beneficial Owners of any series of Preferred Stock, the Board of Directors is hereby authorized to create and to authorize and direct the issuance (on either a pro rata or non-pro rata basis) by the Corporation of rights, options or warrants for the purchase of shares of Common Stock or Preferred Stock of the Corporation, other securities of the Corporation, or shares or other securities of any successor in interest of the Corporation (a "Successor"), at such times, in such amounts, to such persons, for such consideration (if any), with such form and content (including without limitation the consideration for which any shares of Common Stock or Preferred Stock of the Corporation, other securities of the Corporation, or shares or other securities of any Successor are to be issued) and upon such terms and conditions as it may, from time to time, determine, subject only to the restrictions, limitations, conditions and requirements imposed by the Maryland General Corporation Law ("MGCL") other applicable laws and these Articles of Incorporation. Without limiting the generality of the foregoing, the authority granted hereby includes the authority to adopt a "rights plan" or similar plan that treats stockholders in a discriminatory or non pro rata manner, based upon the number of shares owned thereby or otherwise.
SECTION 4.6 Severability.
If any provision of this Article IV or any application of any such provision is determined to be void, invalid or unenforceable by any court having jurisdiction over the issue, the validity and enforceability of the remainder of this Article IV shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court.
ARTICLE V
BOARD OF DIRECTORS
The number of directors shall be no less than three (3) unless a lesser number is permitted pursuant to the terms of the MGCL, nor more than seven (7). Subject to the foregoing, the Bylaws and to the express rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed by the Bylaws of the Corporation and may be increased or decreased from time to time in such a manner as may be prescribed by the Bylaws. The names of the Directors who shall act until the first annual meeting or until their successors are duly elected and qualify are: Alan J. Hyatt, S. Scott Kirkley, Cecilia Lowman and Melvin E. Meekins, Jr.
ARTICLE VI
MATTERS RELATING TO THE POWERS OF THE
BOARD OF DIRECTORS AND STOCKHOLDERS
SECTION 6.1 Matters Relating to the Board of Directors.
(A) Authority as to Bylaws. Except as otherwise provided herein, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation and the Corporation may, in its Bylaws, confer powers on the Board of Directors in addition to those contained herein or conferred by applicable law.
(B) Authority as to Stock Issuances. The Board of Directors of the Corporation may authorize the issuance, from time to time, of shares of its stock of any class or series, whether now or hereafter authorized, or securities convertible into shares now or hereafter authorized, for such consideration as the Board of Directors may deem advisable, subject to such restrictions or limitations, if any, as may be set forth in these Articles of Incorporation or the Bylaws of the Corporation or in the laws of the State of Maryland.
(C) Manner of Election. Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot.
(D) Voluntary Bankruptcy. The affirmative vote of at least two-thirds of the Board of Directors is required in order for the Corporation to file a voluntary petition of bankruptcy.
(E) Reserved Powers of Board. The enumeration and definition of particular powers of the Board of Directors included in this Article VI shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other provision of these Articles of Incorporation of the Corporation, or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board of Directors under the laws of the State of Maryland as now or hereafter in force.
(F) Alteration of Authority Granted to the Board of Directors. The affirmative vote of the proportion of the then-outstanding shares of Common Stock and Preferred Stock entitled to vote (the "Voting Stock") necessary to approve an amendment to these Articles of Incorporation pursuant to the MGCL, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with Section 6.1 of this Article VI.
(G) REIT Qualifications. The Board of Directors shall use its best efforts to cause the Corporation and its stockholders to qualify for U.S. federal income tax treatment in accordance with the provisions of the Code applicable to REITs. In furtherance of the foregoing, the Board of Directors shall use its best efforts to take such actions as are necessary, and may take such actions as it deems desirable (in its sole discretion) to preserve the status of the Corporation as a REIT; provided, however, that in the event that the Board of Directors determines, in its sole discretion, that it no longer is in the best interests of the Corporation to qualify as a REIT, the Board of Directors shall take such actions as are required by the Code, the MGCL and other applicable law, to cause the matter of termination of qualification as a REIT to be submitted to a vote of the stockholders of the Corporation pursuant to paragraph (B) of Section 6.2.
(H) Waiver. The Board of Directors shall have the right, but not the obligation, to waive the enforcement of any of the terms of any provision of Article IV herein, if the Board of Directors, in its sole opinion, determines that such a waiver does not jeopardize the Corporation's status as a REIT and is otherwise in the best interest of the Corporation. Any waiver granted for any particular occurrence shall not constitute a waiver for any future occurrence unless expressly agreed to in writing by the Board of Directors.
SECTION 6.2 Matters Relating to the Stockholders.
(A) Voting. Except as otherwise provided by these Articles of Incorporation, any matter (other than the election of directors) submitted to the stockholders for a vote shall be decided by a majority of the votes entitled to be cast on the matter, including, if applicable, the majority of votes entitled to be cast by each class of stock entitled to vote separately on the matter.
(B) Termination of REIT Status. Anything contained in these Articles of Incorporation to the contrary notwithstanding, the affirmative vote of the holders of a majority of the then-outstanding shares of Voting Stock, voting as a single class, and the approval of the Board of Directors, shall be required to terminate voluntarily the Corporation's status as a REIT.
(C) No Preemptive Rights. Except as may be expressly provided with respect to any series of Preferred Stock, no holders of stock of the Corporation, of whatever class or series, shall have any preferential right of subscription for the purchase of any shares of stock of any class or series or for the purchase of any securities convertible into shares of stock of any class or series of the Corporation other than such rights, if any, as the Board of Directors, in its sole discretion, may determine, and for such consideration as the Board of Directors, in its sole discretion, may fix; and except as may be expressly provided with respect to any series of Preferred Stock, any shares of stock of any class or series of convertible securities which the Board of Directors may determine to offer for subscription to the holders of stock may, as the Board of Directors shall determine in its sole discretion, be offered to holders of any then-existing class, classes or series of stock or other securities to the exclusion of holders of any or all other then-existing classes or series of securities.
