-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/pwRyu/e47SjkX6AIgP5yuYHBEMpQrXlZcOI0p94bP8OFLGTJdA/MRpwyx9xCVy k18T0Y0dpVpI23xd+Gngow== 0000950169-98-000347.txt : 19980331 0000950169-98-000347.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950169-98-000347 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLUMBIA BANCORP CENTRAL INDEX KEY: 0000834105 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 521545782 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24302 FILM NUMBER: 98579008 BUSINESS ADDRESS: STREET 1: 10480 LITTLE PATUXENT PKWY STREET 2: PARK VIEW BUILDING CITY: COLUMBIA STATE: MD ZIP: 21044 BUSINESS PHONE: 3017305000 MAIL ADDRESS: STREET 2: 10480 LITTLE PATUXENT PARKWAY CITY: COLUMCOLUMBIA STATE: MD ZIP: 21044 10-K 1 COLUMBIA BANCORP FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission file number 0-23402 COLUMBIA BANCORP (Exact name of registrant as specified in its charter) Maryland 52-1545782 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10480 Little Patuxent Parkway Columbia, Maryland 21044 (Address of principal executive offices) (zip code) 410-465-4800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. [cover page 1 of 2 pages] (1) State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of this filing. Common Stock, par value $0.01 per share: Market value held by non-affiliates based on the closing sales price at March 17, 1998 $57,973,826 State the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock, par value $0.01 per share: Shares outstanding at March 17, 1998 2,212,845 Documents Incorporated by Reference: Portions of Annual Report to Stockholders for Fiscal Year Ended December 31, 1997, incorporated by reference into Part II. Portions of Definitive Proxy Statement dated March 27, 1998, incorporated by reference into Part III. [cover page 2 ] (2) TABLE OF CONTENTS
PART I PAGE ---- Item 1 - Business................................................................ 2 Item 2 - Properties.............................................................. 9 Item 3 - Legal Proceedings....................................................... 9 Item 4 - Submission of Matters to a Vote of Stockholders......................... 9 PART II Item 5 - Market for Common Stock and Related Stockholder Matters................. 10 Item 6 - Selected Financial Data................................................. 10 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations .............................................. 10 Item 7a - Quantitative and Qualitative Disclosures About Market Risk.............. 10 Item 8 - Financial Statements and Supplementary Data............................ 10 Columbia Bancorp and Subsidiary: Independent Auditors' Report Consolidated Statements of Financial Condition as of December 31, 1997 and 1996 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................... 10 PART III Item 10 - Directors and Executive Officers of the Registrant...................... 11 Item 11 - Executive Compensation.................................................. 12 Item 12 - Security Ownership of Certain Beneficial Owners and Management.......... 12 Item 13 - Certain Relationships and Related Transactions.......................... 12 PART IV Item 14 - Exhibits and Reports on Form 8-K........................................ 12 Signatures........................................................................ 16
(1) PART I ITEM 1. BUSINESS - ----------------- General Columbia Bancorp (the "Company"), a bank holding company, was incorporated in November, 1987, under the laws of Maryland and registered under the Bank Holding Company Act of 1956, as amended. The Columbia Bank (the "Bank") was organized by the Company as a Maryland trust company and commenced operations in May, 1988. The Bank currently accounts for substantially all of the Company's assets. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is headquartered in Columbia, Maryland and has nine branch locations in Howard County, Maryland; two branch locations in Baltimore County, Maryland; and two branch locations in Baltimore City, Maryland. The Bank also has three mortgage origination offices in Howard, Montgomery and Baltimore Counties, Maryland. At December 31, 1997, the Company had total assets of $373.5 million, total loans, net of unearned income, of $265.2 million, total deposits of $313.4 million and stockholders' equity of $34.4 million. The Bank is an independent, community bank which seeks to provide personal attention and professional financial services to its customers while offering virtually all of the banking services of larger competitors. These customers are primarily individuals and small- and medium-sized businesses. The Bank's business philosophy includes offering direct access to its President and other officers and providing friendly, informed and courteous service, local and timely decision-making, flexible and reasonable operating procedures and consistently-applied credit policies. The executive offices of the Company and the principal office of the Bank are located at 10480 Little Patuxent Parkway, Columbia, Maryland 21044, telephone number (410) 465-4800. Services of the Bank The Bank provides comprehensive and service-intensive commercial and retail banking services to individuals and small- and medium-sized businesses. The following types of services are offered by the Bank: Commercial Services: * Loans, including working capital loans and lines of credit, a wide range of demand, term, and time loans, loans for real estate acquisition, development and construction and equipment, inventory and accounts receivable financing. * Cash management, including automatic overnight investment of funds. * Certificates of deposit and other interest-bearing accounts. * Direct deposit of payroll. * Letters of credit. (2) Retail Services: * Transaction accounts, including checking and NOW accounts. * Savings accounts. * Certificates of deposit. * Individual retirement accounts. * 24-hour automated teller machines with access to most major network systems. * 24-hour telephone banking. * PC - Banking. * Installment and home equity loans and lines of credit. * Residential construction and first mortgage loans. * VISA(R) credit and debit cards. * Travelers checks, money orders and safe deposit boxes. The Bank does not now exercise general trust powers. Lending Activities General. At December 31, 1997, the Company's loan portfolio, net of unearned income, totaled $265.2 million, representing approximately 71.0% of its total assets of $373.5 million. The categories of loans in the Company's portfolio are commercial, real estate development and construction, residential real estate mortgage, commercial real estate mortgage and consumer. Loan Portfolio Composition. The following table sets forth the Company's loans by major categories as of December 31, 1997: Amount Percent ---------------------- (dollars in thousands) Commercial $ 37,519 14.1% Real estate - development and construction(1) 110,413 41.5 Real estate - mortgage: Residential 11,078 4.2 Commercial 21,146 8.0 Consumer: Retail(2) 84,039 31.6 Credit card 1,639 .6 -------- ----- Total loans $265,834 100.0% ======== ===== - --------------------- (1) At December 31, 1997, loans to individuals for constructing primary personal residences represented $15.9 million. (2) Approximately $76.6 million were retail loans secured by the borrowers' principal residences in the form of home equity lines of credit and second mortgages. Commercial Loans. The Company originates secured and unsecured loans for business purposes. Additionally, commercial business loans are made to provide working capital to businesses in the form of lines of credit (3) which may be secured by real estate, accounts receivable, inventory, equipment or other assets. At December 31, 1997, $37.5 million or 14.1% of the Company's total loan portfolio consisted of commercial business loans. The financial condition and cash flow of commercial borrowers are closely monitored by the submission of corporate financial statements, personal financial statements and income tax returns. The frequency of submissions of required information depends upon the size and complexity of the credit and the collateral which secures the loan. Financial statements are analyzed using a financial spreadsheet software program. It is also the Company's general policy to obtain personal guarantees from the principals of the commercial loan borrowers. Real Estate Development and Construction Loans. Real estate development and construction loans constitute the largest portion of the Company's lending activities, and consisted of the following at December 31, 1997: Amount Percent ---------------------- (Dollars in thousands) Residential land development $48,081 43.5% Residential construction(1) 47,579 43.1 Residential land acquisition(2) 9,704 8.8 Commercial construction 5,049 4.6 -------- ----- $110,413 100.0% ======== ===== - ----------- (1) Includes $13.6 million of loans to individuals for construction of primary personal residences. (2) Includes $2.3 million of loans to individuals for the purchase of residential building lots. The Company provides interim residential real estate development and construction loans to builders, developers and persons who will ultimately occupy the single family dwellings. Loans for the development of residential land represented the largest component of the real estate development and construction loan portfolio at December 31, 1997, totaling $48.1 million or 43.5% of the portfolio. Generally, development loans are extended only when evidence is provided that the lots under development will be or have been sold to builders satisfactory to the Company. These loans are generally extended for a period of time sufficient to allow for the clearing and grading of the land and the installation of water, sewer and roads, typically a minimum of 18 months to three years. In addition, residential land development loans generally carry a loan to value ratio not to exceed 75% of the value of the project as completed. Residential construction loans constitute the second largest component of the real estate development and construction loan portfolio, representing primarily loans for the construction of single family dwellings. At December 31, 1997, loans to individuals for the construction of primary personal residences accounted for $13.6 million of the $47.6 million residential construction portfolio. These loans are typically secured by the property under construction, frequently include additional collateral (such as a second mortgage on the borrower's present home), and commonly have maturities of six to twelve months. The remaining $34.0 million of residential construction loans represented loans to residential builders and developers. Approximately 50% of these loans were for the construction of residential homes for which a binding sales contract existed and the prospective buyers had been pre-qualified for permanent mortgage financing by either third-party lenders (mortgage companies or other financial institutions) or the Company. To date, permanent mortgage loan financing has primarily been provided by third-party lenders. The Company attempts to obtain the permanent mortgage loan under terms, conditions and documentation standards which permit the sale of the mortgage loan in the secondary mortgage loan market. The Company's practice is to immediately sell substantially all residential mortgage loans in the secondary market with servicing released. The Company makes residential real estate development and construction loans generally to provide interim financing on property during the construction period. These loans are typically made for 75% or less of the appraised value of the property. Residential real estate development and construction loan funds are disbursed periodically as pre-specified stages of completion are attained based upon site inspections. Interest rates on these loans are usually adjustable. The Company has limited loan losses in this area of lending through careful monitoring of development and construction loans with on-site inspections and control of disbursements on loans in process. Development and (4) construction loans are secured by the properties under development/construction and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely upon the value of the underlying collateral, the Company considers the financial condition and reputation of the borrower and any guarantors, the amount of the borrower's equity in the project, independent appraisals, cost estimates and pre-construction sale information. Residential Real Estate Mortgage Loans. The Company originates adjustable and fixed-rate residential mortgage loans in order to provide a full range of products to its customers. Such mortgage loans are generally originated under terms, conditions and documentation which permit their sale in the secondary mortgage market. The Company's practice is to immediately sell substantially all residential mortgage loans in the secondary market with servicing released. At December 31, 1997, $11.1 million or 4.2% of the Company's total loan portfolio consisted of residential mortgage loans. For any loans retained by the Company, title insurance insuring the priority of its mortgage lien, as well as fire and extended coverage casualty insurance protecting the properties securing the loans are required. Borrowers may be required to advance funds, with each monthly payment of principal and interest, to a loan escrow account from which the Company makes disbursements for items such as real estate taxes, hazard insurance premiums and mortgage insurance premiums. The properties securing all of the Company's residential mortgage loans are appraised by appraisers approved by the Company. Commercial Real Estate Mortgage Loans. The Company also originates mortgage loans secured by commercial real estate. At December 31, 1997, $21.1 million or 8.0% of the Company's total loan portfolio consisted of commercial mortgage loans. Such loans are primarily secured by office condominiums, retail buildings and warehouse and general purpose business space. Although terms vary, the Company's commercial mortgages generally have maturities of five years or less. The Company seeks to reduce the risks associated with commercial mortgage lending by generally lending in its market area, using conservative loan-to-value ratios and obtaining periodic financial statements and tax returns from borrowers to perform annual loan reviews. It is also the Company's general policy to obtain personal guarantees from the principals of the borrowers. Consumer Loans. The Company offers a variety of consumer loans in order to provide a full range of financial services to its customers. The consumer loans offered by the Company include home equity loans and lines of credit and loans that are secured by personal property. At December 31, 1997, $85.7 million or 32.2% of the Company's total loan portfolio consisted of consumer loans. Home equity loans are originated by the Company for typically up to 90% of the appraised value, less the amount of any existing prior liens on the property. Home equity loans have a maximum term of 15 years and the interest rate is generally adjustable. The Company secures these loans with mortgages on the homes (typically a second mortgage). Potential Problem Loans. At December 31, 1997, management had identified seven credit facilities totaling approximately $2.2 million which, while not adversely classified, had exhibited potential weaknesses. Five of these facilities, extended to a single borrower and totaling $1.1 million, were placed on nonaccrual status in February, 1998 and foreclosure proceedings have been initiated. The loans are secured by 24 residential townhouse units in various stages of completion. The weaknesses identified in the remaining two loans may result in a reduced likelihood of repayment. All of these loans are subject to an increased level of monitoring by management in accordance with the Company's established credit policies and procedures. Competition While promotional activities emphasize the many advantages of dealing with a locally-run institution closely attuned to the needs of its community, the Company faces strong competition in all areas of its operations. This (5) competition comes from entities operating in the Baltimore-Washington metropolitan area, which include offices of most of the largest banks in Maryland. Its most direct competition for deposits comes from other commercial banks, savings banks, savings and loan associations and credit unions operating in the Baltimore/Washington marketplace. The Company also competes for deposits with money market mutual funds and with larger banks for cash management customers. The Company competes with banking entities, mortgage banking companies, and other institutional lenders for loans. The competition for loans varies from time to time depending on certain factors. These factors include, among others, the general availability of lendable funds and credit, general and local economic conditions, current interest rate levels, conditions in the mortgage market and other factors which are not readily predictable. Interstate Banking Adequately capitalized bank holding companies, such as the Company, may acquire control of banks in any state, although states may limit the eligibility of banks to be acquired to those in existence for a period of time but no longer than five years. No bank holding company may acquire more than 10% of the nationwide insured deposits or more than 30% of deposits in any state; however, states may waive the 30% limit. In addition, since June 1, 1997, banks have been permitted to branch across state lines either by merging with banks in other states or by establishing new branches in other states. The date relating to interstate branching through mergers may be accelerated by any state, and such mergers may be prohibited by any state. The provision relating to establishing new branches in another state requires a state's specific approval. Maryland law permits interstate branching both by mergers and establishing new branches; however, until June 1, 1997, this provision was subject to the reciprocity requirements that banks from another state may branch into Maryland only if Maryland banks may branch into that state. The Company is unable to predict the ultimate impact of interstate banking legislation on it or its competitors. Supervision and Regulation Bank Holding Company Regulations. Bank holding companies and banks are extensively regulated under both federal and state law. These laws and regulations are intended primarily to protect depositors and not stockholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in the applicable law or regulation may have a material effect on the business and prospects of the Company and the Bank. The Company is a registered bank holding company subject to regulation and examination by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the "Act"). The Company is required to file with the Federal Reserve Board quarterly and annual reports and any additional information that may be required under the Act. The Act also requires every bank holding company to obtain the prior approval of the Federal Reserve Board before (i) acquiring all or substantially all of the assets of, or direct or indirect ownership or control of, more than 5% of the outstanding voting stock of any bank which is not already majority owned, or (ii) acquiring, or, merging or consolidating with, any other bank holding company. The Federal Reserve Board will not approve any acquisition, merger, or consolidation that would have a substantially anti-competitive effect, unless the anti-competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board also considers capital adequacy and other financial and managerial resources and future prospects of the companies and the banks concerned, together with the convenience and needs of the community to be served, when reviewing acquisitions, mergers or consolidations. The Act now further provides that the Federal Reserve Board shall not approve any such acquisition of control of any bank operating outside the bank holding company's principal state of operations, unless such action is specifically authorized by the statutes of the state in which the bank to be acquired is located. This prohibition on interstate acquisitions has been amended, effective September 29, 1995. Additionally, the Act prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries unless such non-banking business is determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determination, the Federal Reserve Board is required to weigh the expected benefits to the public, such as greater convenience, increased competition or gains in efficiency, against the possible (6) adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies, designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories. Failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities. Bank holding companies currently are required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital is required to be "Tier 1 capital," consisting of common equity, retained earnings, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill items and certain other intangible assets. The remainder ("Tier 2 capital") may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted risk assets, (b) excess of qualifying perpetual preferred stock (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible debt securities, and (f) a limited amount of subordinated debt and intermediate-term preferred stock up to 50% of Tier 1 capital. The maximum amount of supplementary capital elements that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital net of goodwill and certain other intangible assets. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal holdings of other banking organizations' capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the Federal Reserve Board (determined on a case by case basis or as a matter of policy after formal rule-making). Bank holding company assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans will be assigned to the 100% risk category, except for performing first mortgage loans fully secured by certain residential property, which carry a 50% risk rating. Most investment securities (including, primarily, general obligation claims on states or other political subdivisions of the United States) will be assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weight. In converting off-balance-sheet items, direct credit substitutes including general guarantees and standby letters of credit backing financial obligations, are given a 100% conversion factor. Transaction related contingencies such as bid bonds, standby letters of credit backing non-financial obligations and commitments (including commercial credit lines) with an initial maturity of more than one year have a 50% conversion factor. Short-term commercial letters of credit are converted at 20% and certain short-term or unconditionally cancelable commitments have a 0% factor. The Company's management believes that the risk-weighting of assets under these guidelines does not and will not have a material impact on the Company's operations or on the operations of the Bank. As of December 31, 1997 and 1996, the Company's total risk-based capital ratios were 12.5% and 13.2%, respectively, and its Tier 1 risk-based capital ratios were 11.3% and 11.9%, respectively. In addition to the risk-based capital guidelines, the Federal Reserve Board has adopted a minimum Tier 1 capital leverage ratio, under which a bank holding company that has the highest regulatory examination rating and is not contemplating significant growth or expansion must maintain a minimum level of Tier 1 capital to average total consolidated assets of at least 3%. All other bank holding companies are expected to maintain a Tier 1 leverage ratio of at least 1.0% to 2.0% above the stated minimum. The Tier 1 leverage ratio assists in the assessment of the capital adequacy of bank holding companies. Its principal objective is to place a constraint on the maximum degree to which a banking organization can leverage its equity capital base, even if it invests primarily in assets with low risk-weights. As of December 31, 1997 and 1996, the Company's Tier 1 capital leverage ratios were 9.3% and 10.1%, respectively. In September, 1995, the federal bank regulatory agencies revised the capital adequacy guidelines to explicitly include a bank's exposure to declines in the economic value of its capital due to changes in interest rates as a factor that the banking agencies will consider in evaluating a bank's capital adequacy. While the revised capital guidelines do not codify a measurement framework for assessing the level of a bank's interest rate exposure, the measurement of interest rate exposure using either a supervisory model, developed by the federal bank agencies, or the bank's own internal (7) model is a quantitative factor, among other quantitative and qualitative factors, available for use by examiners in determining the adequacy of an individual bank's capital for interest rate risk. Other quantitative factors include the bank's historical financial performance and its earnings exposure to interest rate movements. Qualitative factors include the adequacy of the bank's internal interest rate management. Establishment of an explicit supervisory threshold, defining a "normal" level of interest rate risk exposure is expected at some future date. The revision of the capital adequacy guidelines did not have a material adverse effect on the Company. Bank Regulations. The Bank is a state-chartered bank subject to supervision, regulation and examination by the Maryland Commissioner of Financial Regulation and by the FDIC under the Federal Deposit Insurance Act. Deposits, reserves, investments, loans, consumer law compliance, issuance of securities, payment of dividends, establishment and closing of branches, mergers and consolidations, changes in control, electronic funds transfer, community reinvestment, management practices and other aspects of operations are subject to regulation by the appropriate federal and state regulatory agencies. The Bank is also subject to various regulatory requirements of the Federal Reserve Board applicable to FDIC-insured banks, including disclosure requirements in connection with personal and mortgage loans, interest on deposits and reserve requirements. In addition, the Bank is subject to numerous federal, state and local laws and regulations which set forth specific restrictions and procedural requirements with respect to the extension of credit, credit practices, the disclosure of credit terms and discrimination in credit transactions. Federal regulatory agencies have broad powers to take prompt corrective action to resolve problems at banking institutions, including (in certain cases) the appointment of a conservator or receiver. The extent of these powers is generally influenced by the level of capital at the institution. The Bank is assessed by the FDIC in respect of its deposit insurance. As a result of the acquisition of Fairview Federal Savings and Loan Association ("Fairview") in June 1992, approximately $118.9 million or 39.4% of the Bank's average assessable deposit base is insured by the Savings Association Insurance Fund (the "SAIF"). The remainder of the Bank's average assessable deposit base is insured by the Bank Insurance Fund (the "BIF"). In September 1996 and as a result of congressional legislation to recapitalize the SAIF, the Company was charged a one-time special assessment of approximately $486,000 pretax. Subsequent to this charge and effective October 1, 1996, the Company's FDIC insurance premium associated with deposits insured by the SAIF fell from 23 cents per $100 of deposits to zero. Also effective October 1, 1996, the Company began paying a Financing Corporation ("FICO") assessment. As of December 31, 1997, this assessment was 1.26 cents per $100 of BIF deposits and 6.28 cents per $100 of SAIF deposits. In the liquidation or other resolution by any receiver of a bank insured by the FDIC, the claims of depositors have priority over the general claims of other creditors. Hence, in the event of the liquidation or other resolution of a banking subsidiary of the Company, the general claims of the Company as creditor of such banking subsidiary would be subordinate to the claims of the depositors of such banking subsidiary, even if the claims of the Company were not by their terms so subordinated. As a consequence of the extensive regulation of the commercial banking business in the United States, the business of the Company and the Bank are particularly susceptible to changes in federal and state legislation and regulations which may increase the cost of doing business. Governmental Monetary Policies and Economic Controls The Company is affected by monetary policies of regulatory agencies, including the Federal Reserve Board, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. Among the techniques available to the Federal Reserve Board are engaging in open market transactions in the United States Government securities, changing the discount rate on bank borrowings, changing reserve requirements against bank deposits, prohibiting the payment of interest on demand deposits, and imposing conditions on time and savings deposits. These techniques are used in varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans or paid on deposits. The effect of governmental policies on the earnings of the Company cannot be predicted; however, modest short-term changes should have little effect so long as the Company maintains its current interest sensitivity gap position. (8) Employees At December 31, 1997, the Company and the Bank had 227 employees of which 47 were officers, 197 were full-time employees and 30 were part-time employees. The Company believes its employee relations are good. ITEM 2. PROPERTIES - ------------------ The principal offices of the Company and the Bank are located at 10480 Little Patuxent Parkway, Columbia, Howard County, Maryland. At December 31, 1997, the Company owned two banking offices, one drive-through facility and an office building. These properties had a book value of $5.1 million at December 31, 1997, and the office building was producing annual rental income of $179,500. The remaining eleven banking offices and three mortgage origination offices open at December 31, 1997 were leased. The lease for the principal office of the Bank expires in 2013 (after giving effect to all renewal options), and annual rent is currently $232,000. Leases for the remaining leased banking offices and mortgage origination offices expire from 1998 through 2037 (after giving effect to all renewal options), and aggregate annual rent is currently $631,000. The Company believes that its facilities are adequate for its current and near-term needs. ITEM 3. LEGAL PROCEEDINGS - ------------------------- The Company is party to legal actions which are routine and incidental to its business. In management's opinion, the outcome of these matters, individually or in the aggregate, will not have a material adverse impact on the results of operations or financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS - ------------------------------------------------------- No matter was submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report. (9) PART II ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS - --------------------------------------------------------------- The information required by this Item is set forth by reference to the information appearing under the captions "Dividends" on page 45 and "Recent Common Stock Prices" on page 51 of the 1997 Annual Report to Stockholders included in Exhibit 13.1 filed herewith. ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- The information required by this Item as to the Company is incorporated by reference to the information appearing under the caption "Selected Financial Highlights" on page 8 of the 1997 Annual Report to Stockholders included in Exhibit 13.1 filed herewith. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS - ------------- The information required by this Item as to the Company is incorporated by reference to the information appearing under the caption "Management's Discussion and Analysis" on pages 9 through 25 of the 1997 Annual Report to Stockholders included in Exhibit 13.1 filed herewith. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- For information regarding the market risk of the Company's financial instruments, see "Management's Discussion and Analysis - Market Risk and Interest Rate Sensitivity" on pages 21 through 23 of the 1997 Annual Report to Stockholders included in Exhibit 13.1 filed herewith. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- The financial statements required by this Item as to the Company and the Company's Independent Public Accountants' Report thereon is incorporated by reference to the 1997 Annual Report to Stockholders included in Exhibit 13.1, pages 26 through 49, filed herewith. The supplementary data required by this Item as to the Company is incorporated by reference to the information appearing under the caption "Selected Quarterly Financial Data" on page 50 of the 1997 Annual Report to Stockholders included in Exhibit 13.1 filed herewith. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- There have been no changes in nor disagreements with accountants on accounting and financial disclosure. (10) PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- The information with respect to Directors of the Company is incorporated by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders included in Exhibit 99.1 filed herewith. The following information is supplied with respect to Mr. Bond and to other named executive officers of the Company and the Bank who do not serve on the Board of Directors. Each such officer serves at the pleasure of the Board and is appointed annually. Each person's principal occupation for at least the past five years has been to serve as an officer of the Company and/or the Bank. "Age" is that as of March 15, 1998. Position with the Name Age Company and the Bank ---- --- -------------------- John M. Bond, Jr. 54 President, Chief Executive Officer and Treasurer of the Company and the Bank. Michael T. Galeone 49 Executive Vice President of the Bank. Charles C. Holman 64 Executive Vice President of the Bank. Robert W. Locke 52 Senior Vice President of the Bank. John A. Scaldara, Jr. 34 Executive Vice President of the Bank, Chief Financial Officer and Secretary of the Company and the Bank. Mr. Bond has over 20 years of experience in the banking industry, holding senior positions with the Bank, Chase Bank of Maryland and The First National Bank of Maryland. Prior to returning to Maryland in 1978, Mr. Bond was a Vice President with Citibank, N.A. in New York and a consultant with McKinsey & Company. Mr. Bond is an active volunteer in his community, working with various organizations involved in education, health and community development in both Howard County and Baltimore. Mr. Bond is a graduate of Harvard College (A.B.) and Columbia University (M.B.A. and J.D.). He has been admitted to the New York State Bar. Mr. Galeone directs the retail branch operations and consumer lending activities of the Bank. He has in excess of 20 years of experience in the consumer finance industry with the Bank and Household International Corporation. Mr. Galeone is actively involved in civic and professional affairs, serving in the past as President of the Howard County Arts Council and Vice Chair of the Howard County Board of Realtors and currently a member of several other civic organizations. Mr. Galeone attended Temple University, Institute of Technology. Mr. Holman directs the real estate construction and development lending activities of the Bank relating to builders and developers. He has over 30 years of experience in the banking and real estate industries with the Bank, Fairview, Union Trust Company of Maryland, James W. Rouse & Co., Inc. and Weaver Brothers, Inc. of Maryland. He has been active in several civic and professional organizations in the community. Mr. Holman is a graduate of University of Baltimore (B.S. in Business Management). Mr. Locke directs the commercial lending activities of the Bank. He has 20 years of experience in the commercial lending area with the Bank and the former Maryland National Bank and The National Bank of Washington. Mr. Locke is actively involved in civic and professional affairs, serving in the past as a director of the (11) Howard County Chamber of Commerce and the president of the James Rouse Entrepreneurial Fund. He is a graduate of Colgate University (B.A.) and City College of New York (M.S.Ed). Mr. Scaldara directs the accounting, finance, loan administration, cash management and transaction processing activities of the Company. He has been a Certified Public Accountant since 1985. Prior to joining the Company, Mr. Scaldara held various staff accounting and consulting positions with KPMG Peat Marwick LLP in Baltimore. He is a graduate of Loyola College (B.A.) and is actively involved in civic organizations, serving as a director of the Howard Hospital Foundation. Mr. Scaldara has served as Secretary of the Company and the Bank since January 14, 1991. ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- The information required by this Item is incorporated by reference to the information appearing under the caption "Executive Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders included in Exhibit 99.1 filed herewith. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information required by this Item is incorporated by reference to the information appearing under the caption "Beneficial Ownership of Executive Officers, Directors and Nominees" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders included in Exhibit 99.1 filed herewith. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- The information required by this Item is incorporated by reference to the information appearing under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders included in Exhibit 99.1 filed herewith. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- a. Exhibits (3.1) Form of Restated Articles of Incorporation of the Company, restated as of December 31, 1995, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (File No. 0-23402). (3.2) Form of Restated By-Laws of the Company, restated as of January 26, 1998 and in effect at all times since then through March 27, 1998 (filed herein as Exhibit 3.2). (10.1) Form of the Company's 1987 Stock Option Plan, as amended April 17, 1990, December 18, 1995, and February 24, 1997, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1996 (File No. 0-23402). (12) (10.2) Form of Incentive Stock Option Agreement for use under the 1987 Stock Option Plan, as amended (previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Registration Statement on Form S-8 filed August 15, 1996)(Reg. No. 333-10231). (10.3) Form of Non-Qualified Stock Option Agreement for use under the 1987 Stock Option Plan, as amended (previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Registration Statement on Form S-8 filed August 15, 1996)(Reg. No. 333-10231). (10.4) Form of the Company's 1990 Director Stock Option Plan, as amended July 29, 1996 and February 24, 1997, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1996 (File No. 0-23402). (10.5) Form of Employment Agreement dated February 26, 1996 with John M. Bond, Jr., previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (File No. 0-23402). (10.5a) Amdendment dated December 18, 1997 to the employment agreement dated February 26, 1996 with John M. Bond, Jr. (filed herein as Exhibit 10.5a). (10.6) Form of Employment Agreement dated February 26, 1996 with Michael T. Galeone, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (File No. 0-23402). (10.6a) Amendment dated December 16, 1997 to the employment agreement dated February 26, 1996 with Michael T. Galeone (filed herein as Exhibit 10.6a). (10.7) Form of Employment Agreement dated February 27, 1996 with Charles C. Holman, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (File No. 0-23402). (10.7a) Amendment dated December 16, 1997 to the employment agreement dated February 27, 1996 with Charles C. Holman (filed herein as Exhibit 10.7a). (10.8) Form of Employment Agreement dated February 26, 1996 with John A. Scaldara, Jr., previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (File No. 0-23402). (10.8a) Amendment dated December 16, 1997 to the employment agreement dated February 26, 1996 with John A. Scaldara, Jr. (filed herein as Exhibit 10.8a). (13) (10.9) Form of Severance Agreement dated February 26, 1996 with Robert W. Locke, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (File No. 0-23402). (10.9a) Amendment dated December 16, 1997 to the severance agreement dated February 26, 1996 with Robert W. Locke (filed herein as Exhibit 10.9a). (10.10) Agreements by and between the Bank and an affiliate of Directors G. Clark and Moxley, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (File No. 0-23402). (10.11) Agreements by and between the Bank and an affiliate of Director G. Clark, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (File No. 0-23402). (10.12) Deferred Compensation Plan dated September 27, 1996, as amended December 30, 1996, and February 24, 1997, including addendums thereto, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1996, (File No. 0-23402). (10.13) Data Processing agreements by and between the Bank and M&I Data Services, Inc., including addendums thereto, previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1996 (File No. 0-23402). (10.14) Form of the Company's 1997 Stock Option Plan (previously filed with the Commission as an Exhibit to, and incorporated herein by reference from, the Company's Registration Statement on Form S-8 filed July 29, 1997) (Reg. No. 333-10231). (13.1) 1997 Annual Report to Stockholders (filed herein as Exhibit 13.1). (14) (21.1) List of Subsidiaries of the Company
State of Percentage Name Incorporation Owned by Ownership ---- ------------- -------- --------- The Columbia Maryland Columbia 100% Bank Bancorp McAlpine Maryland The Columbia 100% Enterprises, Bank Inc. Howard I, LLC Maryland The Columbia 100% Bank