(D) Authority as to Bylaws. Except as otherwise specifically required by the MGCL, and in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by the MGCL, these Articles of Incorporation or the Bylaws of the Corporation with respect to any series of Preferred Stock the affirmative vote of that proportion of the voting power of the Voting Stock necessary to approve an amendment to these Articles of Incorporation pursuant to the MGCL, voting together as a single class, may alter, amend or repeal any provision of the Bylaws.
ARTICLE VII
DIRECTORS' LIABILITY
No director or officer of the Corporation shall be liable to the Corporation or to its stockholders for money damages except (i) to the extent that it is established that such director or officer actually received an improper benefit or profit in money, property or services for the amount of the benefit or profit in money, property or services actually received or (ii) to the extent that a judgment or other final adjudication adverse to such director or officer is entered in a proceeding based on a finding in such proceeding that such director's or officer's action, or failure to act, was the result of the active and deliberate dishonesty and was material to the cause of the action adjudicated in the proceeding. In addition to, and not in limitation of, the foregoing, to the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers, no director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor repeal of this Article VII, nor the adoption or amendment of any provision of these Articles of Incorporation or Bylaws of the Corporation inconsistent with this Article VII, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
ARTICLE VIII
INDEMNIFICATION
Each person who is or was or who agrees to become a director or officer of the Corporation, or each person who, while a director of the Corporation, is or was serving or who agrees to serve, at the request of the Corporation, as a director, officer, partner, joint venturer, employee or trustee of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise (including the heirs, executors, administrators or estate of such person), shall be indemnified by the Corporation, and shall be entitled to have paid on his behalf or be reimbursed for reasonable expenses in advance of final disposition of a proceeding, in accordance with the Bylaws of the Corporation, to the full extent permitted from time to time by the MGCL (but, in the case of any amendment to the MGCL, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) or any other applicable laws presently or hereafter in effect. The Corporation shall have the power, with the approval of the Board of Directors, to provide such indemnification and advancement of expenses to any employee or agent of the Corporation, in accordance with the Bylaws of the Corporation. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Article VIII. Any amendment or repeal of this Article VIII shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal and shall not adversely affect any right or protection then existing pursuant to any such indemnification agreement.
ARTICLE IX
AMENDMENT
The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in its Articles of Incorporation and any other provisions authorized by the laws of the State of Maryland at the time in force may be added or inserted in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to these Articles of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article IX; provided, however, that any amendment or repeal of Articles VII or VIII of these Articles of Incorporation or this Article IX shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal.
ARTICLE X
DURATION
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation this _____ day of __________, 1997, and I acknowledge the same to be my act.
ARTICLES SUPPLEMENTARY
OF
9% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
OF
SEVERN PREFERRED CAPITAL CORPORATION
Pursuant to Section 2-208 of the
Maryland General Corporation Law
SEVERN PREFERRED CAPITAL CORPORATION, a corporation organized and existing under the laws of the State of Maryland (the "Corporation"), HEREBY CERTIFIES that the following resolution was duly adopted by the Board of Directors of the Corporation on May 14, 1997, pursuant to authority conferred upon the Board of Directors by the provisions of the Articles of Incorporation of the Corporation, which authorize the issuance and classification of up to 500,000 shares of preferred stock, $1.00 par value per share (the "Preferred Stock"):
RESOLVED that the issuance and classification of up to 200,000 shares of 9% Noncumulative Exchangeable Preferred Stock, Series A, $1.00 par value per share, of the Corporation is hereby authorized, and the designation, preferences, conversion, or other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of all 200,000 shares of this Series, in addition to those set forth in the Corporation's Articles of Incorporation, as the same may be amended or restated from time to time, are hereby fixed as follows:
1. Designation. The designation of this Series shall be 9% Noncumulative Exchangeable Preferred Stock, Series A (hereinafter referred to as the "Series A Preferred Shares" or the "Series"), and the number of Series A Preferred Shares constituting this Series shall be 200,000. The Series A Preferred Shares shall have a liquidation preference of $20.00 per share. The number of authorized Series A Preferred Shares may be reduced by further resolution duly adopted by the Board of Directors of the Corporation and by the filing of articles pursuant to the provisions of the Maryland General Corporation Law stating that such reduction has been so authorized. The number of authorized shares of this Series shall not be increased.
2. Dividends. (a) Dividends on the Series A Preferred Shares shall be payable at a rate of 9% per annum of the liquidation preference, if, when, and as declared by the Board of Directors of the Corporation out of assets of the Corporation legally available therefor. If declared, dividends on the Series A Preferred Shares shall be payable quarterly in arrears on the last day of March, June, September and December in each year (a "Dividend Period"), commencing on September 30, 1997. Dividends will accrue from the first day of each Dividend Period, whether or not declared or paid for the prior Dividend Period. Each declared dividend shall be payable to holders of record of the Series A Preferred Shares as they appear at the close of business on the stock register of the Corporation on such record date, not exceeding 45 days preceding the payment date thereof, as shall be fixed by the Board of Directors of the Corporation.
(b) Dividends shall be noncumulative. If the Board of Directors of the Corporation fails to declare a dividend on the Series A Preferred Shares for a Dividend Period, then holders of the Series A Preferred Shares will have no right to receive a dividend for that Dividend Period, and the Corporation will have no obligation to pay a dividend for that Dividend Period, whether or not dividends are declared and paid for any future Dividend Period with respect to either the Series A Preferred Shares or the common stock, par value $1.00 per share, of the Corporation (the "Common Stock").
(c) If full dividends on the Series A Preferred Shares for any Dividend Period shall not have been declared and paid, or declared and a sum sufficient for the payment thereof shall not have been set apart for such payments, no dividends shall be declared or paid or set aside for payment and no other distribution shall be declared or made or set aside for payment upon the Common Stock or any other capital stock of the Company ranking junior to or on a parity with the Series A Preferred Shares as to dividends or amounts upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with the Series A Preferred Shares as to dividends or amounts upon liquidation be redeemed, purchased, or otherwise acquired for any consideration (or any monies to be paid to or made available for a sinking fund for the redemption of any such stock) by the Company (except by conversion into or exchange for other capital stock of the Company ranking junior to the Series A Preferred Shares as to dividends and amounts upon liquidation), until such time as dividends on all outstanding Series A Preferred Shares have been (i) declared and paid for two consecutive dividend periods and (ii) declared and paid or declared and a sum sufficient for the payment thereof has been set apart for payment for the third consecutive Dividend Period. Notwithstanding the above, nothing in this subparagraph shall prevent the Company from treating an amount consented to by the holder of the Common Stock under the provisions of section 565 of the Internal Revenue Code of 1986, as amended (the "Code"), as a dividend for purposes of the dividends paid deduction under section 561 of the Code.
(d) When dividends are not paid in full (or a sum sufficient for such full payment is not set apart) upon the Series A Preferred Shares and the shares of any other series of capital stock ranking on a parity as to dividends with the Series A Preferred Shares, all dividends declared upon the Series A Preferred Shares and any other series of capital stock ranking on a parity as to dividends with the Series A Preferred Shares shall be declared pro rata so that the amount of dividends declared per share on the Series A Preferred Shares and such other series of capital stock shall in all cases bear to each other the same ratio that full dividends, for the then-current Dividend Period, per share on the Series A Preferred Shares (which shall not include any accumulation in respect of unpaid dividends for prior Dividend Periods) and full dividends, including required or permitted accumulations, if any, on such other series of capital stock bear to each other.
(e) Holders of the Series A Preferred Shares shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full dividends, as herein provided, on the Series A Preferred Shares. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series A Preferred Shares which may be in arrears.
3. Redemption. (a) The Series A Preferred Shares are not redeemable prior to June 30, 2001, except upon the occurrence of a Tax Event (as defined in paragraph (b) of this Section 3). The Corporation, at its option, may redeem the Series A Preferred Shares, in whole or in part, at any time or from time to time, on or after June 30, 2001, at a redemption price of $20.00 per share, plus accrued and unpaid dividends thereon to the date fixed for redemption. Any such redemption may only be effected with the prior approval of the Office of Thrift Supervision (the "OTS").
(b) The Corporation will have the right, at any time
upon the occurrence of a Tax Event and with the prior written approval
of the OTS, to redeem the Series A Preferred Shares, in whole, but not
in part, at a redemption price of $20.00 per share, plus the quarterly
accrued and unpaid dividend thereon to the date fixed for redemption.
"Tax Event" means the receipt by the Corporation of an opinion of a
nationally recognized law firm experienced in such matters to the
effect that, as a result of (i) any amendment to, clarification of, or
change (including any announced prospective change) in, the laws or
treaties (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein affecting
taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure,
notice, or announcement (including any notice or announcement of intent
to adopt such procedures or regulations) ("Administrative Action") or
(iii) any amendment to, clarification of, or change in the official
position or the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position with
respect to such Administrative Action that differs from the theretofore
generally accepted position, in each case, by any legislative body,
court, governmental authority, or regulatory body, irrespective of the
manner in which such amendment, clarification, or change is made known,
which amendment, clarification, or change is effective or such
pronouncement or decision is announced on or after the date of issuance
of the Series A Preferred Shares, there is more than an insubstantial
risk that (a) dividends paid or to be paid by the Corporation with
respect to the Common Stock and Preferred Stock are not, or will not
be, fully deductible by the Corporation for United States federal
income tax purposes or (b) the Corporation is, or will be, subjecnt of
other taxes, duties, or other governmental charges.
(c) In the event that fewer than all the outstanding Series A Preferred Shares are to be redeemed, the number of Series A Preferred Shares to be redeemed shall be determined by the Board of Directors of the Corporation, and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable.
(d) In the event the Corporation shall redeem any of the Series A Preferred Shares, notice of such redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the Series A Preferred Shares to be redeemed, at such holder's address as the same appears on the stock register of the Corporation. Each such notice shall state: (i) the redemption date; (ii) the number of Series A Preferred Shares to be redeemed and, if fewer than all the Series A Preferred Shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; and (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price.
(e) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing money for the payment of the redemption price), said Series A Preferred Shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the redemption price) shall cease. Upon surrender in accordance with said notices of the certificates for any Series A Preferred Shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the redemption price aforesaid. In case fewer than all the Series A Preferred Shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed Series A Preferred Shares without cost to the holder thereof.
(f) Any Series A Preferred Shares, which shall at any time have been redeemed, shall, after such redemption, have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series by the Board of Directors of the Corporation.
(g) Notwithstanding the foregoing provisions of this
Section 3, unless full dividends on the Series A Preferred Shares have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof has been set apart for payment for
the then-current Dividend Period, no Series A Preferred Shares shall be
redeemed unless all outstanding Series A Preferred Shares are redeemed
and the Corporation shall not purchase or otherwise acquire any Series
A Preferred Shares; provided, however, that the Corporation may
purchase or acquire Series A Preferred Shares pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding
Series A Preferred Shares.
4. Automatic Exchange. (a) Subject to the terms and conditions of this Section 4, each Series A Preferred Share will be exchanged automatically (the "Automatic Exchange") for one share of 9% Noncumulative Preferred Stock, Series B, $20.00 par value per share (a "Bank Preferred Share"), of Severn Savings Bank, FSB (the "Bank"). The issuance of the Bank Preferred Shares has been duly authorized by the board of directors of the Bank. Prior to or contemporaneously with the filing of these Articles Supplementary with the Maryland State Department of Assessments and Taxation, the Bank shall file with the OTS a Certificate of Designation establishing the Bank Preferred Shares. The preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of the Bank Preferred Shares shall be substantially identical to the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of the Series A Preferred Shares established by these Articles Supplementary.
(b) The Automatic Exchange will occur only if (i) the Bank fails to meet the minimum capital ratios for an "adequately capitalized" savings association under the OTS prompt corrective action rule; (ii) the OTS directs such conversion to occur; or (iii) the Bank is placed in bankruptcy, reorganization, conservatorship, or receivership (the "Conversion Event").