(23.1) Consent of Independent Certified Public Accountants (filed herein as Exhibit 23.1). (27.1) Financial Data Schedule (filed herein as Exhibit 27.1). (99.1) Notice of the 1998 Annual Meeting of Stockholders, Proxy Statement for the 1998 Annual Meeting of Stockholders and the 1998 Form of Proxy (filed herein as Exhibit 99.1). b. Reports on Form 8-K There were no Current Reports on Form 8-K filed during the quarter ended December 31, 1997. (15) SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Columbia Bancorp (Registrant) March 23, 1998 By: /S/ ___________________________________ John M. Bond, Jr. President, Chief Executive Officer and Treasurer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /S/ Chairman of the 3/23/98 ___________________________________ Board James R. Moxley, Jr. /S/ Vice Chairman of 3/23/98 ___________________________________ the Board Herschel L. Langenthal /S/ President, Chief 3/23/98 ___________________________________ Executive Officer and Treasurer John M. Bond, Jr. /S/ Secretary 3/23/98 ___________________________________ and Chief Financial Officer John A. Scaldara, Jr. /S/ Director 3/23/98 ___________________________________ Anand S. Bhasin (16) Signature Title Date - --------- ----- ---- /S/ Director 3/23/98 ___________________________________ Garnett Y. Clark /S/ Director 3/23/98 ___________________________________ James Clark, Jr. /S/ Director 3/23/98 ___________________________________ Hugh F.Z. Cole, Jr. /S/ Director 3/23/98 ___________________________________ G. William Floyd /S/ Director 3/23/98 ___________________________________ Robert J. Gaw /S/ ___________________________________ Director 3/23/98 Mary T. Gould /S/ Director 3/23/98 ___________________________________ William L. Hermann /S/ Director 3/23/98 ___________________________________ Harry L. Lundy, Jr. /S/ Director 3/23/98 ___________________________________ Richard E. McCready /S/ Director 3/23/98 ___________________________________ Patricia T. Rouse /S/ Director 3/23/98 ___________________________________ Maurice M. Simpkins (17) Signature Title Date - --------- ----- ---- /S/ Director 3/23/98 ___________________________________ Mary S. Scrivener /S/ Director 3/23/98 ___________________________________ Robert N. Smelkinson /S/ Director 3/23/98 ___________________________________ Theodore G. Venetoulis (18) INDEX TO EXHIBITS ----------------- Exhibit No. Title of Exhibit ----------- ---------------- 3.2 Form of Restated By-Laws of the Company, restated as of January 26, 1998 and in effect at all times since then through March 27, 1998. 10.5a Amendment dated December 18, 1997 to the employment agreement dated February 26, 1996 with John M. Bond, Jr. 10.6a Amendment dated December 16, 1997 to the employment agreement dated February 26, 1996 with Michael T. Galeone. 10.7a Amendment dated December 16, 1997 to the employment agreement dated February 27, 1996 with Charles C. Holman. 10.8a Amendment dated December 16, 1997 to the employment agreement dated February 26, 1996 with John A. Scaldara, Jr. 10.9a Amendment dated December 16, 1997 to the severance agreement dated February 26, 1996 with Robert W. Locke. 13.1 Annual Report to Stockholders for the year ended December 31, 1997. 23.1 Consent of Independent Certified Public Accountants. 27.1 Financial Data Schedule. 99.1 Notice of the 1998 Annual Meeting of Stockholders, Proxy Statement for the 1998 Annual Meeting of Stockholders and the 1998 Form of Proxy. (i) EX-3 2 EXHIBIT 3.2 EXHIBIT 3.2 COLUMBIA BANCORP 1998 AMENDED AND RESTATED BY-LAWS (AMENDED AND RESTATED AS OF JANUARY 26, 1998) ARTICLE I. STOCKHOLDERS SECTION 1.01. ANNUAL MEETING. The Corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers, either at 3:00 p.m. on the third Tuesday of April in each year if not a legal holiday, or at such other time on such other day falling on or before the 30th day thereafter as shall be set by the Board of Directors. Except as the Charter or statute provides otherwise, any business may be considered at an annual meeting without the purpose of the meeting having been specified in the notice. Failure to hold an annual meeting does not invalidate the Corporation's existence or affect any otherwise valid corporate acts. SECTION 1.02. SPECIAL MEETING. At any time in the interval between annual meetings, a special meeting of the stockholders may be called by the Chairman of the Board or the President or by a majority of the Board of Directors by vote at a meeting or in writing (addressed to the Secretary of the Corporation) with or without a meeting. Special meetings of the stockholders shall be called by the Secretary at the request of stockholders only on the written request of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting. A request for a special meeting shall state the purpose of the meeting and the matters proposed to be acted on at it. The Secretary shall inform the stockholders who make the request of the reasonably estimated costs of preparing and mailing a notice of the meeting and, on payment of these costs to the Corporation, notify each stockholder entitled to notice of the meeting. SECTION 1.03. PLACE OF MEETINGS. Meetings of stockholders shall be held at such place in the United States as is set from time to time by the Board of Directors. SECTION 1.04. NOTICE OF MEETINGS; WAIVER OF NOTICE. Not less than ten nor more than 90 days before each stockholders' meeting, the Secretary shall give written notice of the meeting to each stockholder entitled to vote at the meeting and each other stockholder entitled to notice of the meeting. The notice shall state the time and place of the meeting and, if the meeting is a -1- special meeting or notice of the purpose is required by statute, the purpose of the meeting. Notice is given to a stockholder when it is personally delivered to him or her, left at his or her residence or usual place of business, or mailed to him or her at his or her address as it appears on the records of the Corporation. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if he or she before or after the meeting signs a waiver of the notice which is filed with the records of stockholders' meetings, or is present at the meeting in person or by proxy. SECTION 1.05. QUORUM; VOTING. Unless any statute or the Charter provides otherwise, at a meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director. SECTION 1.06. ADJOURNMENTS. Whether or not a quorum is present, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time without further notice by a majority vote of the stockholders present in person or by proxy to a date not more than 120 days after the original record date. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum shall be present. SECTION 1.07. GENERAL RIGHT TO VOTE; PROXIES. Unless the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders. In all elections for directors, each share of stock may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A stockholder may vote the stock the stockholder owns of record either in person or by proxy. A stockholder may sign a writing authorizing another person to act as proxy. Signing may be accomplished by the stockholder or the stockholder's authorized agent signing the writing or causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signature. A stockholder may authorize another person to act as proxy by transmitting, or authorizing the transmission of, a telegram, cablegram, datagram, or other means of electronic transmission to the person authorized to act as proxy or to a proxy solicitation firm, proxy support service organization, or other person authorized by the person who will act as proxy to receive the transmission. Unless a proxy provides otherwise, it is not valid more than 11 months after its date. A proxy is revocable by a stockholder at any time without condition or qualification unless the proxy states that it is irrevocable and the proxy is coupled with an interest. A proxy may be made irrevocable for so long as it is coupled with an interest. The interest with which a proxy may be coupled includes an interest in the stock to be voted under the proxy or another general interest in the Corporation or its assets or liabilities. -2- SECTION 1.08. LIST OF STOCKHOLDERS. At each meeting of stockholders, a full, true and complete list of all stockholders entitled to vote at such meeting, showing the number and class of shares held by each and certified by the transfer agent for such class or by the Secretary, shall be furnished by the Secretary. SECTION 1.09. CONDUCT OF BUSINESS AND VOTING. At all meetings of stockholders, unless the voting is conducted by inspectors, the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies, the acceptance or rejection of votes and procedures for the conduct of business not otherwise specified by these By-Laws, the Charter or law, shall be decided or determined by the chairman of the meeting. If demanded by stockholders, present in person or by proxy, entitled to cast 10% in number of votes entitled to be cast, or if ordered by the chairman, the vote upon any election or question shall be taken by ballot and, upon like demand or order, the voting shall be conducted by two inspectors, in which event the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided, by such inspectors. Unless so demanded or ordered, no vote need be by ballot and voting need not be conducted by inspectors. The stockholders at any meeting may choose an inspector or inspectors to act at such meeting, and in default of such election the chairman of the meeting may appoint an inspector or inspectors. No candidate for election as a director at a meeting shall serve as an inspector thereat. SECTION 1.10. INFORMAL ACTION BY STOCKHOLDERS. Any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if there is filed with the records of stockholders meetings an unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at it. SECTION 1.11. STOCKHOLDER PROPOSALS. For any stockholder proposal to be presented in connection with an annual meeting of stockholders of the Corporation, including any proposal relating to the nomination of a director to be elected to the Board of Directors of the Corporation, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including -3- such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of stock of the Corporation which are owned beneficially and of record by such stockholders and such beneficial owner. ARTICLE II. BOARD OF DIRECTORS SECTION 2.01. FUNCTION OF DIRECTORS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to the stockholders by statute or by the Charter or By-Laws. SECTION 2.02. NUMBER OF DIRECTORS. The Corporation shall have at least three directors; provided that, if there is no stock outstanding, the number of Directors may be less than three but not less than one, and, if there is stock outstanding and so long as there are less than three stockholders, the number of Directors may be less than three but not less than the number of stockholders. The Corporation shall have the number of directors provided in the Charter until changed as herein provided. A majority of the entire Board of Directors may alter the number of directors set by the Charter to not exceeding 30 nor less than the minimum number then permitted herein, but the action may not affect the tenure of office of any director. SECTION 2.03. ELECTION AND TENURE OF DIRECTORS. The directors shall be divided into classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1988 Annual Meeting of Stockholders, the term of office of the second class to expire at the 1989 Annual Meeting of Stockholders, and the term of office of the third class to expire at the 1990 Annual Meeting of Stockholders. At each annual meeting of stockholders beginning in 1988, successors to the class of directors whose term expires at that annual meeting shall be elected for a three year term. SECTION 2.04 QUALIFICATION. No person shall stand for election as a director who would be 70 years of age on or before the date of the election; provided, that any person who is an incorporator or a member of the original Board of Directors may be elected to serve for three terms as director (after the initial term specified in the Corporation's Articles of Incorporation). -4- SECTION 2.05. REMOVAL OF DIRECTOR. Subject to the rights of the holders of any class or series separately entitled to elect one or more directors, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of at least 80% of the voting power of all classes of shares of capital stock entitled to vote in the election for directors. SECTION 2.06. VACANCY ON BOARD. Subject to the rights of the holders of any class of stock separately entitled to elect one or more directors, the stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a director. A director elected by the stockholders to fill a vacancy which results from the removal of a director serves for the balance of the term of the removed director. Subject to the rights of the holders of any class of stock separately entitled to elect one or more directors, a majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the Board of Directors which results from any cause except an increase in the number of directors, and a majority of the entire Board of Directors may fill a vacancy which results from an increase in the number of directors. A director elected by the Board of Directors to fill a vacancy serves until the next annual meeting of stockholders and until his or her successor is elected and qualifies. SECTION 2.07. REGULAR MEETINGS. After each meeting of stockholders at which directors shall have been elected, the Board of Directors shall meet as soon as practicable for the purpose of organization and the transaction of other business. In the event that no other time and place are specified by resolution of the Board, the President or the Chairman, with notice in accordance with Section 2.09, the Board of Directors shall meet immediately following the close of, and at the place of, such stockholders' meeting. Any other regular meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. SECTION 2.08. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board or the President or by a majority of the Board of Directors by vote at a meeting, or in writing with or without a meeting. A special meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. In the absence of designation such meeting shall be held at such place as may be designated in the call. SECTION 2.09. NOTICE OF MEETING. Except as provided in Section 2.07, the Secretary shall give notice to each director of each regular and special meeting of the Board of Directors. The notice shall state the time and place of the meeting. Notice is given to a director when it is delivered personally to him or her, left at his or her residence or usual place of business, or sent by telegraph, facsimile transmission or telephone, at least 24 hours before the time of the meeting or, in the alternative by mail to his or her address as it shall appear on the records of the Corporation, at least 72 hours before the time of the meeting. Unless these By-Laws or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at or the purposes of any regular or special meeting of the Board of Directors. No notice of any -5- meeting of the Board of Directors need be given to any director who attends 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, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any meeting of the Board of Directors, regular or special, may adjourn from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement. SECTION 2.10. QUORUM; ACTION BY DIRECTORS. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present by majority vote and without notice other than by announcement may adjourn the meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Unless statute or the Charter or By-Laws requires a greater proportion, the action of a majority of the directors present at a meeting at which a quorum is present is action of the Board of Directors. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the Board and filed with the minutes of proceedings of the Board. SECTION 2.11. MEETING BY CONFERENCE TELEPHONE. At the discretion of the chairman of the meeting, members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting. SECTION 2.12. COMPENSATION. By resolution of the Board of Directors a fixed sum and expenses, if any, for attendance at each regular or special meeting of the Board of Directors or of committees thereof, and other compensation for their services as such or on committees of the Board of Directors, may be paid to directors. Directors who are full-time employees of the Corporation need not be paid for attendance at meetings of the board or committees thereof for which fees are paid to other directors. A director who serves the Corporation in any other capacity also may receive compensation for such other services, pursuant to a resolution of the directors. ARTICLE III. COMMITTEES SECTION 3.01. COMMITTEES. The Board of Directors may appoint from among its members an Executive Committee and other committees composed of one or more directors and delegate to these committees any of the powers of the Board of Directors, except the power to authorize dividends on stock, elect directors, issue stock other than as provided in the next -6- sentence, recommend to the stockholders any action which requires stockholder approval, amend these By-Laws, or approve any merger or share exchange which does not require stockholder approval. The Chairman of the Board and Vice Chairman of the Board, if any, shall be members of all Committees appointed with the exception of the Audit Committee. The President shall be a member of all Committees appointed with the exception of the Audit Committee and Personnel, Compensation and Stock Option Committee. If the Board of Directors has given general authorization for the issuance of stock providing for or establishing a method or procedure for determining the maximum number of shares to be issued, a committee of the Board, in accordance with that general authorization or any stock option or other plan or program adopted by the Board of Directors, may authorize or fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. SECTION 3.02. COMMITTEE PROCEDURE. Each committee may fix rules of procedure for its business. A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Section 2.10. SECTION 3.03. EMERGENCY. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Corporation by its directors and officers as contemplated by the Charter and these By-Laws, any two or more available members of the then incumbent Executive Committee shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Corporation in accordance with the provisions of Section 3.01. In the event of the unavailability, at such time, of a minimum of two members of the then incumbent Executive Committee, the available directors shall elect an Executive Committee consisting of any two members of the Board of Directors, whether or not they be officers of the Corporation, which two members shall constitute the Executive Committee for the full conduct and management of the affairs of the Corporation in accordance with the foregoing provisions of this Section. This Section shall be subject to implementation by resolution of the Board of Directors passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim Executive Committee acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs and business under all the other provisions of these By-Laws. -7- ARTICLE IV. OFFICERS SECTION 4.01. EXECUTIVE AND OTHER OFFICERS. The Corporation shall have a President, a Secretary, and a Treasurer who shall be the executive officers of the Corporation. It may also have a Chairman of the Board; the Chairman of the Board shall be an executive officer if he or she is designated as the chief executive officer of the Corporation. Provided the Corporation has a Chairman of the Board it may also have a Vice Chairman of the Board. The Vice Chairman of the Board shall not be an executive officer of the Corporation. The Board of Directors may designate who shall serve as chief executive officer, having general supervision of the business and affairs of the Corporation, or as chief operating officer, having supervision of the operations of the Corporation; in the absence of designation the President shall serve as chief executive officer and chief operating officer. It may also have one or more Vice-Presidents, assistant officers, and subordinate officers as may be established by the Board of Directors. A person may hold more than one office in the Corporation except that no person may serve concurrently as both President and Vice-President nor Chairman of the Board and Vice Chairman of the Board of the Corporation. The Chairman of the Board and Vice Chairman of the Board shall be a directors; the other officers may be directors. SECTION 4.02. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one be elected, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present; and, in general, he or she shall perform all such duties as are from time to time assigned to him or her by the Board of Directors. SECTION 4.03. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board, if one be elected, in the absence of the Chairman of the Board, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present; and, in general, he or she shall perform all such duties as are from time to time assigned to him or her by the Board of Directors. SECTION 4.04. PRESIDENT. Unless otherwise provided by resolution of the Board of Directors, the President, in the absence of the Chairman of the Board, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present; he or she may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall have been expressly delegated to some other officer or agent of the Corporation. In general, he or she shall perform such other duties customarily performed by a president of a corporation and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors or the chief executive officer of the Corporation. SECTION 4.05. VICE-PRESIDENTS. The Vice-President or Vice-Presidents, at the request of the chief executive officer or the President, or in the President's absence or during his or her inability to act, shall perform the duties and exercise the functions of the President, and when so -8- acting shall have the powers of the President. If there be more than one Vice-President, the Board of Directors may determine which one or more of the Vice-Presidents shall perform any of such duties or exercise any of such functions, or if such determination is not made by the Board of Directors, the chief executive officer, or the President may make such determination; otherwise any of the Vice-Presidents may perform any of such duties or exercise any of such functions. Each Vice-President shall perform such other duties and have such other powers, and have such additional descriptive designations in their titles (if any), as are from time to time assigned to them by the Board of Directors, the chief executive officer, or the President. SECTION 4.06. SECRETARY. The Secretary shall keep the minutes of the meetings of the stockholders, of the Board of Directors and of any committees, in books provided for the purpose; he or she shall see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; he or she shall be custodian of the records of the Corporation; he or she may witness any document on behalf of the Corporation, the execution of which is duly authorized, see that the corporate seal is affixed where such document is required or desired to be under its seal, and, when so affixed, may attest the same. In general, he or she shall perform such other duties customarily performed by a secretary of a corporation, and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors, the chief executive officer, or the President. SECTION 4.07. TREASURER. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he or she shall render to the President and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation. In general, he or she shall perform such other duties customarily performed by a treasurer of a corporation, and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors, the chief executive officer, or the President. SECTION 4.08. ASSISTANT AND SUBORDINATE OFFICERS. The assistant and subordinate officers of the Corporation are all officers below the office of Vice-President, Secretary, or Treasurer. The assistant or subordinate officers shall have such duties as are from time to time assigned to them by the Board of Directors, the chief executive officer, or the President. SECTION 4.09. ELECTION, TENURE AND REMOVAL OF OFFICERS. The Board of Directors shall elect the officers of the Corporation. The Board of Directors may from time to time authorize any committee or officer to appoint assistant and subordinate officers. Election or appointment of an officer, employee or agent shall not of itself create contract rights. All officers shall be appointed to hold their offices, respectively, during the pleasure of the Board. The Board of Directors (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may remove an officer at any time. The removal of an officer does not prejudice any of his or her contract rights. The Board of Directors (or, as to any assistant or subordinate -9- officer, any committee or officer authorized by the Board) may fill a vacancy which occurs in any office for the unexpired portion of the term. SECTION 4.10. ELECTION, TENURE AND REMOVAL OF THE CHAIRMAN OF THE BOARD AND VICE CHAIRMAN OF THE BOARD. The Board of Directors shall elect the Chairman of the Board and Vice Chairman of the Board, if any be elected. The Chairman of the Board and Vice Chairman of the Board shall be appointed to hold their offices, respectively, for two years. The Board of Directors may remove the Chairman of the Board and Vice Chairman of the Board from their respective office at any time. The removal of the Chairman of the Board and/or Vice Chairman of the Board does not prejudice his/their rights as a director and stockholder of the Corporation conveyed by the Charter and By-Laws of the Corporation. SECTION 4.11. COMPENSATION. The Board of Directors shall have power to fix the salaries and other compensation and remuneration, of whatever kind, of all officers of the Corporation. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the Corporation. The Board of Directors may authorize any committee or officer, upon whom the power of appointing assistant and subordinate officers may have been conferred, to fix the salaries, compensation and remuneration of such assistant and subordinate officers. ARTICLE V. STOCK SECTION 5.01. CERTIFICATES FOR STOCK. Each stockholder is entitled to certificates which represent and certify the shares of stock he or she holds in the Corporation. Each stock certificate shall include on its face the name of the Corporation, the name of the stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. It shall also include on its face or back (a) a statement of any restrictions on transferability and (b) a statement which provides in substance that the Corporation will furnish to any stockholder on request and without charge a full statement of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the stock of each class which the Corporation is authorized to issue, of the differences in the relative rights and preferences between the shares of each series of a preferred or special class in series which the Corporation is authorized to issue, to the extent they have been set, and of the authority of the Board of Directors to set the relative rights and preferences of subsequent series of a preferred or special class of stock and any restrictions on transferability. Such request may be made to the Secretary or to its transfer agent. It shall be in such form, not inconsistent with law or with the Charter, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the Chairman of the Board, the President, or a Vice-President, and countersigned by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of -10- it or in any other form and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. A certificate may not be issued until the stock represented by it is fully paid. SECTION 5.02. TRANSFERS. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock; and may appoint transfer agents and registrars thereof. The duties of transfer agent and registrar may be combined. SECTION 5.03. RECORD DATES OR CLOSING OF TRANSFER BOOKS. The Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including which stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be prior to the close of business on the day the record date is fixed nor, subject to Section 1.06, more than 90 days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than 20 days; and, in the case of a meeting of stockholders, the record date or the closing of the transfer books shall be at least ten days before the date of the meeting. SECTION 6.04. STOCK LEDGER. The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock, or, if none, at the principal office in the State of Maryland or the principal executive offices of the Corporation. SECTION 5.05. CERTIFICATION OF BENEFICIAL OWNERS. The Board of Directors may adopt by resolution a procedure by which a stockholder of the Corporation may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may certify; the purpose for which the certification may be made; the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board considers necessary or desirable. On receipt of a certification which complies with the procedure adopted by the Board in accordance with this Section, the person specified in the certification is, for the purpose set forth in the certification, the holder of record of the specified stock in place of the stockholder who makes the certification. SECTION 5.06. LOST STOCK CERTIFICATES. The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have been lost, stolen, or destroyed, or the Board of Directors may delegate such power to any -11- officer or officers of the Corporation. In their discretion, the Board of Directors or such officer or officers may require the owner of the certificate to give bond, with sufficient surety, to indemnify the Corporation against any loss or claim arising as a result of the issuance of a new certificate. In their discretion, the Board of Directors or such officer or officers may refuse to issue such new certificate save upon the order of some court having jurisdiction in the premises. ARTICLE VI. FINANCE SECTION 6.01. CHECKS, DRAFTS, ETC. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall, unless otherwise provided by resolution of the Board of Directors, be signed by the Chairman of the Board, the President, a Vice-President or an Assistant Vice-President and countersigned by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. SECTION 6.02. ANNUAL STATEMENT OF AFFAIRS. The President or chief accounting officer shall prepare annually a full and correct statement of the affairs of the Corporation, to include a balance sheet and a financial statement of operations for the preceding fiscal year. The statement of affairs shall be submitted at the annual meeting of the stockholders and, within 20 days after the meeting, placed on file at the Corporation's principal office. SECTION 6.03. FISCAL YEAR. The fiscal year of the Corporation shall be the twelve calendar months period ending December 31 in each year, unless otherwise provided by the Board of Directors. SECTION 6.04. DIVIDENDS. If declared by the Board of Directors at any meeting thereof, the Corporation may pay dividends on its shares in cash, property, or in shares of the capital stock of the Corporation, unless such dividend is contrary to law or to a restriction contained in the Charter. ARTICLE VII. INDEMNIFICATION SECTION 7.01. PROCEDURE. Any indemnification, or payment of expenses in advance of the final disposition of any proceeding, shall be made promptly, and in any event within 60 days, upon the written request of the director or officer entitled to seek indemnification (the "Indemnified Party"). The right to indemnification and advances hereunder shall be enforceable by the Indemnified Party in any court of competent jurisdiction, if (i) the Corporation denies such request, in whole or in part, or (ii) no disposition thereof is made within 60 days. The Indemnified Party's costs and expenses incurred in connection with successfully establishing his or her right to -12- indemnification, in whole or in part, in any such action shall also be reimbursed by the Corporation. It shall be a defense to any action for advance for expenses that (a) a determination has been made that the facts then known to those making the determination would preclude indemnification or (b) the Corporation has not received both (i) an undertaking as required by law to repay such advances in the event it shall ultimately be determined that the standard of conduct has not been met and (ii) a written affirmation by the Indemnified Party of such Indemnified Party's good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met. SECTION 7.02. EXCLUSIVITY, ETC. The indemnification and advance of expenses provided by the Charter and these By-Laws shall not be deemed exclusive of any other rights to which a person seeking indemnification or advance of expenses may be entitled under any law (common or statutory), or any agreement, vote of stockholders or disinterested directors or other provision that is consistent with law, both as to action in his or her official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the Corporation, shall continue in respect of all events occurring while a person was a director or officer after such person has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. The Corporation shall not be liable for any payment under this By-Law in connection with a claim made by a director or officer to the extent such director or officer has otherwise actually received payment under insurance policy, agreement, vote or otherwise, of the amounts otherwise indemnifiable hereunder. All rights to indemnification and advance of expenses under the Charter of the Corporation and hereunder shall be deemed to be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this By-Law is in effect. Nothing herein shall prevent the amendment of this By-Law, provided that no such amendment shall diminish the rights of any person hereunder with respect to events occurring or claims made before its adoption or as to claims made after its adoption in respect of events occurring before its adoption. Any repeal or modification of this By-Law shall not in any way diminish any rights to indemnification or advance of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this By-Law or any provision hereof is in force. SECTION 7.03. SEVERABILITY; DEFINITIONS. The invalidity or unenforceability of any provision of this Article VII shall not affect the validity or enforceability of any other provision hereof. The phrase "this By-Law" in this Article VII means this Article VII in its entirety. ARTICLE VIII. SUNDRY PROVISIONS SECTION 8.01. BOOKS AND RECORDS. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its stockholders and Board of Directors and of any executive or other committee when exercising -13- any of the powers of the Board of Directors. The books and records of the Corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form but may be maintained in the form of a reproduction. The original or a certified copy of these By-Laws shall be kept at the principal office of the Corporation. SECTION 8.02. CORPORATE SEAL. The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating to a corporate seal to place the word "(seal)" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation. SECTION 8.03. BONDS. The Board of Directors may require any officer, agent or employee of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of his or her duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors. SECTION 8.04. VOTING STOCK IN OTHER CORPORATIONS. Stock of other corporations or associations, registered in the name of the Corporation, may be voted by the President, a Vice-President, or a proxy appointed by either of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution. SECTION 8.05. MAIL. Any notice or other document which is required by these By-Laws to be mailed shall be deposited in the United States mails, postage prepaid. SECTION 8.06. EXECUTION OF DOCUMENTS. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer. SECTION 8.07. AMENDMENTS. Subject to the special provisions of Section 2.02, these By-Laws may be repealed, altered, amended or rescinded and new by-laws may be adopted (a) by the stockholders of the Corporation by vote of not less than 80% 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 any meeting of the stockholders called for that purpose (provided that notice of such proposal is included in the notice of such meeting) or (b) by the Board of Directors by a vote of not less than two-thirds of the Board of Directors at a meeting held in accordance with the provisions of these By-Laws. EX-10 3 EXHIBIT 10.5A EXHIBIT 10.5A FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT, effective December 18, 1997, between COLUMBIA BANCORP, a Maryland corporation (the "Corporation"), THE COLUMBIA BANK, a Maryland trust company and a principal subsidiary of the Corporation (the "Bank"), and JOHN M. BOND, JR. (the "Executive"), amends the Employment Agreement between the Corporation, the Bank and the Executive, dated February 26, 1996 (the "Employment Agreement"). W I T N E S S E T H: - - - - - - - - - - The Corporation and the Bank (each, a "Company" and collectively, the "Companies") recognized the Executive's contribution to the organization, growth and success of the Companies and entered into the Employment Agreement with the Executive to secure his services. The Companies and the Executive desire to amend the Employment Agreement as set forth below in this First Amendment to clarify certain provisions thereof. Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the Companies and the Executive agree to amend the Employment Agreement as follows: 1. Paragraph 5.2 shall be amended to read as follows: "5.2. Amount of Payments. Except as provided in paragraph 5.2(e), and in lieu of amounts payable under paragraph 4, the Companies will pay the Executive the following amounts in the following circumstances: (a) (i) If the Executive is terminated by either of the Companies in the circumstances described under paragraph 4.3(a)(i), or if the Executive resigns during a Change in Control Period in the circumstances described under paragraph 4.3(a)(ii), or if during a Change in Control Period the Executive resigns in circumstances other than those described under paragraph 4.3(a)(ii) without having been offered an employment agreement the terms of which are comparable to those of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's termination or resignation occurs before the Executive has attained the age of 62 years, an amount equal to three times the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's termination or resignation occurs on or after the Executive has attained the age of 62 years, an amount equal to the amount set forth in paragraph 5.2(a)(i)(a) multiplied by a fraction, the numerator of which shall be -1- 1095 minus the number of days which have passed since the Executive's 62nd birthday, and the denominator of which shall be 1095. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's termination or resignation. (b) (i) If the Executive resigns during a Change in Control Period in circumstances other than those described under paragraph 4.3(a)(ii) after having been offered an employment agreement the terms of which are comparable to those of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's resignation occurs before the Executive has attained the age of 64 years, an amount equal to the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's resignation occurs on or after the Executive has attained the age of 64 years, an amount equal to the amount set forth in paragraph 5.2(b)(i)(a) multiplied by a fraction, the numerator of which shall be 365 minus the number of days which have passed since the Executive's 64th birthday, and the denominator of which shall be 365. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's resignation. (c) Except as provided in paragraph 5.2(e), if the Executive is terminated by the Companies or resigns as described in paragraph 5.2(a), or resigns as described in paragraph 5.2(b), the Executive shall continue to receive all health, life, and disability insurance benefits available to him pursuant to paragraph 1.2(b) of this Agreement immediately before such termination or resignation. The Executive shall continue to receive such benefits until the earliest of (a) such time as the Executive shall have been receiving substantially similar insurance benefits for six months under subsequent employment, (b) 36 months after the date of a termination or resignation described in paragraph 5.2(a) or 12 months after the date of a resignation described in paragraph 5.2(b), or (c) such date as the Executive shall have attained the age of 65 years. (d) All options granted to the Executive under the Corporation's stock option award arrangements providing for the granting of options to acquire common stock to founders, directors and key employees shall immediately become fully vested in the event of a Change of Control. (e) The Executive is to receive no payments under paragraph 5.2(a) or (b) and no benefits under paragraph 5.2(c) if the -2- Executive is terminated during a Change in Control Period after having already attained the age of 65 years, or if the Executive is terminated by either of the Companies during a Change in Control Period upon the death or total disability of the Executive or for cause. In an instance of death or total disability of the Executive, however, the Executive and his dependents, beneficiaries and estate shall receive any benefits payable to them under paragraphs 4.2 (c) and 4.2 (d). (f) Notwithstanding the foregoing, in the event that any of the amounts payable to the Executive under paragraph 5.2 would, if made, cause the Executive to have tax under Section 4999 of the Code, the Executive may elect, at his discretion, to reduce the amount payable to him under paragraph 5.2(a) or (b) by an amount such that the aggregate after-tax amounts the Executive will receive under paragraph 5.2 will be equal to the aggregate after-tax amounts the Executive would receive without the reduction he elected (i.e., the aggregate amounts after the application of the tax under Section 4999 of the Code and other taxes)." IN WITNESS WHEREOF, the parties have executed and delivered this First Agreement to the Employment Agreement on this 13th day of March, 1998. ATTEST: COLUMBIA BANCORP /s/ /s/ _____________________ _____________________ Name: Title: ATTEST: THE COLUMBIA BANK /s/ /s/ _____________________ _____________________ Name: Title: WITNESS: /s/ /s/ John M. Bond, Jr. _____________________ _____________________ John M. Bond, Jr. -3- EX-10 4 EXHIBIT 10.6A EXHIBIT 10.6A FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT, effective December 16, 1997, between COLUMBIA BANCORP, a Maryland corporation (the "Corporation"), THE COLUMBIA BANK, a Maryland trust company and a principal subsidiary of the Corporation (the "Bank"), and MICHAEL T. GALEONE (the "Executive"), amends the Employment Agreement between the Corporation, the Bank and the Executive, dated February 26, 1996 (the "Employment Agreement"). W I T N E S S E T H: - - - - - - - - - - The Corporation and the Bank (each, a "Company" and collectively, the "Companies") recognized the Executive's contribution to the organization, growth and success of the Companies and entered into the Employment Agreement with the Executive to secure his services. The Companies and the Executive desire to amend the Employment Agreement as set forth below in this First Amendment to clarify certain provisions thereof. Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the Companies and the Executive agree to amend the Employment Agreement as follows: 1. Paragraph 5.2 shall be amended to read as follows: "5.2. Amount of Payments. Except as provided in paragraph 5.2(e), and in lieu of amounts payable under paragraph 4, the Companies will pay the Executive the following amounts in the following circumstances: (a) (i) If the Executive is terminated by either of the Companies in the circumstances described under paragraph 4.3(a)(i), or if the Executive resigns during a Change in Control Period in the circumstances described under paragraph 4.3(a)(ii), or if during a Change in Control Period the Executive resigns in circumstances other than those described under paragraph 4.3(a)(ii) without having been offered an employment agreement the terms of which are comparable to those of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's termination or resignation occurs before the Executive has attained the age of 63 years, an amount equal to two times the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's termination or resignation occurs on or after the Executive has attained the age of 63 years, an amount equal to the amount set forth in paragraph 5.2(a)(i)(a) multiplied by a fraction, the numerator of which shall be -1- 730 minus the number of days which have passed since the Executive's 63rd birthday, and the denominator of which shall be 730. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's termination or resignation. (b) (i) If the Executive resigns during a Change in Control Period in circumstances other than those described under paragraph 4.3(a)(ii) after having been offered an employment agreement the terms of which are comparable to those of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's resignation occurs before the Executive has attained the age of 64 years, an amount equal to the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's resignation occurs on or after the Executive has attained the age of 64 years, an amount equal to the amount set forth in paragraph 5.2(b)(i)(a) multiplied by a fraction, the numerator of which shall be 365 minus the number of days which have passed since the Executive's 64th birthday, and the denominator of which shall be 365. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's resignation. (c) Except as provided in paragraph 5.2(e), if the Executive is terminated by the Companies or resigns as described in paragraph 5.2(a), or resigns as described in paragraph 5.2(b), the Executive shall continue to receive all health, life, and disability insurance benefits available to him pursuant to paragraph 1.2(b) of this Agreement immediately before such termination or resignation. The Executive shall continue to receive such benefits until the earliest of (a) such time as the Executive shall have been receiving substantially similar insurance benefits for six months under subsequent employment, (b) 24 months after the date of a termination or resignation described in paragraph 5.2(a) or 12 months after the date of a resignation described in paragraph 5.2(b), or (c) such date as the Executive shall have attained the age of 65 years. (d) All options granted to the Executive under the Corporation's stock option award arrangements providing for the granting of options to acquire common stock to founders, directors and key employees shall immediately become fully vested in the event of a Change in Control. (e) The Executive is to receive no payments under paragraph 5.2(a) or (b) and no benefits under paragraph 5.2(c) if the -2- Executive is terminated during a Change in Control Period after having already attained the age of 65 years, or if the Executive is terminated by either of the Companies during a Change in Control Period upon the death or total disability of the Executive or for cause. In an instance of death or total disability of the Executive, however, the Executive and his dependents, beneficiaries and estate shall receive any benefits payable to them under paragraphs 4.2 (c) and 4.2 (d). (f) Notwithstanding the foregoing, in the event that any of the amounts payable to the Executive under paragraph 5.2 would, if made, cause the Executive to have tax under Section 4999 of the Code, the Executive may elect, at his discretion, to reduce the amount payable to him under paragraph 5.2(a) or (b) by an amount such that the aggregate after-tax amounts the Executive will receive under paragraph 5.2 will be equal to the aggregate after-tax amounts the Executive would receive without the reduction he elected (i.e., the aggregate amounts after the application of the tax under Section 4999 of the Code and other taxes)." IN WITNESS WHEREOF, the parties have executed and delivered this First Agreement to the Employment Agreement on this 13th day of March, 1998. ATTEST: COLUMBIA BANCORP /s/ /s/ John M. Bond, Jr. _____________________ _____________________ John M. Bond, Jr. President and Chief Executive Officer ATTEST: THE COLUMBIA BANK /s/ /s/ John M. Bond, Jr. _____________________ _____________________ John M. Bond, Jr. President and Chief Executive Officer WITNESS: /s/ /s/ Michael T. Galeone _____________________ ______________________ Michael T. Galeone -3- EX-10 5 EXHIBIT 10.7A EXHIBIT 10.7A FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT, effective December 16, 1997, between COLUMBIA BANCORP, a Maryland corporation (the "Corporation"), THE COLUMBIA BANK, a Maryland trust company and a principal subsidiary of the Corporation (the "Bank"), and CHARLES C. HOLMAN (the "Executive"), amends the Employment Agreement between the Corporation, the Bank and the Executive, dated February 27, 1996 (the "Employment Agreement"). W I T N E S S E T H: - - - - - - - - - - The Corporation and the Bank (each, a "Company" and collectively, the "Companies") recognized the Executive's contribution to the organization, growth and success of the Companies and entered into the Employment Agreement with the Executive to secure his services. The Companies and the Executive desire to amend the Employment Agreement as set forth below in this First Amendment to clarify certain provisions thereof. Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the Companies and the Executive agree to amend the Employment Agreement as follows: 1. Paragraph 5.2 shall be amended to read as follows: "5.2. Amount of Payments. Except as provided in paragraph 5.2(e), and in lieu of amounts payable under paragraph 4, the Companies will pay the Executive the following amounts in the following circumstances: (a) (i) If the Executive is terminated by either of the Companies in the circumstances described under paragraph 4.3(a)(i), or if the Executive resigns during a Change in Control Period in the circumstances described under paragraph 4.3(a)(ii), or if during a Change in Control Period the Executive resigns in circumstances other than those described under paragraph 4.3(a)(ii) without having been offered an employment agreement the terms of which are comparable to those of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's termination or resignation occurs before the Executive has attained the age of 63 years, an amount equal to two times the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's termination or resignation occurs on or after the Executive has attained the age of 63 years, an amount equal to the amount set forth in paragraph 5.2(a)(i)(a) multiplied by a fraction, the numerator of which shall be -1- 730 minus the number of days which have passed since the Executive's 63rd birthday, and the denominator of which shall be 730. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's termination or resignation. (b) (i) If the Executive resigns during a Change in Control Period in circumstances other than those described under paragraph 4.3(a)(ii) after having been offered an employment agreement the terms of which are comparable to those of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's resignation occurs before the Executive has attained the age of 64 years, an amount equal to the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's resignation occurs on or after the Executive has attained the age of 64 years, an amount equal to the amount set forth in paragraph 5.2(b)(i)(a) multiplied by a fraction, the numerator of which shall be 365 minus the number of days which have passed since the Executive's 64th birthday, and the denominator of which shall be 365. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's resignation. (c) Except as provided in paragraph 5.2(e), if the Executive is terminated by the Companies or resigns as described in paragraph 5.2(a), or resigns as described in paragraph 5.2(b), the Executive shall continue to receive all health, life, and disability insurance benefits available to him pursuant to paragraph 1.2(b) of this Agreement immediately before such termination or resignation. The Executive shall continue to receive such benefits until the earliest of (a) such time as the Executive shall have been receiving substantially similar insurance benefits for six months under subsequent employment, (b) 24 months after the date of a termination or resignation described in paragraph 5.2(a) or 12 months after the date of a resignation described in paragraph 5.2(b), or (c) such date as the Executive shall have attained the age of 65 years. (d) All options granted to the Executive under the Corporation's stock option award arrangements providing for the granting of options to acquire common stock to founders, directors and key employees shall immediately become fully vested in the event of a Change in Control. (e) The Executive is to receive no payments under paragraph 5.2(a) or (b) and no benefits under paragraph 5.2(c) if the -2- Executive is terminated during a Change in Control Period after having already attained the age of 65 years, or if the Executive is terminated by either of the Companies during a Change in Control Period upon the death or total disability of the Executive or for cause. In an instance of death or total disability of the Executive, however, the Executive and his dependents, beneficiaries and estate shall receive any benefits payable to them under paragraphs 4.2 (c) and 4.2 (d). (f) Notwithstanding the foregoing, in the event that any of the amounts payable to the Executive under paragraph 5.2 would, if made, cause the Executive to have tax under Section 4999 of the Code, the Executive may elect, at his discretion, to reduce the amount payable to him under paragraph 5.2(a) or (b) by an amount such that the aggregate after-tax amounts the Executive will receive under paragraph 5.2 will be equal to the aggregate after-tax amounts the Executive would receive without the reduction he elected (i.e., the aggregate amounts after the application of the tax under Section 4999 of the Code and other taxes)." IN WITNESS WHEREOF, the parties have executed and delivered this First Agreement to the Employment Agreement on this 13th day of March, 1998. ATTEST: COLUMBIA BANCORP /s/ /s/ John M. Bond, Jr. _____________________ _____________________ John M. Bond, Jr. President and Chief Executive Officer ATTEST: THE COLUMBIA BANK /s/ /s/ John M. Bond, Jr. _____________________ _____________________ John M. Bond, Jr. President and Chief Executive Officer WITNESS: /s/ /s/ Charles C. Holman _____________________ _____________________ Charles C. Holman -3- EX-10 6 EXHIBIT 10.8A EXHIBIT 10.8A FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT, effective December 16, 1997, between COLUMBIA BANCORP, a Maryland corporation (the "Corporation"), THE COLUMBIA BANK, a Maryland trust company and a principal subsidiary of the Corporation (the "Bank"), and JOHN A. SCALDARA, JR. (the "Executive"), amends the Employment Agreement between the Corporation, the Bank and the Executive, dated February 26, 1996 (the "Employment Agreement"). W I T N E S S E T H: - - - - - - - - - - The Corporation and the Bank (each, a "Company" and collectively, the "Companies") recognized the Executive's contribution to the organization, growth and success of the Companies and entered into the Employment Agreement with the Executive to secure his services. The Companies and the Executive desire to amend the Employment Agreement as set forth below in this First Amendment to clarify certain provisions thereof. Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the Companies and the Executive agree to amend the Employment Agreement as follows: 1. Paragraph 5.2 shall be amended to read as follows: "5.2. Amount of Payments. Except as provided in paragraph 5.2(e), and in lieu of amounts payable under paragraph 4, the Companies will pay the Executive the following amounts in the following circumstances: (a) (i) If the Executive is terminated by either of the Companies in the circumstances described under paragraph 4.3(a)(i), or if the Executive resigns during a Change in Control Period in the circumstances described under paragraph 4.3(a)(ii), or if during a Change in Control Period the Executive resigns in circumstances other than those described under paragraph 4.3(a)(ii) without having been offered an employment agreement the terms of which are comparable to those of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's termination or resignation occurs before the Executive has attained the age of 63 years, an amount equal to two times the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's termination or resignation occurs on or after the Executive has attained the age of 63 years, an amount equal to the amount set forth in paragraph -1- 5.2(a)(i)(a) multiplied by a fraction, the numerator of which shall be 730 minus the number of days which have passed since the Executive's 63rd birthday, and the denominator of which shall be 730. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's termination or resignation. (b) (i) If the Executive resigns during a Change in Control Period in circumstances other than those described under paragraph 4.3(a)(ii) after having been offered an employment agreement the terms of which are comparable to those of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's resignation occurs before the Executive has attained the age of 64 years, an amount equal to the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's resignation occurs on or after the Executive has attained the age of 64 years, an amount equal to the amount set forth in paragraph 5.2(b)(i)(a) multiplied by a fraction, the numerator of which shall be 365 minus the number of days which have passed since the Executive's 64th birthday, and the denominator of which shall be 365. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's resignation. (c) Except as provided in paragraph 5.2(e), if the Executive is terminated by the Companies or resigns as described in paragraph 5.2(a), or resigns as described in paragraph 5.2(b), the Executive shall continue to receive all health, life, and disability insurance benefits available to him pursuant to paragraph 1.2(b) of this Agreement immediately before such termination or resignation. The Executive shall continue to receive such benefits until the earliest of (a) such time as the Executive shall have been receiving substantially similar insurance benefits for six months under subsequent employment, (b) 24 months after the date of a termination or resignation described in paragraph 5.2(a) or 12 months after the date of a resignation described in paragraph 5.2(b), or (c) such date as the Executive shall have attained the age of 65 years. (d) All options granted to the Executive under the Corporation's stock option award arrangements providing for the granting of options to acquire common stock to founders, directors and key employees shall immediately become fully vested in the event of a Change in Control. -2- (e) The Executive is to receive no payments under paragraph 5.2(a) or (b) and no benefits under paragraph 5.2(c) if the Executive is terminated during a Change in Control Period after having already attained the age of 65 years, or if the Executive is terminated by either of the Companies during a Change in Control Period upon the death or total disability of the Executive or for cause. In an instance of death or total disability of the Executive, however, the Executive and his dependents, beneficiaries and estate shall receive any benefits payable to them under paragraphs 4.2 (c) and 4.2 (d). (f) Notwithstanding the foregoing, in the event that any of the amounts payable to the Executive under paragraph 5.2 would, if made, cause the Executive to have tax under Section 4999 of the Code, the Executive may elect, at his discretion, to reduce the amount payable to him under paragraph 5.2(a) or (b) by an amount such that the aggregate after-tax amounts the Executive will receive under paragraph 5.2 will be equal to the aggregate after-tax amounts the Executive would receive without the reduction he elected (i.e., the aggregate amounts after the application of the tax under Section 4999 of the Code and other taxes)." IN WITNESS WHEREOF, the parties have executed and delivered this First Agreement to the Employment Agreement on this 13th day of March, 1998. ATTEST: COLUMBIA BANCORP /s/ /s/ John M. Bond, Jr. _____________________ ______________________ John M. Bond, Jr. President and Chief Executive Officer ATTEST: THE COLUMBIA BANK /s/ /s/ John M. Bond, Jr. _____________________ ______________________ John M. Bond, Jr. President and Chief Executive Officer WITNESS: /s/ /s/ John A. Scaldara, Jr. _____________________ __________________________ John A. Scaldara, Jr. -3- EX-10 7 EXHIBIT 10.9A EXHIBIT 10.9A FIRST AMENDMENT TO SEVERANCE AGREEMENT THIS FIRST AMENDMENT, effective December 16, 1997, between COLUMBIA BANCORP, a Maryland corporation (the "Corporation"), THE COLUMBIA BANK, a Maryland trust company and a principal subsidiary of the Corporation (the "Bank"), and ROBERT W. LOCKE (the "Executive"), amends the Severance Agreement between the Corporation, the Bank and the Executive, dated February 26, 1996 (the "Severance Agreement"). W I T N E S S E T H: - - - - - - - - - - The Executive serves as a Senior Vice President of the Bank and has contributed to the growth and success of the Corporation and the Bank (each, a "Company" and collectively, the "Companies"). The Companies entered into the Severance Agreement with the Executive in order to assure him of certain benefits if he is terminated or resigns in certain circumstances in the event of a change in control of the Companies. The Companies and the Executive desire to amend the Severance Agreement as set forth below in this First Amendment to clarify certain provisions thereof. Accordingly, in consideration of the mutual covenants and representations contained herein and the mutual benefits derived herefrom, the parties hereto agree to amend the Severance Agreement as follows: Paragraph 1.2 is amended to read as follows: "1.2. Amount of Payments. Except as provided in paragraph 1.2(e), the Companies will pay the Executive the following amounts in the following circumstances: (a) (i) If the employment of the Executive with either of the Companies is terminated during a Change in Control Period by either of the Companies for any reason other than death or total disability of the Executive or other than for cause, or if the Executive resigns during a Change in Control Period due to a significant change in the nature or scope of his authorities or duties from those immediately prior to the Change in Control period, a reduction in total compensation from that provided immediately prior to the Change in Control period, or the breach by either of the Companies of any other provision of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's termination or resignation occurs before the Executive has attained the age of 63 years, an amount equal to two times the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of -1- the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's termination or resignation occurs on or after the Executive has attained the age of 63 years, an amount equal to the amount set forth in paragraph 1.2(a)(i)(a) multiplied by a fraction, the numerator of which shall be 730 minus the number of days which have passed since the Executive's 63rd birthday, and the denominator of which shall be 730. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's termination or resignation. (b) (i) If the Executive resigns during a Change in Control Period for any reason other than due to a significant change in the nature or scope of his authorities or duties from those immediately prior to the Change in Control period, or a reduction in total compensation from that provided immediately prior to the Change in Control period, or the breach by either of the Companies of any other provision of this Agreement, the Companies will pay, or cause to be paid, to the Executive: (a) if the Executive's resignation occurs before the Executive has attained the age of 64 years, an amount equal to the sum of (i) the Executive's annual base salary immediately before the Change in Control and (ii) the average of the bonuses paid to the Executive over the past three years (including years in which no bonus was awarded); or (b) if the Executive's resignation occurs on or after the Executive has attained the age of 64 years, an amount equal to the amount set forth in paragraph 1.2(b)(i)(a) multiplied by a fraction, the numerator of which shall be 365 minus the number of days which have passed since the Executive's 64th birthday, and the denominator of which shall be 365. (ii) Such payment shall be made in one lump sum within 15 business days after the Executive's resignation. (c) Except as provided in paragraph 1.2(e), if the Executive is terminated by the Companies or resigns as described in paragraph 1.2(a), or resigns as described in paragraph 1.2(b), the Executive shall continue to receive all health, life, and disability insurance benefits available to him pursuant to his employment with the Companies immediately before such termination or resignation. The Executive shall continue to receive such benefits until the earliest of (a) such time as the Executive shall have been receiving substantially similar insurance benefits for six months under subsequent employment, (b) 24 months after the date of a termination or resignation described in paragraph 1.2(a) or 12 months after the date of a resignation described in paragraph 1.2(b), or (c) such date as the Executive shall have attained the age of 65 years. (d) All options granted to the Executive under the Corporation's stock option award arrangements providing for the granting of options to acquire common stock to founders, directors and key employees shall immediately become fully vested in the event of a Change in Control. -2- (e) The Executive is to receive no payments under paragraph 1.2(a) or (b) and no benefits under paragraph 1.2(c) if the Executive is terminated during a Change in Control Period after having already attained the age of 65 years, or if the Executive is terminated by either of the Companies during a Change in Control Period upon the death or total disability of the Executive or for cause. (f) Notwithstanding the foregoing, in the event that any of the amounts payable to the Executive under paragraph 1.2 would, if made, cause the Executive to have tax under Section 4999 of the Code, the Executive may elect, at his discretion, to reduce the amount payable to him under paragraph 1.2(a) or (b) by an amount such that the aggregate after-tax amounts the Executive will receive under paragraph 1.2 will be equal to the aggregate after-tax amounts the Executive would receive without the reduction he elected (i.e., the aggregate amounts after the application of the tax under Section 4999 of the Code and other taxes). IN WITNESS WHEREOF, the parties have executed and delivered this First Agreement to the Severance Agreement on this 13th day of March, 1998. ATTEST: COLUMBIA BANCORP /s/ /s/ John M. Bond, Jr. _____________________ _____________________ John M. Bond, Jr. President and Chief Executive Officer ATTEST: THE COLUMBIA BANK /s/ /s/ John M. Bond, Jr. _____________________ _____________________ John M. Bond, Jr. President and Chief Executive Officer WITNESS: /s/ /s/ Robert W. Locke _____________________ _____________________ Robert W. Locke -3- EX-13 8 EXHIBIT 13.1 [COLUMBIA LOGO HERE] COLUMBIA BANCORP ANNUAL REPORT 1997 CELEBRATING A DECADE OF COMMUNITY SERVICE COLUMBIA BANCORP AND SUBSIDIARY 1 Columbia Bancorp Corporate Profile [COLUMBIA LOGO HERE] Columbia Bancorp is a bank holding company whose subsidiary, The Columbia Bank, commenced operations in 1988. Headquartered in Columbia, Maryland, The Columbia Bank is the largest community bank in Howard County, one of the wealthiest counties in the United States. In less than ten years, the Bank has risen to third in market share in its home market, Howard County, and is working hard to close the gap with the two market leaders, Allied Irish (First National Bank of Maryland) and NationsBank. The Bank's continued commitment is to expand by introducing its unique and successful style of banking to other communities of the Baltimore-Washington Corridor. [MAP APPEARS BELOW] Banking Offices of the Columbia Bank Residential Mortgage Lending Offices Home Market Area Target Area HOWARD COUNTY Columbia Town Center Columbia Town Center Residential Mortgage Lending Office Ellicott City Harmony Hall Harper's Choice Long Gate Oakland Mills River Hill Vantage House Wilde Lake BALTIMORE CITY Cross Keys Roland Park Place BALTIMORE COUNTY Blakehurst Heaver Plaza - Lutherville Heaver Plaza Residential Mortgage Lending Office MONTGOMERY COUNTY Olney Residential Mortgage Lending Office 2 COLUMBIA BANCORP AND SUBSIDIARY Financial Highlights