(c) Upon the Conversion Event, each holder of the Series A Preferred Shares shall be unconditionally obligated to surrender to the Bank the certificates representing each share of the Series A Preferred Shares of such holder, and the Bank shall be unconditionally obligated to issue to such holder in exchange for each such Series A Preferred Share a certificate representing one Bank Preferred Share.
(d) The Automatic Exchange shall occur as of 8:00
a.m. Eastern Time on the date for such exchange set forth in the
Directive, or, if such date is not set forth in the Directive, as of
8:00 a.m. on the earliest possible date such exchange could occur
consistent with the Directive (the "Time of Exchange"), as evidenced by
the issuance by the Bank of a press release. As of the Time of
Exchange, all of the Series A Preferred Shares required to be exchanged
will be deemed canceled without any further action by the Corporation,
all rights of the holders of the Series A Preferred Shares as
stockholders of the Corporation shall cease, and such persons shall
thereupon and thereafter be deemed to be and shall be for all purposes
the holders of Bank Preferred Shares. Notice of the occurrence of the
Exchange Event shall be given by first-class mail, postage prepaid,
mailed within 30 days of such event, to each holder of record of the
Series A Preferred Shares, at such holder's address as the same appears
on the stock register of the Corporation. Each such notice shall
indicate the place or places where certificates for the Series A
Preferred Shares are to be surrendered by the holders thereof, and the
Bank shall deliver to each such holder certificates for Bank Preferred
Shares upon surrender of certificates for the Series A Preferred
Shares. Until such replacement stock certificates are delivered (or in
the event such replacement certificates are not delivered),
certificates previously representing the Series A Preferred Shares
shall be deemed for all purposes to represent Bank Preferred Shares.
(e) Any Series A Preferred Shares purchased or redeemed by the Corporation in accordance with Section 3 hereof prior to the Time of Exchange shall not be deemed outstanding and shall not be subject to the Automatic Exchange. In the event of the Automatic Exchange, any accrued and unpaid dividends on the Series A Preferred Shares as of the Time of Exchange would be deemed to be accrued and unpaid dividends on the Bank Preferred Shares.
5. Conversion. The holders of Series A Preferred Shares shall not have any rights to convert such shares into shares of any other class or series of capital stock of the Corporation.
6. Liquidation Rights. (a) Upon the voluntary or involuntary dissolution, liquidation, or winding up of the Corporation, the holders of the Series A Preferred Shares shall be entitled to receive and to be paid out of the assets of the Corporation available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or on any other class of stock ranking junior to the Series A Preferred Shares upon liquidation, the amount of $20.00 per share, plus the quarterly accrued and unpaid dividend thereon to the date of liquidation.
(b) After the payment to the holders of the Series A
Preferred Shares of the full preferential amounts provided for in this
Section 6, the holders of the Series A Preferred shares as such shall
have no right or claim to any of the remaining assets of the
Corporation.
(c) If, upon any voluntary or involuntary dissolution, liquidation, or winding up of the Corporation, the amounts payable with respect to the stated value of the Series A Preferred Shares and any other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series A Preferred Shares are not paid in full, the holders of the Series A Preferred Shares and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full respective liquidating distributions to which they are entitled.
(d) Neither the sale of all or substantially all the property or business of the Corporation, nor the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, of the Corporation for purposes of this Section 6.
(e) Upon the dissolution, liquidation or winding up
of the Corporation, the holders of the Series A Preferred Shares then
outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its stockholders all amounts
to which such holders are entitled pursuant to paragraph (a) of this
Section 6 before any payment shall be made to the holder of any class
of capital stock of the Corporation ranking junior to the Series A
Preferred Shares upon liquidation.
7. Ranking. For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank:
(a) Prior to the Series A Preferred Shares, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Corporation, as the case may be, in preference or priority to the holders of the Series A Preferred Shares;
(b) On a parity with the Series A Preferred Shares, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share or sinking fund provisions, if any, are different from those of the Series A Preferred Shares, if the holders of such stock are entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Corporation, as the case may be, without preference or priority, one over the other, as between the holders of such stock and the holders of the Series A Preferred Shares; and
(c) Junior to the Series A Preferred Shares, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of the Series A Preferred Shares shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of such class or classes.
8. Voting Rights. The Series A Preferred Shares shall not have any voting powers, either general or special, except that:
(a) If at the time of any annual meeting of the Corporation's stockholders for the election of directors there is a default in preference dividends on the Preferred Stock, including the Series A Preferred Shares, the number of directors then constituting the Board of Directors of the Corporation shall be increased by two (if not already increased by two due to a default in preference dividends), and the holders of the Series A Preferred Shares, voting together with the holders of all other series of Preferred Stock as a single class without regard to series (whether or not the holders of such series of Preferred Stock would be entitled to vote for the election of directors if such default in preference dividends did not exist), shall have the right at such meeting to the exclusion of the holders of Common Stock, to elect two additional directors of the Corporation to fill such newly created directorships. Each director elected by the holders of shares of the Preferred Stock (a "Preferred Director") shall continue to serve as such director until the later of (i) the full term for which he or she shall have been elected or (ii) the payment of four quarterly dividends on the Preferred Stock, including the Series A Preferred Shares. Any Preferred Director may be removed by, and shall be not removed except by, the vote of the holders of record of all the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at a meeting of the Corporation's stockholders, or of the holders of shares of Preferred Stock, called for that purpose. As long as a default in any preference dividends on the Preferred Stock shall exist (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation, and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holde of Preferred Stock, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors shall be reduced by two. For purposes hereof, a "default in preference dividends" on the Preferred Stock shall be deemed to have occurred whenever the Corporation has failed to declare and set aside for payment a quarterly dividend during any two of the four preceding quarterly dividend periods on any series of Preferred Stock of the Corporation, including the Series A Preferred Shares.
(b) Without the consent of the holders of shares entitled to cast at least 67% of the votes entitled to be cast by the holders of the total number of shares of Preferred Stock then outstanding, voting together as a single class without regard to series, the holders of the Series A Preferred Shares being entitled to cast one vote per share thereon, the Corporation may not: (i) create any class or series of stock which shall as to dividends or distribution of assets rank prior to or on a parity with any outstanding series of Preferred Stock other than a series which shall not have any right to object to such creation or (ii) alter or change the provisions of the Corporation's Articles of Incorporation, as the same may be amended or restated from time to time, so as to adversely affect the voting powers, preferences, or special rights of the holders of a series of Preferred Stock; provided, however, that if such creation, alteration, or change would adversely affect the voting power, preferences, or special rights of one or more, but not all, series of Preferred Stock at the time outstanding, consent of the holders of shares entitled to cast at least 67% of the votes entitled to be cast by the holders of all of the shares of all such series so affected, voting together as a single class, shall be required in lieu of the consent of the holders of shares entitled to cast at least 67% of the votes entitled to be cast by the holders of the total number of shares of Preferred Stock at the time outstanding.
9. Approval of Independent Directors. (a) As long as any Series A Preferred Shares are outstanding, the Corporation may not take the following actions without first obtaining the approval of a majority of the Independent Directors. "Independent Director" means any director of the Corporation who is either (i) not a current officer or employee of the Corporation or a current director, officer, or employee of the Bank or any affiliate of the Bank, or (ii) a Preferred Director. The actions that require the prior approval of a majority of the Independent Directors include (i) the issuance of additional Preferred Stock ranking on a parity with the Series A Preferred Shares, (ii) the incurrence of debt for borrowed money in excess of 25% of the Corporation's total stockholders' equity, (iii) the modification of the general distribution policy of the Corporation or the declaration of any distribution in respect of Common Stock for any year if, after taking into account any such proposed distribution, total distributions on the Series A Preferred Shares and the Common Stock would exceed an amount equal to the sum of 105% of the Corporation's "REIT taxable income" (excluding capital gains) for such year plus net capital gains of the Corporation for that year, (iv) the acquisition of real estate assets other than mortgage loans or mortgage securities representing interests in or obligations backed by pools of mortgage loans, (v) the redemption of any shares of Common Stock, (vi) the termination or modification of, or the election not to renew, the Advisory Agreement, dated May 14, 1997, by and between the Corporation and the Bank or the Servicing Agreement, dated May 14, 1997, by and between the Corporation and the Bank, or the subcontracting of any duties under said Servicing Agreements to third parties unaffiliated with the Bank, (vii) any dissolution, liquidation or termination of the Corporation prior to January 15, 2027, (viii) any material amendment to or modificatich the Corporation purchases its real estate mortgage assets, and (ix) the determination to revoke the Corporation's status as a real estate investment trust.
(b) In assessing the benefits to the Corporation of any proposed action requiring their consent, the Independent Directors shall take into account the interests of holders of shares of both the Common Stock and the Preferred Stock, including, without limitation, the holders of the Series A Preferred Shares. In considering the interests of the holders of the Preferred Stock, including, without limitation, holders of the Series A Preferred Shares, the Independent Directors shall owe the same duties that the Independent Directors owe to holders of shares of Common Stock.
IN WITNESS WHEREOF, SEVERN PREFERRED CAPITAL CORPORATION has caused these Articles Supplementary to be signed and acknowledged in its name and on its behalf by its President and Chief Executive Officer and attested to by its Secretary on this 14 day of May, 1997.
SEVERN PREFERRED CAPITAL CORPORATION
By: /s/
---------------------------
Alan J. Hyatt
President and Chief
Executive Officer
ATTEST:
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Secretary
THE UNDERSIGNED, President and Chief Executive Officer of SEVERN PREFERRED CAPITAL CORPORATION, who executed on behalf of said corporation the foregoing Articles Supplementary to its Articles of Incorporation, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects under the penalties of perjury.
Dated: May 14, 1997
/s/
------------------------------------
Alan J. Hyatt
President and Chief Executive Officer
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SEVERN BANCORP, INC.
STOCK OPTION AND INCENTIVE PLAN
1. Purpose of the Plan.
The purpose of this Severn Bancorp, Inc. Stock Option and Incentive Plan (the "Plan") is to advance the interests of the Company through providing select key Employees and Directors of the Bank, the Company, and their Affiliates with the opportunity to acquire Shares. By encouraging such stock ownership, the Company seeks to attract, retain and motivate the best available personnel for positions of substantial responsibility and to provide additional incentive to Directors and key Employees of the Company or any Affiliate to promote the success of the business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(c) and
(f), respectively, of the Code, and any other subsidiary corporations of a
parent corporation of the Company.
(b) "Agreement" shall mean a written agreement entered into in accordance with Section 5(c).
(c) "Bank" shall mean Severn Savings Bank, FSB.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Committee" shall mean the Stock Option Committee appointed by the Board in accordance with Section 5(a) hereof.
(g) "Common Stock" shall mean the common stock, par value $.01 per share, of the Company.
(h) "Company" shall mean Severn Bancorp, Inc.
(i) "Continuous Service" shall mean the absence of any interruption or termination of service as an Employee or Director of the Company or an Affiliate. Continuous Service shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Company or in the case of transfers between payroll locations of the Company or between the Company, an Affiliate, or a successor.
(j) "Control" shall mean the ownership, control, or power to vote ten percent (10%) or more of the voting stock of the Company or otherwise control in any manner the election or appointment of a majority of the Board. "Change in Control" shall mean: (i) the sale of all, or a material portion, of the assets of the Company; (ii) a merger or recapitalization in the Company whereby the Company is not the surviving entity; (iii) an Acquisition by which a person becomes a Controlling Shareholder within the meaning of 12 C.F.R. Part 574 or as otherwise defined by the Office of Thrift Supervision, or any successor agency or regulation thereto; or (vi) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of ten percent (10%) or more of the outstanding voting securities of the Company by any person, entity, or group; provided, however, that a change in Control of the Company shall not include the acquisition or disposition of securities of the Company by any person in Control of the Company at the time of the adoption of this Plan and shall not include any subsequent acquisition or disposition of the securities of the Company by any person owned or Controlled by, or under common Control with, a person in Control of the Company at the time of the adoption of this Plan. This definition shall not apply to the purchase of Shares by underwriters in connection with a public offering of securities of the Company, or the purchase of shares of up to 25% of any class of securities of the Company by a tax-qualified employee stock benefit plan as defined in 12 C.F.R. ss.563b.2(a)(39). The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, sole proprietorship, unincorporated organization, syndicate, or any other form of entity not listed. The decision of the Committee as to whether a change in Control has occurred shall be conclusive and binding.