- ---------------------------------------------------------------------------------------------------------- DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- Assets $373,451 $317,234 $263,025 $224,208 $206,592 Loans, net of unearned income 265,194 237,875 190,691 162,253 131,365 Deposits 313,357 254,640 218,162 189,463 176,285 Stockholders' equity 34,385 30,975 28,064 16,873 15,459 Net income 4,168 3,752 3,429 2,416 1,743 - ---------------------------------------------------------------------------------------------------------- Per Share Data: Net income per common share: Basic $ 1.93 $ 1.75 $ 2.06 $ 1.80 $ 1.16 Diluted 1.82 1.66 1.80 1.57 1.16 Tangible book value per common share 15.54 14.29 12.92 11.61 10.28 Dividends declared: Common .50 .42 .25 .14 -- Preferred -- -- 1.30 1.20 1.20 - ---------------------------------------------------------------------------------------------------------- Return on average assets 1.21% 1.34% 1.42% 1.13% .88% Return on average stockholders' equity 12.78 12.71 15.60 15.01 11.85 Nonperforming assets and past-due loans to total assets 1.41 1.37 .49 1.29 2.29 - ----------------------------------------------------------------------------------------------------------
[GRAPH APPEARS HERE-PLOT POINTS BELOW] Loans, Net of Unearned Income Deposits Total Assets Net Income ($ in Millions) ($ in Millions) ($ in Millions) ($ in Thousands) 93 131.4 93 176.3 93 206.6 93 1,743 94 162.3 94 189.5 94 224.2 94 2,416 95 190.7 95 218.2 95 263 95 3,429 96 237.9 96 254.6 96 317.2 96 3,752 97 265.2 97 313.4 97 373.5 97 4,168 COLUMBIA BANCORP AND SUBSIDIARY 3 Report to Shareholders As we approach the tenth anniversary of the opening of THE COLUMBIA BANK in May 1988, we look back with pride on our 34 percent compound annual rate of growth in total assets over the past decade. However, our record of superior profitability as compared to other DE NOVO banks of the past decade, is equally important to us. During the third quarter of 1997, Danielson Associates, Inc., a recognized authority on new banks, published a report based upon 1996 income which ranked THE COLUMBIA BANK as the 5th most profitable of all banks opened on the East Coast since 1984. Our greatest achievement has been creating a balance between growth and profitability which is consistent with maximizing shareholder value. During 1997, we successfully completed several major growth initiatives without compromising our ability to deliver consistent increases in profitability. These initiatives included opening three new full-service branches and two residential mortgage lending offices, while at the same time continuing to invest heavily in our back-office infrastructure. Our underlying business strategy has remained constant since our founding: to provide comprehensive and competitive banking services in a convenient community banking format, with emphasis on a high level of customer service. 1997 PERFORMANCE HIGHLIGHTS RAPID GROWTH (bullet) At December 31, 1997 total assets were $373.5 million, representing a 17.7 percent annual increase. This growth was driven by a 13.5 percent annual increase in loans outstanding, inclusive of loans held for sale, and a 23.1 percent increase in deposits. RECORD PROFITABILITY (bullet) Core operating earnings continued to be strong. Net income of $4.2 million was up 11.1 percent over 1996, reaching a record level for the sixth consecutive year. (bullet) Return on assets and return on equity were 1.2 percent and 12.8 percent, respectively, comparing favorably with peer group ratios. (bullet) Our net yield on earning assets has remained strong at 5.9 percent, well above the 4.8 percent recorded by our peer institutions. (bullet) Our efficiency ratio (noninterest expense as a percentage of operating income) for 1997 of 66.5 percent was only slightly higher than our peer group ratio in spite of the fact that we continued to invest heavily in infrastructure and expansion. STRONG ASSET QUALITY (bullet) Net loan losses to average loans equaled .13 percent, consistent with the strong overall quality of our loan portfolio. (bullet) Nonperforming assets and past-due loans to total assets increased slightly to 1.41 percent, but this increase continued to reflect primarily isolated problems encountered with two loan relationships, each secured by residential real estate. Such increases in nonperforming assets occur from time-to-time in the normal course of our residential development and construction lending business. 4 COLUMBIA BANCORP AND SUBSIDIARY INCREASED SHAREHOLDER VALUE (bullet) Stockholders' equity reached $34.4 million with tangible book value per share of $15.54. (bullet) Diluted earnings per share were $1.82, as compared to $1.66 for 1996. (bullet) Market capitalization increased significantly to $74.8 million at December 31, 1997. (bullet) In December, 1997 we increased our quarterly common stock dividend from $.12 to $.14 per share, which represents a compound annual growth rate of 47 percent since we began paying dividends in 1994, while maintaining a prudent dividend pay-out ratio of 24.8%. - ------------------------------------------------------- COLUMBIA BANCORP VS. PEER BANKS COMPARATIVE RATIOS - ------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 - ------------------------------------------------------- PEER COLUMBIA BANKS* - ------------------------------------------------------- PERFORMANCE: Return on average assets 1.21% 1.04% Return on average equity 12.78 12.16 Net yield on earning assets 5.94 4.76 Efficiency ratio 66.47 63.84 CAPITAL: Year-end capital to year-end risk-weighted assets: Tier 1 11.31% 14.34% Total 12.51 15.37 ASSET QUALITY: Nonaccrual loans to total assets .16% .58% Nonperforming assets and past-due loans to total assets 1.41 .70 Net charge-offs to average loans .13 .12 - ------------------------------------------------------- *ALL PUBLICLY TRADED BANKS IN MARYLAND, PENNSYLVANIA, VIRGINIA AND THE DISTRICT OF COLUMBIA WITH TOTAL ASSETS LESS THAN $1 BILLION. STRATEGIC DIRECTION AND GROWTH INITIATIVES DURING 1997 Our performance is the product of a significant competitive advantage: we are a banking company whose ownership, management and employees, and business activities are concentrated in a robust, dynamic...AND LOCAL geographic area--consisting of our Howard County home market and selected contiguous sub-markets with very similar characteristics. - ----------------------------------------------------- HOWARD COUNTY MARKET DEMOGRAPHICS - ----------------------------------------------------- HOWARD COUNTY MARYLAND U.S. - ----------------------------------------------------- Population PROJECTED GROWTH (1995-2020) 12% 5% 5% Households PROJECTED GROWTH (1995-2020) 18% 7% 7% Average Household Income PROJECTED (1999) $77,640 $61,260 $48,308 Unemployment Rate (12/97) 2.5% 4.7% 5.5% - ----------------------------------------------------- SOURCE: THE WADLEY-DONOVAN GROUP LTD., CLARITAS INC., US BUREAU OF CENSUS. COLUMBIA BANCORP AND SUBSIDIARY 5 We understand this banking environment and have created our organizational structure with the flexibility to make informed, rapid decisions...and to deliver responsive, courteous service to our customers. Unlike many of our larger competitors, we are not hampered by rigid organizational structures frequently dependent upon out-of-state decision makers. As banking industry consolidation continues in Maryland, it is evident that our community banking franchise has increasing long-term viability and value based upon this local competitive advantage. We are aided by the strong growth of our home market which continues to provide us new expansion opportunities. Our success can be measured by our increasing market share which places us well ahead of such major regional banks as First Union and Crestar. - ---------------------------------------------------- HOWARD COUNTY, MARYLAND DEPOSIT MARKET SHARE - ---------------------------------------------------- PERCENT OF TOTAL DEPOSITS AS OF JUNE 30, 1997 - ---------------------------------------------------- Allied Irish (First National Bank of Maryland) 20% NationsBank Corporation 18 COLUMBIA BANCORP 13 First Union/Signet 9 Commercial and Farmers Bank 6 Citizens National Bank 5 Crestar 4 - ---------------------------------------------------- SOURCE: FDIC NEW OFFICE EXPANSION (bullet) Our Long Gate Center Branch in Ellicott City, Wilde Lake Village Center Branch in Columbia, and River Hill Village Center Branch in Clarksville opened in 1997. We now have a total of nine full-service branches, plus four limited-service retirement community branches. (bullet) In July we opened a new Towson-area full-service Residential Mortgage Lending center to service consumers in Baltimore City and Baltimore and Harford Counties. In August we added another such center in Olney, focused on Montgomery and Prince George's Counties. TECHNOLOGICAL ENHANCEMENTS (bullet) Completing a major data processing and systems upgrade begun in 1996, we have installed fully automated work stations with state-of-the-art terminals for all branch personnel. (bullet) PC based banking was introduced in 1997. This innovation has received a strong endorsement from customers who recognize that our product offerings compare very favorably with those of our much larger competitors. ORGANIZATIONAL STRENGTH Since opening in May 1988, we have grown from eleven to 227 employees. These individuals are the first and foremost strength of our organization. We have unusual depth of experienced management for a community bank, which enables us to compete effectively with the largest institutions. Most importantly, our staff is dedicated and committed to delivering the highest possible levels of customer service. 6 COLUMBIA BANCORP AND SUBSIDIARY [PHOTO APPEARS HERE] HERSCHEL L. LANGENTHAL VICE CHAIRMAN JAMES R. MOXLEY, JR. CHAIRMAN JOHN M. BOND, JR. PRESIDENT AND CHIEF EXECUTIVE OFFICER The same management team that helped form Columbia Bancorp a decade ago is still with the Company. Members of our management team are leaders in our community, serving on a wide variety of boards and in other positions. During the past year, our Chairman was named Howard County "Business Person of the Year," our President received honors as "Entrepreneur of the Year" for Financial Services in a major regional competition, and our Bank was cited as "Business of the Year" by the Maryland Private Industry Council. These awards are indicative of our approach to doing business. OUTLOOK FOR THE FUTURE Our goal continues to be to improve profitability while maintaining superior asset quality and above-average growth. We intend to leverage our capital position as we seek new growth opportunities, including possible additional acquisitions. We continue to see substantial opportunities within our marketplace. As the largest community bank headquartered in Howard County, at the heart of the Baltimore-Washington Corridor, we are well positioned to continue gaining market share as the banking industry consolidation in Maryland disrupts still more customer relationships. Investors viewed our progress favorably during 1997, as Columbia Bancorp enjoyed a healthy increase in market capitalization. Yet, as we view our prospects for the future and valuation levels applicable to our peers, we believe that there is still considerable growth potential. We will continue to build shareholder value by striving for an optimal balance between rapid growth and enhanced profitability. Table of Contents Selected Financial Highlights 8 Management's Discussion and Analysis 9 Independent Auditors' Report 26 Consolidated Statements of Condition 27 Consolidated Statements of Income 28 Consolidated Statements of Stockholders' Equity 29 Consolidated Statements of Cash Flows 30 Notes to Consolidated Financial Statements 32 Selected Quarterly Financial Data 50 Recent Common Stock Prices and Stock Performance Graph 51 Directors and Officers 52 Corporate Information 54 8 COLUMBIA BANCORP AND SUBSIDIARY Selected Financial Highlights - ------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- Consolidated Income Statement Data: Interest income $ 30,194 $ 25,822 $ 22,210 $ 17,031 $ 14,188 Interest expense 11,473 8,769 7,892 5,705 5,466 -------------------------------------------------------- Net interest income 18,721 17,053 14,318 11,326 8,722 Provision for credit losses 663 621 559 242 505 -------------------------------------------------------- Net interest income after provision for credit losses 18,058 16,432 13,759 11,084 8,217 Noninterest income 2,648 2,058 1,575 1,821 2,580 Noninterest expense 14,188 12,351 9,747 8,966 7,961 -------------------------------------------------------- Income before income taxes 6,518 6,139 5,587 3,939 2,836 Income taxes 2,350 2,387 2,158 1,523 1,093 -------------------------------------------------------- Net income $ 4,168 $ 3,752 $ 3,429 $ 2,416 $ 1,743 ======================================================== Consolidated Balance Sheet Data, at year-end: Assets $373,451 $317,234 $263,025 $224,208 $206,592 Loans, net of unearned income 265,194 237,875 190,691 162,253 131,365 Deposits 313,357 254,640 218,162 189,463 176,285 Stockholders' equity 34,385 30,975 28,064 16,873 15,459 ------------------------------------------------------- Number of shares of Common Stock outstanding 2,200 2,148 2,146 1,040 1,040 Per Share Data: Net income: Basic $ 1.93 $ 1.75 $ 2.06 $ 1.80 $ 1.16 Diluted 1.82 1.66 1.80 1.57 1.16 Cash dividends declared: Common .50 .42 .25 .14 -- Preferred -- -- 1.30 1.20 1.20 Tangible book value, at year-end 15.54 14.29 12.92 11.61 10.28 Performance and Capital Ratios: Return on average assets 1.21% 1.34% 1.42% 1.13% .88% Return on average stockholders' equity 12.78 12.71 15.60 15.01 11.85 Net yield on earning assets (a) 5.94 6.60 6.46 5.90 4.88 Average stockholders' equity to average total assets 9.44 10.53 9.07 7.53 7.39 Year-end capital to year-end risk-weighted assets (b): Tier 1 11.31 11.91 12.97 9.28 9.34 Total 12.51 13.16 14.12 10.56 10.87 Year-end Tier 1 leverage ratio (b) 9.25 10.11 10.67 7.39 6.73 Cash dividends declared to net income 26.05 24.05 25.66 28.38 30.99 Asset Quality Ratios: Allowance for credit losses, at year-end, to: Total loans, net of unearned income 1.37% 1.38% 1.54% 1.59% 1.80% Nonperforming and past-due loans 548.35 84.23 245.72 222.62 126.19 Net charge-offs to average total loans, net of unearned income .13 .12 .12 .02 .17 Nonperforming and past-due loans to total loans, net of unearned income, at year-end .25 1.64 .63 .71 1.43 Nonperforming assets and past-due loans to total assets, at year-end 1.41 1.37 .49 1.29 2.29 - -------------------------------------------------------------------------------------------------------
(a) Net yield on earning assets is the ratio of net interest income to total average interest-earning assets. (b) The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") capital guidelines for bank holding companies require minimum risk-based ratios of Tier 1 and total capital to risk-weighted assets of 4.00% and 8.00%, respectively, and a minimum leverage-based ratio of Tier 1 capital to total average quarterly assets generally of at least 4.00%. The ratios above were calculated using the guidelines in effect at each reported date. COLUMBIA BANCORP AND SUBSIDIARY 9 Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL Columbia Bancorp was formed November 16, 1987 and is a Maryland chartered bank holding company. The Company holds all of the issued and outstanding shares of common stock of The Columbia Bank (the "Bank"). The Bank is a Maryland trust company which engages in general commercial banking operations. The Bank provides a full range of financial services to individuals, businesses and organizations through thirteen branch banking offices, three mortgage loan origination offices and fourteen Automated Teller Machines. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC"). The Company considers its home market area to be Howard County, Maryland, with extension of business throughout the contiguous counties comprising central Maryland. FORWARD - LOOKING STATEMENTS In addition to historical information, this annual report contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in this section. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by the Company in 1998. OVERVIEW The Company reported an increase in net income from $3.8 million in 1996 to $4.2 million in 1997, representing an 11.1% increase and marking the sixth consecutive year during which the Company posted improved earnings. Net income for 1996 was reduced $299,000 as a result of a one-time special assessment imposed by the FDIC to recapitalize the Savings Association Insurance Fund ("SAIF"). Diluted net income per share for 1997 was $1.82 as compared to $1.66 ($1.79 if adjusted to exclude the SAIF assessment) for 1996. Return on average assets and return on average equity for 1997 were 1.2% and 12.8%, respectively. Tangible book value per share increased to $15.54 at December 31, 1997. The year 1997 can be characterized as a year during which the Company continued its aggressive growth strategy and investment in the future, balanced with solid financial results. Key factors which influenced the Company's financial performance during 1997 and which will continue to influence future performance include: (bullet) Expansion of the Company's branch network with the addition of three full-service branch facilities in Howard County, Maryland. (bullet) Expansion of the Company's mortgage banking business, including the addition of personnel as well as the opening of two offices in Baltimore and Montgomery Counties, Maryland. (bullet) Growth in total deposits of 23.1%. Core deposits, representing deposits exclusive of certificates of deposit in excess of $100,000, grew $51.9 million or 21.4%. (bullet) Growth in loans, net of unearned income and inclusive of loans held for sale, of $32.3 million or 13.5%. (bullet) Maintenance of the net yield on earning assets well above the peer group's ratio. The net yield on earning assets was 5.9% during 1997 as compared to 4.8% for the peer group. 10 COLUMBIA BANCORP AND SUBSIDIARY Management's Discussion and Analysis (continued) The discussion which follows provides further detailed analysis regarding the Company's financial condition and results of operations. It is intended to assist readers in their analysis of the accompanying consolidated financial statements and notes thereto. INCOME STATEMENT ANALYSIS Net Interest Income Net interest income, the amount by which interest income on interest-earning assets exceeds interest expense on interest-bearing liabilities, is the most significant component of the Company's earnings. Net interest income is a function of several factors, including changes in the volume and mix of interest-earning assets and funding sources, and market interest rates. While management policies influence these factors, external forces, including customer needs and demands, competition, the economic policies of the federal government and the monetary policies of the Federal Reserve Board, are also important. The following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.