(k) "Director" shall mean any member of the Board, and any member of the board of directors of any Affiliate that the Board has by resolution designated as being eligible for participation in this Plan.
(l) "Disinterested Person" shall mean any member of the Board who, at the time discretion under the Plan is exercised, is a "disinterested person" within the meaning of Rule 16b-3 promulgated pursuant to the Exchange Act.
(m) "Effective Date" shall mean the date specified in Section 14 hereof.
(n) "Employee" shall mean any person employed by the Company, the Bank, or an Affiliate who is an employee for federal tax purposes.
(o) "Exercise Price" shall mean the price per Optioned Share at which an Option may be exercised.
(p) "ISO" means an option to purchase Common Stock that meets the requirements set forth in the Plan, and which is intended to be and is identified as an "incentive stock option" within the meaning of Section 422 of the Code.
(q) "Market Value" shall mean the fair market value of the Common Stock, as determined under Section 7(b) hereof.
(r) "Non-ISO" means an option to purchase Common Stock that meets the requirements set forth in the Plan but which is not intended to be and is not identified as an ISO.
(s) "Option" means an ISO and/or a Non-ISO.
(t) "Optioned Shares" shall mean Shares subject to an Option granted pursuant to this Plan.
(u) "Participant" shall mean any key Employee or other person who receives an Option pursuant to the Plan.
(v) "Plan" shall mean this Severn Bancorp, Inc., Stock Option and Incentive Plan.
(w) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, or any successor regulation thereto.
(x) "Share" shall mean one share of Common Stock.
3. Term of the Plan and Options.
(a) Term of the Plan. The Plan shall continue in effect for a term of 10 years from the Effective Date or the date the Plan is adopted by the Board (whichever period ends earlier), unless sooner terminated pursuant to Section 16 hereof. No Option shall be granted under the Plan after such 10 year term.
(b) Term of Options. The term of each Option granted under the Plan shall be established by the Committee, but shall not exceed 10 years; provided, however, that in the case of an Employee who owns Shares representing more than 10% of the outstanding Common Stock at the time an ISO is granted, the term of such ISO shall not exceed five years, subject to the provisions of Section 8(c) hereof.
4. Shares Subject to the Plan.
Except as otherwise required by the provisions of Section 11 hereof, the aggregate number of shares deliverable pursuant to Options shall not exceed 75,000 Shares. Such Shares may either be authorized but unissued Shares or Shares held in treasury. If any Options should expire, become unexercisable, or be forfeited for any reason without having been exercised or becoming vested in full, the Optioned Shares shall, unless the Plan shall have been terminated, be available for the grant of additional Options under the Plan.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the Committee, which shall consist of not less than 3 members of the Board who are Disinterested Persons. Members of the Committee shall serve at the pleasure of the Board. In the absence at any time of a duly appointed Committee, the Plan shall be administered by those members of the Board who are Disinterested Persons.
(b) Powers of the Committee. Except as limited by the express provisions of the Plan or by resolutions adopted by the Board, the Committee shall have sole and complete authority and discretion, subject to compliance with applicable regulations (i) to select Participants and grant Options, (ii) to determine the form and content of Options to be issued in the form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to prescribe, amend and rescind rules and regulations relating to the Plan, and (v) to make other determinations necessary or advisable for the administration of the Plan. The Committee shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. A majority of the entire Committee shall constitute a quorum and the actin of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be deemed the action of the Committee.
(c) Agreement. Each Option shall be evidenced by a written agreement containing such provisions as may be approved by the Committee. Each such Agreement shall constitute a binding contract between the Company and the Participant, and every Participant, upon acceptance of such Agreement, shall be bound by the terms and restrictions of the Plan and of such Agreement. The terms of each such Agreement shall be in accordance with the Plan, but each Agreement may include such additional provisions and restrictions determined by the Committee, in its discretion, subject to compliance with applicable regulations, provided that such additional provisions and restrictions are not inconsistent with the terms of the Plan. In particular, the Committee shall set forth in each Agreement (i) the Exercise Price of an Option, (ii) the number of Shares subject to, and the expiration date of, the Option, (iii) the manner, time, and rate (cumulative or otherwise) of exercise or vesting of such Option, (iv) the restrictions, if any, to be placed upon such Option, or upon Shares which may be issued upon exercise of such Option, and (v) whether the Option is intended to be an ISO or a Non-ISO.
The Chairman of the Committee and such other Directors and officers as shall be designated by the Committee are hereby authorized to execute Agreements on behalf of the Company and to cause them to be delivered to the recipients of Options.
(d) Effect of the Committee's Decisions. All decisions, determinations and interpretations of the Committee shall be final and conclusive on all persons affected thereby.
(e) Indemnification. In addition to such other rights of indemnification as they may have, the members of the Committee shall be indemnified by the Company in connection with any claim, action, suit, or proceeding relating to any action taken or failure to act under or in connection with the Plan or any Option, granted hereunder to the full extent provided for under the Company's Articles of Incorporation and Bylaws with respect to the indemnification of Directors.
6. Grant of Options.
(a) General Rule. On and after the Effective Date, key Employees and Non-Employee Directors shall be eligible to receive discretionary grants of Options (or other Options) pursuant to the Plan; provided that such grant shall not be made to an Employee or Non-Employee Director whose Continuous Service terminates on or before the date of grant.
(b) The Option granted to the optionee hereunder (i) shall become
vested and exercisable in accordance with the Agreement regarding such Option,
(ii) shall have a term of not more than 10 years from the date of the Option,
and (iii) shall be subject to the general rule set forth in Section 8(c) with
respect to the effect of an optionee's termination of Continuous Service on the
Optionee's right to exercise his or her Options.
(c) Special Rules for ISOs.
(1) The Option granted to the optionee hereunder (i) shall become vested and exercisable, on a cumulative basis, with respect to 20% of the Optioned Shares upon each of the first five anniversary dates of the date of grant, provided that vesting shall not occur on a particular date if the Optionee's Continuous Service has terminated on or before such date and (ii) shall have a term not to exceed 10 years from the date of the Option.
(2) The aggregate Market Value, as of the date the Option is granted, of the Shares with respect to which ISOs are exercisable for the first time by an Employee during any calendar year (under all incentive stock option plans, as defined in Section 422 of the Code, of the Company or any present or future Parent or Subsidiary of the Company) shall not exceed $100,000. Notwithstanding the foregoing, the Committee may grant Options in excess of the foregoing limitations, in which case such Options granted in excess of such limitation shall be Options which are Non-ISOs.
7. Exercise Price for Options.
(a) Limits on Committee Discretion. The Exercise Price as to any particular Option shall not be less than 100% of the Market Value of the Optioned Shares on the date of grant without taking into account any restrictions on the Optioned Shares. In the case of an Employee who owns Shares representing more than 10% of the Company's outstanding Shares of Common Stock at the time an ISO is granted, the Exercise Price shall not be less than 110% of the Market Value of the Optioned Shares at the time the ISO is granted.
(b) Standards for Determining Exercise Price. If the Common Stock is listed on a national securities exchange (including the Nasdaq National Market or Small Cap System) on the date in question, then the Market Value per Share shall be the average of the highest and lowest selling price on such exchange on such date, or if there were no sales on such date, then the Exercise Price shall be the mean between the bid and asked price on such date. If the Common Stock is traded otherwise than on a national securities exchange on the date in question, then the market value per Share shall be the mean between the bid and asked price on such date, or, if there is no bid and asked price on such date, then on the next prior business day on which there was a bid and asked price. If no such bid and asked price is available, then the Market Value per Share shall be its fair market value as determined by the Committee, in its sole and absolute discretion.
8. Exercise of Options.
(a) Generally. Subject to (e) below, any Option granted hereunder shall be exercisable at such times and under such conditions as shall be permissible under the terms of the Plan and of the Agreement granted to a Participant. An Option may not be exercised for a fractional Share.
(b) Procedure for Exercise. A Participant may exercise Options, subject to provisions relative to its termination and limitations on its exercise, only by (1) written notice of intent to exercise the Option with respect to a specified number of Shares, and (2) payment to the Company (contemporaneously with delivery of such notice) in cash, in Common Stock, or a combination of cash and Common Stock, of the amount of the Exercise Price for the number of Shares with respect to which the Option is then being exercised. Each such notice (and payment where required) shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Treasurer of the Company at the Company's executive offices. Common Stock utilized in full or partial payment of the Exercise Price for Options shall be valued at its Market value at the date of exercise.
(c) Period of Exercisability. Except to the extent, otherwise provided in more restrictive terms of an Agreement, an Option may be exercised by a Participant only with respect to the vested portion of such Option and only while a Participant is an Employee or Director that has maintained Continuous Service from the date of the grant of the Option, or within 3 months after termination of such Continuous Service (but not later than the date on which the Option would otherwise expire), except if the Employee's or Director's Continuous Service terminates by reason of:
(1) "Just Cause" which for purposes hereof shall have the meaning set forth in any unexpired employment agreement between the Participant and the Bank and/or the Company (and, in the absence of any such agreement, shall mean termination because of the Employee's or Director's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, then the Participant's rights to exercise such Option shall expire on the date of such termination;
(2) death, then all Options of the deceased Participant shall become immediately exercisable and may be exercised within 2 years from the date of his death (but not later than the date on which the Option would otherwise expire) by the personal representatives of his estate or person or persons to whom his rights under such Option shall have passed by will or by laws of descent and distribution.
(3) Permanent and Total Disability (as such term is defined in Section 22(e)(3) of the Code), then all Options of the disabled participant shall become immediately exercisable and may be exercised within 1 year from the date of such Permanent and Total Disability, but not later than the date on which the Option would otherwise expire.
(d) Effect of the Committee's Decisions. The Committee's determination whether a Participant's Continuous Service has ceased, and the effective date thereof, shall be final and conclusive on all persons affected thereby.
(e) Vesting of all Options shall cease immediately upon the termination of employment or directorship of an optionee. The vesting schedule for ISOs set forth in Section 6(c)(1) of this Plan is the most rapid vesting permitted under the Plan for ISOs, except in the case of death or disability (which shall be governed by Sections 8(c)(2) and (3) above) or a change in Control (which shall be governed by Section 10).
9. Grants of Options to Non-Employee Directors
(a) Automatic Grants. Notwithstanding any other provisions of this Plan, each Director who is not an employee but is a Director on the Effective Date shall receive, on said date, Non-ISOs to purchase 4,000 Shares. Such Non-ISOs shall have an Exercise Price per Share equal to the market value of a Share on the date of grant.
Each Director who joins the Board after the Effective Date and who is not then an Employee shall be eligible to receive, on the date of joining the Board, a discretionary grant of Non-ISOs in accordance with Section 6 of the Plan, at an Exercise Price per Share equal to the market Value on the date of grant.
(b) Terms of Exercise. Options received under the provisions of this
Section may be exercised in accordance with Section 8 above.
10. Change in Control.
All outstanding Options shall become immediately exercisable in the event of a change in Control of the Company, as determined by the Committee in its sole discretion. In the event of a change in Control, the Committee and the Board of Directors, at their discretion, will take one or a combination of the following actions to be effective as of the date of such change in Control:
(1) provide that such Options shall be assumed, or equivalent Options shall be substituted ("Substitute Options") by the acquiring or succeeding corporation (or an Affiliate thereof), provided that (a) any such Substitute Option exchanged for ISOs shall meet the requirements of Section 424(a) of the Code, and (b) the shares of stock issuable upon the exercise of such Substitute Option shall constitute securities registered in accordance with the Securities Act of 1933, as amended ("Securities Act"), or such securities shall be exempt from such registration in accordance with Sections 3(a)(2) or 3(a)(5) of the Securities Act, or
(2) provide that the Participants will receive upon the consummation of the change in Control transaction a cash payment for each Option surrendered equal to the difference between (1) the Market Value of the consideration to be received for each share of Common Stock in the change in Control transaction times the number of Shares subject to a surrendered Option, and (2) the aggregate exercise price of such surrendered Options. Options to which the Committee or the Board has determined to provide a cash payment in lieu of the Option pursuant to this section shall be and become, upon the change in Control the right to receive the cash payment only and shall cease to be an Option.