- ----------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- ------------------------ AVERAGE AVERAGE AVERAGE (DOLLARS IN THOUSANDS) BALANCES (a) INTEREST RATE BALANCES (a) INTEREST RATE BALANCES (a) INTEREST RATE - ------------------------------------------------------------------------------------------------------------------------------ Assets Interest-earning assets: Loans, net of unearned income (b)(c) $256,949 $26,786 10.42% $215,348 $23,447 10.89% $175,363 $19,832 11.31% Investment securities and securities available-for-sale (c) 55,974 3,265 5.83 35,714 2,000 5.60 36,752 1,887 5.13 Federal funds sold 3,113 193 6.20 7,194 375 5.21 9,628 491 5.10 Total interest-earning -------------------- -------------------- -------------------- assets 316,036 30,244 9.57 258,256 25,822 10.00 221,743 22,210 10.02 ------- ------- ------- Noninterest-earning assets: Cash and due from banks 13,642 12,856 11,296 Property and equipment, net 8,547 7,085 6,359 Other assets 10,914 5,366 5,524 Less allowance for credit losses (3,513) (3,211) (2,721) -------- -------- -------- Total assets $345,626 $280,352 $242,201 ======== ======== ========
COLUMBIA BANCORP AND SUBSIDIARY 11 Management's Discussion and Analysis (continued)
- ----------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- ------------------------ AVERAGE AVERAGE AVERAGE (DOLLARS IN THOUSANDS) BALANCES (a) INTEREST RATE BALANCES (a) INTEREST RATE BALANCES (a) INTEREST RATE - ------------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Interest-bearing liabilities: NOW accounts $ 29,474 $ 609 2.07% $ 25,479 $ 521 2.04% $ 23,688 $ 484 2.04% Savings accounts 45,415 1,560 3.43 44,022 1,420 3.22 43,864 1,527 3.48 Money market accounts 39,149 1,229 3.14 34,860 1,098 3.15 31,059 1,036 3.33 Certificates of deposit 122,737 6,696 5.46 92,125 5,010 5.44 74,289 4,038 5.44 Short-term borrowings 27,654 1,379 4.99 15,974 720 4.51 16,045 807 5.03 ----------------- ------------------- ------------------- Total interest-bearing liabilities 264,429 11,473 4.34 212,460 8,769 4.13 188,945 7,892 4.18 Noninterest-bearing ------- ------- ------ liabilities: Noninterest-bearing deposits 46,876 36,785 29,885 Other liabilities 1,701 1,595 1,398 Stockholders' equity 32,620 29,512 21,973 -------- -------- -------- Total liabilities and stockholders' equity $345,626 $280,352 $242,201 ======== ======== ======== Net interest income $ 18,771 $17,053 $14,318 ======== ======= ======= Net interest spread 5.23% 5.87% 5.84% ==== ==== ==== Net yield on earning assets 5.94% 6.60% 6.46% ==== ==== ====
(a) Average balances are calculated as the average of month-end balances. (b) Average loan balances include first mortgage loans originated for sale and nonaccrual loans. Interest income on loans includes amortized loan fees, net of costs, of $2.0 million, $2.4 million, and $1.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. (c) Interest on tax exempt loans and securities is presented on a fully-taxable equivalent basis. Net interest income on a tax equivalent basis increased to $18.8 million for the year ended December 31, 1997, compared to $17.1 million for 1996. The increase in net interest income during 1997 was primarily the result of growth in average interest-earning assets during 1997 of $57.8 million or 22.4%. While interest income increased in 1997, the net interest margin (representing net interest income divided by average interest-earning assets) declined from 6.6% during 1996 to 5.9% during 1997. The decline reflected the impact of competitive forces on loan and deposit pricing, a larger nonperforming loan portfolio and changes in the mix of interest-earning assets and funding sources. The following table and the related discussions of interest income and interest expense provide further analysis of the increases in net interest income during 1997 and 1996. 12 COLUMBIA BANCORP AND SUBSIDIARY Management's Discussion and Analysis (continued)
1997 OVER 1996 1996 OVER 1995 ------------------------------------------------------------------- INCREASE DUE TO CHANGE IN INCREASE DUE TO CHANGE IN ---------------- ------------------- (DOLLARS IN THOUSANDS) (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE - ------------------------------------------------------------------------------------------------------------------------ Interest income: Loans (a) $3,339 $4,384 $(1,045) $3,615 $3,742 $(127) Investment securities and securities available-for-sale (a) 1,265 1,180 85 113 (14) 127 Federal funds sold (182) (243) 61 (116) (117) 1 ----------------------------------------------------------------- Total 4,422 5,321 (899) 3,612 3,611 1 ----------------------------------------------------------------- Interest expense: Deposits 2,045 1,707 338 964 964 -- Short-term borrowings 659 575 84 (87) (3) (84) ----------------------------------------------------------------- Total 2,704 2,282 422 877 961 (84) ----------------------------------------------------------------- Net interest income $1,718 $3,039 $(1,321) $2,735 $2,650 $ 85 =================================================================
(a) Interest on tax exempt loans and securities is presented on a fully-taxable equivalent basis. (b) The change in interest income and expense due to both rate and volume has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each. Interest Income Interest income on a tax equivalent basis increased $4.4 million or 17.1% in 1997 as compared to 1996, primarily as a result of an increase in the average balance of loans and investment securities outstanding in 1997 as compared to 1996. Average loans outstanding, net of unearned income, increased $41.6 million or 19.3% during 1997 and reflected growth in the Company's consumer, commercial and residential development and construction loan portfolios. Average investment securities and securities available-for-sale increased $20.3 million or 56.7% during 1997 as compared to 1996 as a result of increased investments in U.S. Treasury securities. The increase in interest income due to average balances was mitigated by a decrease in the yield on interest-earning assets from 10.00% in 1996 to 9.57% in 1997. Specifically, the yield on loans decreased to 10.42% in 1997, compared to 10.89% in 1996 as a result of competitive pricing pressure and a higher nonperforming loan portfolio on average. In addition, loans, the Company's highest yielding asset, on average declined as a percentage of interest-earning assets from 83.4% in 1996 to 81.3% in 1997. Interest income increased $3.6 million or 16.3% in 1996 as compared to 1995, also primarily as a result of an increase in the average balance of loans outstanding. Average loans outstanding, net of unearned income, increased $40.0 million or 22.8% during 1996. Loans also became a larger percentage of average interest-earning assets, increasing from 79.1% in 1995 to 83.4% in 1996. Interest Expense Interest expense increased $2.7 million or 30.8% in 1997 as compared to 1996. This increase reflected growth in deposits and short-term borrowings combined with an increase in the cost of funds. Specifically, average interest-bearing deposits and short-term borrowings increased $40.3 million and $11.7 million, respectively, during 1997. Also, the cost of interest-bearing funds increased from 4.1% in 1996 to 4.3% in 1997, reflecting a higher interest rate environment as well as competitive pricing pressure. Interest expense increased $877,000 in 1996 as compared to 1995, again reflecting growth in deposits. Average interest-bearing deposits increased $23.6 million or 13.6% in 1996, as compared to 1995. COLUMBIA BANCORP AND SUBSIDIARY 13 Management's Discussion and Analysis (continued) Provision and Allowance for Loan Losses The Company provides for credit losses through the establishment of an allowance for credit losses (the "Allowance") by provisions charged against earnings. Based upon management's monthly evaluation, provisions are made to maintain the Allowance at a level adequate to absorb potential losses within the loan portfolio. The provision for credit losses was $663,000 for the year ended 1997 as compared with $621,000 and $559,000 for the years ended 1996 and 1995, respectively. The factors used by management in determining the adequacy of the Allowance include the historical relationships among loans outstanding; credit loss experience and the current level of the Allowance; a continuing evaluation of nonperforming loans and loans classified by management as having potential for future deterioration taking into consideration collateral value and the financial strength of the borrowers and guarantors; and a continuing evaluation of the present and future economic environment. Regular review of the loan portfolio's quality is conducted by the Company's staff. In addition, bank supervisory authorities and independent consultants and accountants periodically review the loan portfolio. At December 31, 1997 the Allowance was 1.37% of total loans, net of unearned income. The Allowance at December 31, 1997 is considered by management to be sufficient to address the credit risk in the current loan portfolio. The following table presents certain information regarding the Allowance:
YEARS ENDED DECEMBER 31, ----------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------- Allowance at beginning of year $3,293 $2,929 $2,578 $2,366 $2,067 Less losses charged-off: Commercial 4 -- 72 -- 52 Real estate 23 240 23 37 101 Retail 272 39 140 57 44 Credit cards 66 29 23 32 25 ----------------------------------------------------- Total losses charged-off 365 308 258 126 222 ----------------------------------------------------- Recoveries of losses previously charged-off: Commercial -- 4 -- 5 2 Real estate 20 38 25 55 6 Retail 13 9 22 33 6 Credit cards 8 -- 3 3 2 ----------------------------------------------------- Total recoveries 41 51 50 96 16 ----------------------------------------------------- Net losses charged-off 324 257 208 30 206 Provision for credit losses 663 621 559 242 505 ----------------------------------------------------- Allowance at end of year $3,632 $3,293 $2,929 $2,578 $2,366 ===================================================== Ratio of allowance to nonperforming and past-due loans (a) 548.35% 84.23% 245.72% 222.62% 126.19% ===================================================== Ratio of allowance to loans, net of unearned income 1.37% 1.38% 1.54% 1.59% 1.80% =====================================================
(a) There is no direct relationship between the size of the Allowance (and the related provision for credit losses) and the nonperforming and past-due loans. Accordingly, the ratio of Allowance to nonperforming and past-due loans may tend to fluctuate significantly. A breakdown of the Allowance is provided in the table below; however, management does not believe that the Allowance can be segregated by category with any precision that would be useful. The breakdown of the Allowance is based primarily on those factors discussed previously in evaluating the adequacy of the Allowance as a whole. Since all of those factors are subject to change, the breakdown is not necessarily indicative of the category of potential future credit losses. 14 COLUMBIA BANCORP AND SUBSIDIARY Management's Discussion and Analysis (continued) The following table presents the allocation of the Allowance among the various loan categories.
DECEMBER 31, ----------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------- Commercial $ 526 $ 566 $ 350 $ 362 $ 315 Real estate 1,448 1,946 1,201 816 750 Consumer 337 275 207 185 173 Unallocated 1,321 506 1,171 1,215 1,128 ----------------------------------------------------- $3,632 $3,293 $2,929 $2,578 $2,366 =====================================================
The table below provides a percentage breakdown of the loan portfolio by category to total loans, net of unearned income.
DECEMBER 31, ----------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- Commercial 14.1% 12.8% 15.3% 15.2% 12.1% Real estate 53.5 58.2 58.1 59.2 63.4 Consumer 32.4 29.0 26.6 25.6 24.5 ------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% 100.0% =======================================================
Noninterest Income The Company's primary sources of noninterest income are fees charged for services and gains and fees recognized on the sales of residential mortgage loans. In addition, included in noninterest income is the increase in cash surrender value on life insurance contracts, covering certain executive officers, for which the Bank is the beneficiary. Noninterest income increased $590,000 during 1997 as compared to 1996. The increase during 1997 was primarily the result of an increase in fees charged for services of $262,000, reflecting growth in deposit accounts. The total number of non-certificate deposit accounts increased 14.5%, from 23,200 at December 31, 1996 to 26,600 at December 31, 1997. The Company also continued its promotion of fee-based cash management services to numerous larger and more sophisticated corporate customers. The recognition of the increase in cash surrender value of $201,000 during 1997 also contributed to the growth in noninterest income. The insurance contracts were purchased in November 1996 and April 1997 and therefore, did not contribute significantly to 1996 noninterest income. Gains and fees on sales of residential mortgage loans increased $69,000 during 1997 as compared to 1996 and corresponded with an increase in residential mortgage loans sold from $47.9 million in 1996 to $51.9 million in 1997. Noninterest income increased $483,000 during 1996 as compared to 1995. The growth in noninterest income during 1996 was primarily driven by an increase in fees charged for services of $233,000, reflecting expansion of the Company's deposit base. In addition, gains and fees on sales of residential mortgage loans increased $103,000, reflecting an increased volume of loans sold. Noninterest Expense Noninterest expense primarily consists of costs associated with personnel, occupancy and equipment, data processing and marketing. The Company's noninterest expense for 1997 totalled $14.2 million, representing an increase of $1.8 million or 14.9% over 1996. The increase was primarily driven by continued corporate expansion. Expansion initiatives during 1997 included the addition of three full-service branch facilities and the expansion of the Company's mortgage banking operations with the addition of two offices in Baltimore and Montgomery Counties, Maryland. Salaries and employee benefits, the largest component of noninterest expense, increased from $6.0 million during 1996 to $7.3 million during 1997. The increase was primarily attributable to higher staffing COLUMBIA BANCORP AND SUBSIDIARY 15 Management's Discussion and Analysis (continued) levels required during 1997 in order to accommodate growth. At December 31, 1997, the Company employed 197 full-time and 30 part-time employees compared to 160 full-time and 25 part-time employees at December 31, 1996. Occupancy and equipment expenses, recorded net of rental income, grew $545,000 or 28.5% during 1997. The increase was attributable to the addition of three full-service branch facilities and two mortgage banking locations and the recognition of a full year's costs associated with branch expansion initiatives completed in 1996. The growth in noninterest expense during 1997 was also attributable to an increase in professional fees of $118,000 and in net expenses on other real estate owned of $123,000. In both cases, the increases reflected a higher level of activity associated with the workout of problem assets. Growth in noninterest expense during 1997 was mitigated by a decline in the Company's FDIC insurance premium of $575,000. The decline reflected the $486,000 special, one-time FDIC assessment levied in 1996 to recapitalize the SAIF. Noninterest expense for 1996 totalled $12.4 million and represented an increase over 1995 of 26.7% or $2.6 million. The primary component of the increase was an increase in salaries and employee benefits. The Company employed a total of 185 employees at December 31, 1996 versus 164 employees at December 31, 1995. In addition, the Company incurred an increase in occupancy and equipment expenses of $587,000 during 1996 as a result of the expansion of its branch network (which included the addition of two full-service branch facilities and the relocation of a third branch facility) and the upgrading of backoffice data processing. Also, the Company was assessed a special, one-time FDIC assessment of $486,000. Income Taxes Income tax expense was $2.4 million in 1997 and 1996, with higher pre-tax income in 1997. The 1997 effective tax rate was 36.1%, down from 38.9% for 1996 and 38.6% for 1995. The decrease in 1997 was a result of changes in state tax laws which now permit, on a phased-in basis, the exclusion of interest income on U.S. Treasury obligations. The changes in state tax laws, however, now subject the Company, on a phased-in basis, to personal property taxes which are included in other noninterest expense. REVIEW OF FINANCIAL CONDITION Cash and Due From Banks Cash and due from banks represents cash on hand, cash on deposit with other banks and cash items in process of collection. As a result of the Company's cash management services provided to large, sophisticated corporate customers (which includes processing coin and currency transactions for, and checks received by, retail customers), cash balances may be higher than industry averages for banks of a similar asset size. Analysis of Investments The investment portfolio consists of investment securities and securities available-for-sale. Investment securities are those securities that the Company has the positive intent and ability to hold to maturity and are carried at amortized cost. Securities available-for-sale are those securities which the Company intends to hold for an indefinite period of time but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability management strategy, liquidity management, interest rate risk management, regulatory capital management or other similar factors. 16 COLUMBIA BANCORP AND SUBSIDIARY Management's Discussion and Analysis (continued) The components of the investment portfolio at December 31 were as follows:
1997 1996 1995 - ---------------------------------------------------------------------------------------------------- SECURITIES SECURITIES SECURITIES INVESTMENT AVAILABLE- INVESTMENT AVAILABLE- INVESTMENT AVAILABLE- (DOLLARS IN THOUSANDS) SECURITIES FOR-SALE SECURITIES FOR-SALE SECURITIES FOR-SALE - ---------------------------------------------------------------------------------------------------- U.S. Treasury securities $62,952 $ -- $36,968 $ -- $18,987 $ 3,489 Collateralized mortgage obligations and mortgage-backed securities (a) 504 7 1,312 173 3,780 406 Securities of U.S. Government sponsored agencies 1,515 499 1,515 2,531 2,000 5,029 Municipal securities -- 200 -- 700 -- 700 Investment in Federal Home Loan Bank Stock -- 968 -- 950 -- 950 ------------------------------------------------------------------- $64,971 $1,674 $39,795 $4,354 $ 24,767 $10,574 ===================================================================
(a) The entire balance is issued and guaranteed by U.S. Government sponsored agencies. The investment portfolio increased $22.5 million from December 31, 1996 to December 31, 1997. The increase represented purchases of U.S. Treasury securities totalling $36.0 million with maturities of two years, net of maturities and repayments. There were no securities sold during 1997, 1996 or 1995. The amortized cost and estimated fair values and tax equivalent yield of debt securities at December 31, 1997, by maturities, are shown below. Collateralized mortgage obligations and mortgage-backed securities are categorized by their estimated maturities based upon the most recent monthly prepayment factors, which may change. All other debt securities are categorized based on contractual maturities.
INVESTMENT SECURITIES SECURITIES AVAILABLE-FOR-SALE -------------------------------------- ------------------------------------- CURRENT UNREALIZED UNREALIZED WEIGHTED AMORTIZED ---------- ESTIMATED AMORTIZED ----------- ESTIMATED AVERAGE (DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE YIELD - ---------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities: Due one year or less $26,989 $ 56 $ 3 $27,042 $-- $-- $-- $-- 6.17% Due after one through five years 35,963 146 -- 36,109 -- -- -- -- 6.18 Collateralized mortgage obligations and mortgage-backed securities: Due one year or less 504 -- 4 500 -- -- -- -- 5.02 Due after one through five years -- -- -- -- 7 -- -- 7 8.10 Securities of U.S. Government sponsored agencies: Due one year or less 1,515 -- 16 1,499 500 -- 1 499 4.06 Municipal securities: Due one year or less -- -- -- -- 200 -- -- 200 4.88 ----------------------------------------------------------------------------------------- $64,971 $202 $23 $65,150 $707 $-- $ 1 $706 6.10% =========================================================================================
COLUMBIA BANCORP AND SUBSIDIARY 17 Management's Discussion and Analysis (continued) Analysis of Loans The table below represents a breakdown of loan balances of the Company at December 31.