The individual agreements concerning Options under this Plan or other agreements between Participants and the Company, the Bank, or any Affiliate thereof, may provide restrictions on Options in the case of a change in Control in order to avoid adverse tax results under Section 280G and/or Section 4999 of the Code.
11. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalization Stock Splits, Etc. The number and kind of Shares reserved for issuance under the Plan, and the number and kind of shares subject to outstanding Options, and the Exercise Price thereof, shall be proportionately adjusted for any increase, decrease, change, or exchange of Shares for a different number or kind of shares or other securities of the Company which results from a merger, consolidation, recapitalization, reorganization, reclassification, stock dividend, split-up, combination of shares, or similar event in which the number or kind of Shares is changed without the receipt or payment of consideration by the Company.
(b) Special Rule for ISOs. Any adjustment made pursuant to subsection (a) hereof shall be made in such a manner as not to constitute a modification, within the meaning of Section 424(h) of the Code, of outstanding ISOs.
(c) Conditions and Restrictions on New, Additional, or Different Shares or Securities. If, by reason of any adjustment made pursuant to this Section, a Participant becomes entitled to new, additional, or different shares of stock or securities, such new, additional, or different shares of stock or securities shall thereupon be subject to all of the conditions and restrictions that were applicable to the Shares pursuant to the Option before the adjustment was made.
(d) Other Issuances. Except as expressly provided in this Section, the issuance by the Company or an Affiliate of shares of stock of any class, or of securities convertible into Shares or stock of another class, for cash or property or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, shall not affect, and no adjustment shall be made with respect to, the number, class or Exercise Price of Shares then subject to Options or reserved for issuance under the Plan.
12. Non-Transferability of Options.
Options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution, or pursuant to the terms of a "qualified domestic relations order" (within the meaning of Section 414(p) of the Code and the regulations and rulings thereunder). An Option may be exercised only by a Participant, the Participant's personal representative, or a permitted transferee.
13. Time of Granting Options.
The date of grant of an Option shall, for all purposes, be the later of the date on which the Committee makes the determination of granting such Option, and the Effective Date. Notice of the determination shall be given to each Participant to whom an Option is so granted within a reasonable time after the date of such grant.
14. Effective Date.
The Plan shall become effective immediately upon its approval by the Board; provided, however, that the plan shall be approved by a favorable vote of stockholders owning at least a majority of the Shares cast at a meeting duly held in accordance with the applicable laws within 12 months of the adoption of the Plan by the Board. If such approval of stockholders is not obtained within 12 months of the adoption of the Plan, the Plan shall continue in existence, however, all ISOs granted pursuant to the Plan shall become Non-ISOs.
15. Modification of Options.
At any time, and from time to time, the board may authorize the Committee to direct execution of an instrument providing for the modification of any outstanding Option, provided no such modification shall confer on the holder of said Option any right or benefit which could not be conferred on such person by the grant of a new Option at such time, or impair the Option without the consent of the holder of the Option.
16. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan, subject to compliance with applicable regulations, and, with respect to any Shares at the time not subject to Options, suspend or terminate the Plan; provided that the provisions of Section 9 may not be amended more than once every six months (other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder).
Shareholder approval must be obtained for any amendment of the Plan that would change the number of Shares subject to the Plan (except in accordance with Section 12 above), change the category of persons eligible to be Participants, or materially increase the benefits under the Plan.
No amendment, suspension or termination of the Plan shall, without the consent of any affected holders of an Option, alter or impair any rights or obligations under any Option theretofore granted.
17. Conditions upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not be issued with respect to any Option unless the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, any applicable state securities law, and the requirements of any stock exchange upon which the Shares may then be listed. The Plan is intended to comply with Rule 16b-3, and any provision of the Plan which the Committee determines in its sole and absolute discretion to be inconsistent with said Rule shall, to the extent of such inconsistency, be inoperative and null and void, and shall not affect the validity of the remaining provisions of the Plan.
(b) Special Circumstances. The inability of the Company to obtain approval from any regulatory body or authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of such Shares. As a condition to the exercise of an Option the Company may require the person exercising the Option to make such representations and warranties as may be necessary to assure the availability of an exemption from the registration requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the discretionary authority, subject to compliance with applicable regulations, to impose in Agreements such restrictions on Shares as it may deem appropriate or desirable, including but not limited to the authority to impose a right of first refusal or to establish repurchase rights or both of these restrictions.
18. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available a number of Shares sufficient to satisfy the requirements of the Plan.
19. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options shall be subject to the Participant's satisfaction of all applicable federal, state, and local income and employment tax withholding obligations. The Committee, in its discretion, may permit the Participant to satisfy the obligation, in whole or in part, by irrevocably electing to have the company withhold Shares, or to deliver to the Company Shares that the Participant already owns, having a value equal to the amount required to be withheld. The value of Shares to be withheld, or delivered to the Company, shall be based on the Market Value of the Shares on the date the amount of tax to be withheld is to be determined. As an alternative, the Company may retain, or sell without notice, a number of such Shares sufficient to cover the amount required to be withheld.
20. No Employment or Other Rights.
In no event shall an Employee's or Director's eligibility to participate or participation in the Plan create or be deemed to create any legal or equitable right of the Employee, Director, or any other party to continue service with the Company, the Bank, or any Affiliate of such corporations. Except to the extent provided in Section 9(a), no Employee or Director shall have a right to be granted an Option or, having received an Option the right to again be granted an Option. However, an Employee or Director who has been granted an Option may, if otherwise eligible, be granted an additional Option or Options.
21. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of the State of Maryland, except to the extent that federal law shall be deemed to apply.