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ Commercial $ 37,519 $ 30,517 $ 29,275 $ 24,819 $ 15,947 Real estate--development and construction (a) 110,413 112,838 89,877 72,857 57,453 Real estate--mortgage: Residential 11,078 11,897 12,726 13,383 13,491 Commercial 21,146 14,470 9,108 10,251 12,872 Consumer: Retail (b) 84,039 67,731 49,225 40,354 31,149 Credit card 1,639 1,543 1,527 1,432 1,238 --------------------------------------------------------- Total loans $265,834 $238,996 $191,738 $163,096 $132,150 =========================================================
(a) At December 31, 1997, 1996, 1995, 1994 and 1993 loans to individuals for constructing primary personal residences represented $15,895, $10,780, $16,071, $18,631 and $16,456, respectively, of these loans. (b) Primarily loans secured by the borrowers' principal residences in the form of home equity lines of credit and second mortgages. Total loans increased $26.8 million during the year ended December 31, 1997, representing an 11.2% increase. Commercial loans, inclusive of commercial mortgages, and retail loans, primarily second mortgages and home equity lines of credit, exhibited strong growth during 1997, accounting for $13.7 million and $16.4 million, respectively, of the overall growth in the portfolio. The residential development and construction portfolio declined from $112.8 million at December 31, 1996 to $110.4 million at December 31, 1997 largely as a result of competitive pressures. The following table summarizes the Company's exposure resulting from loan concentrations in its loan portfolio. Loan concentrations result when loans are made to a number of borrowers engaged in similar activities which may be similarly impacted by economic or other conditions. This table presents the Company's credit concentration to borrowers involved in residential real estate development and/or construction as of December 31, 1997. There were no other loan concentrations exceeding 10% of gross loans as of December 31, 1997. TOTAL (DOLLARS IN THOUSANDS) PRINCIPAL ------------------------------------------------------ Loans receivable $ 94,922 Unused credit lines 55,220 Letters of credit (a) 13,797 -------- $163,939 ======== (a) Includes letters of credit totalling $4,378 which are secured by cash. The following table shows the contractual maturities and interest rate sensitivities of loans of the Company at December 31, 1997, exclusive of nonaccrual loans totalling $599,000. Some loans may include contractual installment payments which are not reflected in the table until final maturity. In addition, the Company's experience indicates that a significant number of loans will be extended or repaid prior to contractual maturity. Consequently, the table cannot necessarily be viewed as an accurate forecast of future cash repayments. 18 COLUMBIA BANCORP AND SUBSIDIARY Management's Discussion and Analysis (continued)
MATURING ------------------------------------------------------------------------------ IN ONE YEAR OR LESS AFTER 1 THROUGH 5 YEARS AFTER 5 YEARS - ------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE TOTAL - ------------------------------------------------------------------------------------------------------------- Commercial $ 1,008 $24,063 $ 1,558 $ 9,997 $ 358 $ 436 $ 37,420 Real estate--construction 10,818 97,443 1,388 497 -- -- 110,146 Real estate--mortgage 3,249 1,235 5,261 14,074 5,958 2,447 32,224 Consumer 5,888 3,420 9,836 4,146 536 61,619 85,445 ------------------------------------------------------------------------------ $20,963 $126,161 $18,043 $28,714 $6,852 $64,502 $265,235 ==============================================================================
The following table provides information concerning nonperforming assets and past-due loans.
DECEMBER 31, - --------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------- Nonperforming loans: Nonaccrual loans (a) $ 599 $3,851 $1,051 $ 679 $ 563 Other real estate owned 4,622 448 89 1,731 2,865 ----------------------------------------------------- Total nonperforming assets $5,221 $4,299 $1,140 $2,410 $3,428 ===================================================== Loans past-due 90 days or more $ 63 $ 59 $ 141 $ 479 $1,312 =====================================================
(a) Loans are placed in nonaccrual status when they are past-due 90 days as to either principal or interest or when, in the opinion of management, the collection of all principal and interest is in doubt. Management may grant a waiver from nonaccrual status for a 90-day past-due loan which is both well secured and in the process of collection. A loan remains in nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current. The largest component of nonperforming assets at December 31, 1997 was the Company's portfolio of other real estate owned totalling $4.6 million. At December 31, 1997 other real estate owned included the following four properties: (bullet) A residential development project consisting of 107 single family and 122 townhouse building lots with a carrying value of $3.1 million. The Company has entered into a contract with an independent third-party contractor to manage the completion of development work. In addition, 40 single family and 67 townhouse lots are under contract of sale with a takedown schedule which runs through July 2000. The remaining lots are being marketed for sale. (bullet) A construction project consisting of a 24 unit residential condominium building with a carrying value of $981,000. Currently, 18 of the 24 units are under contract of sale and the remaining 6 units are being marketed for sale. (bullet) A construction project consisting of two residential condominium building pad sites with a carrying value of $304,000. The property is currently under contract of sale. (bullet) Three commercial condominium units with a carrying value of $279,000. One of the three units is currently under contract of sale. The remaining two units are being marketed for sale. Nonaccrual loans totalled $599,000 at December 31, 1997 and consisted primarily of a residential mortgage totalling $267,000, which was paid in full subsequent to December 31, 1997, and eight home equity lines of credit and second mortgages totalling $197,000. A loan is determined to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest past-due. The Company generally considers a period of delay in payment to include delinquency up to 90 days. COLUMBIA BANCORP AND SUBSIDIARY 19 Management's Discussion and Analysis (continued) In accordance with Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" ("SFAS No. 118"), the Company measures impaired loans (i) at the present value of expected future cash flows discounted at the loan's effective interest rate; (ii) at the observable market price; or (iii) at the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, an impairment is recognized through a valuation allowance and corresponding provision for credit losses. SFAS No. 114 does not apply to larger groups of smaller-balance homogeneous loans such as consumer installment, residential first and second mortgage loans and credit card loans. These loans are collectively evaluated for impairment. The Company's impaired loans are therefore comprised primarily of commercial loans, including commercial mortgage loans, and real estate development and construction loans. In addition, impaired loans are generally loans which management has placed in nonaccrual status since loans are generally placed in nonaccrual status on the earlier of the date that management determines that the collection of principal and/or interest is in doubt or the date that principal or interest is 90 days or more past-due. Impaired loans at December 31, 1997 totalled $443,000 and were all collateral dependent loans. Collateral dependent loans are measured based on the fair value of the collateral. There were no impaired loans at December 31, 1997 with an allocated valuation allowance. An impaired loan is charged-off when the loan, or a portion thereof, is considered uncollectible. Deposit Analysis The following table sets forth the average deposit balances and average rates paid on deposits during the periods indicated.
YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE (DOLLARS IN THOUSANDS) BALANCE RATE BALANCE RATE BALANCE RATE - --------------------------------------------------------------------------------------------------------------- Total noninterest-bearing deposits $ 46,876 --% $ 36,785 --% $ 29,885 --% Interest-bearing deposits: NOW accounts 29,474 2.07 25,479 2.04 23,688 2.04 Savings accounts 45,415 3.43 44,022 3.22 43,864 3.48 Money market accounts 39,149 3.14 34,860 3.15 31,059 3.33 Certificates of deposit 122,737 5.46 92,125 5.44 74,289 5.44 ------------------------------------------------------------------ Total interest-bearing deposits 236,775 4.27 196,486 4.10 172,900 4.10 ------------------------------------------------------------------ Total deposits $283,651 $233,271 $202,785 ==================================================================
Total deposits increased $58.7 million during the year ended December 31, 1997. The aggregate growth in deposits during 1997 was primarily attributable to growth in certificates of deposit totalling $36.8 million and growth in noninterest-bearing deposits totalling $12.6 million. 20 COLUMBIA BANCORP AND SUBSIDIARY Management's Discussion and Analysis (continued) The following table provides the maturities of certificates of deposit of the Company in amounts of $100,000 or more. The Company had no brokered deposits as of December 31, 1997.
DECEMBER 31, - -------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Maturing in: 3 months or less $ 5,864 $ 4,336 $3,194 Over 3 months through 6 months 3,629 2,659 1,902 Over 6 months through 12 months 5,681 2,728 739 Over 12 months 3,823 2,427 2,146 ------------------------------------------ $18,997 $12,150 $7,981 ==========================================
Short-term Borrowings Short-term borrowings consist of short-term promissory notes issued to certain qualified investors and borrowings from the FHLB. The short-term promissory notes are in the form of commercial paper, which reprice daily and have maturities of 270 days or less. Borrowings from the FHLB outstanding during 1997, 1996 and 1995 repriced daily, had maturities of one year or less and could have been prepaid without penalty. The table below presents certain information with respect to short-term borrowings:
DECEMBER 31, - --------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Amount outstanding at year-end: Short-term promissory notes $20,725 $12,127 $15,299 Borrowings from FHLB 3,000 18,000 -- Weighted average interest rate at year-end: Short-term promissory notes 5.1% 4.8% 5.3% Borrowings from FHLB 6.5 6.7 -- Maximum outstanding at any month-end: Short-term promissory notes $22,831 $15,369 $15,299 Borrowings from FHLB 18,500 18,000 20,500 Average outstanding: Short-term promissory notes 18,177 12,090 7,503 Borrowings from FHLB 9,477 3,884 8,542 Weighted average interest rate during the year: Short-term promissory notes 4.8% 4.4% 4.6% Borrowings from FHLB 5.3 4.8 5.4
Liquidity Liquidity describes the ability of the Company to meet financial obligations, including lending commitments and contingencies, that arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the customers of the Company, as well as to meet current and planned expenditures. The Company's major source of liquidity ("financing activities" as used in the Consolidated Statements of Cash Flows) is its deposit base. At December 31, 1997, total deposits were $313.4 million. Core deposits, defined as all deposits except certificates of deposit of $100,000 or more, totalled $294.4 million or 93.9% of total deposits. Also, the Bank, as a member of the Federal Home Loan Bank of Atlanta ("FHLB"), has the ability to utilize established credit as an additional source of liquidity. Collateral must be pledged to the FHLB before advances can be obtained. At December 31, 1997, outstanding advances from the FHLB COLUMBIA BANCORP AND SUBSIDIARY 21 Management's Discussion and Analysis (continued) totalled $3.0 million. The Bank's approved credit line was $45.0 million. However, the Bank had sufficient collateral to borrow up to $62.2 million. Borrowings above the approved credit limit require special approval of the FHLB. In addition, liquidity is provided by the Company's overnight investment in federal funds sold. At December 31, 1997, federal funds sold totalled $2.0 million. Market Risk and Interest Rate Sensitivity Market risk represents the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending, investment and deposit taking activities. Interest rate risk is the exposure of the Company's earnings and capital arising from changes in interest rates. The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. In addition, as rates change, the fair market value of assets and liabilities, and correspondingly, the Company's capital, change. Given the potential exposure to adverse changes in interest rates, management actively monitors and manages its interest rate risk. The Asset/Liability Management Committee of the Board of Directors (the "ALCO") oversees the Company's management of interest rate risk. The objective of the management of interest rate risk is to optimize net interest income during periods of volatile as well as stable interest rates while maintaining an appropriate balance between the maturity and repricing characteristics of assets and liabilities that is consistent with the Company's liquidity, asset and earnings growth, and capital adequacy goals. Critical to the managment of this process is the ALCO's interest rate program designed to manage interest rate sensitivity (gap management) and balance sheet mix and pricing (spread management). Gap management represents those actions taken to measure and watch rate sensitive assets and rate sensitive liabilities. Spread management represents managing investments, loans, and funding sources to achieve an acceptable spread between the Company's return on its earning assets and its cost of funds. Currently, the Company does not believe the use of derivative financial instruments and hedging strategies are appropriate in the management of its interest rate risk. Since the Company is not exposed to significant market risk from trading activities, does not utilize hedging strategies and/or off balance sheet management strategies, and does not have an asset and liability structure which possesses meaningful optionability (i.e., assets and liabilities which may prepay or extend given changes in interest rates), the ALCO relies primarily on analyses of the Company's interest sensitivity gap position (i.e., interest-earning assets less interest-bearing liabilities) and internal budgets to assess interest rate risk exposure. The following table summarizes the anticipated maturities or repricing of the Company's interest-earning assets and interest-bearing liabilities as of December 31, 1997 and the Company's interest sensitivity gap. A positive sensitivity gap for any time period indicates that more interest-earning assets will mature or reprice during that time period than interest-bearing liabilities. The Company's goal is generally to maintain a reasonably balanced cumulative interest sensitivity gap position for the period of one year or less in order to mitigate the impact of changes in interest rates on liquidity, interest margins and corresponding operating results. During periods of rising interest rates, a short-term positive interest sensitivity gap position would generally result in an increase in net interest income, and during periods of falling interest rates, a short-term positive interest sensitivity gap position would generally result in a decrease in net interest income. The Company has managed its interest rate risk primarily through the origination of variable rate loans. At December 31, 1997, $220.0 million of the total loan portfolio, or 80.8%, represented variable rate loans. Of this amount, $193.4 million were loans tied to the prime rate of interest, which generally reprice either immediately upon the change in the prime rate of interest or during the month following a change in the prime rate of interest. As the following table indicates, the strategy of emphasizing variable rate lending results in a positive interest sensitivity gap for all periods. With a positive interest sensitivity gap, the Company was positioned well and benefited from the rise in the prime rate of interest in March, 1997. The Company's cumulative interest sensitivity gap position is currently at a level satisfactory to management. 22 COLUMBIA BANCORP AND SUBSIDIARY Management's Discussion and Analysis (continued) There can be no assurances, however, that the Company will be able to maintain the current interest sensitivity gap position. The level of the movement of interest rates up or down is an uncertainty and could impact the earnings of the Company. It is important to note that the table represents the static gap position for interest sensitive assets and liabilities at December 31, 1997. The table does not give effect to prepayment or extension of loans as a result of changes in general market rates. And, while the table does indicate the opportunities to reprice assets and liabilities within certain time frames, it does not account for timing differences which occur during periods of repricing. For example, deposit rates tend to lag in a rising rate environment and lead in a falling rate environment. Also, the table does not account for the core deposit relationship with customers which might suggest that the balances of NOW, savings, and money market accounts totalling $115.4 million are less sensitive than interest-bearing liabilities maturing in three months or less.
INTEREST SENSITIVITY PERIOD - ----------------------------------------------------------------------------------------------------------------- AFTER 3 THROUGH AFTER 1 AFTER 2 LESS THAN 12 THROUGH THROUGH (DOLLARS IN THOUSANDS) 3 MONTHS WAR (a) MONTHS WAR (a) 2 YEARS WAR (a) 3 YEARS WAR (a) - ----------------------------------------------------------------------------------------------------------------- Interest-earning assets: Federal funds sold $ 2,014 6.4% $ -- --% $ -- --% $ -- --% Investment securities 5,999 5.7 23,008 6.0 35,964 5.9 -- -- Securities available-for-sale 1,467 6.4 200 4.9 -- -- -- -- Residential mortgages originated for sale 6,557 6.9 -- -- -- -- -- -- Loans (a): Commercial 35,121 10.0 380 9.3 226 9.3 601 9.7 Real estate--development and construction 103,929 10.1 4,829 8.2 433 8.4 955 9.3 Real estate--mortgage: Residential 1,678 8.4 2,729 8.8 527 8.3 342 8.6 Commercial 15,735 10.1 646 9.5 455 8.6 1,184 9.0 Retail 47,647 9.9 2,765 9.0 4,081 8.8 5,366 9.6 Credit card -- -- 1,639 14.9 -- -- -- -- ------------------------------------------------------------------------------ Total interest-earning assets 220,147 9.7 36,196 7.2 41,686 6.3 8,448 9.5 ------------------------------------------------------------------------------ Interest-bearing liabilities: Deposits: NOW accounts 31,418 1.9 -- -- -- -- -- -- Savings accounts 46,175 3.1 -- -- -- -- -- -- Money market accounts 37,850 3.1 -- -- -- -- -- -- Certificates of deposit 31,158 5.2 63,610 5.3 36,878 5.7 7,274 6.5 Short-term borrowings 23,725 5.3 -- -- -- -- -- -- ------------------------------------------------------------------------------ Total interest-bearing liabilities 170,326 3.6 63,610 5.3 36,878 5.7 7,274 6.5 ------------------------------------------------------------------------------ Interest sensitivity gap $ 49,821 $ (27,414) $ 4,808 $ 1,174 ============================================================================== Cumulative interest sensitivity gap $ 49,821 $ 22,407 $27,215 $28,389 ============================================================================== Cumulative interest sensitivity gap ratio 13.3% 6.0% 7.3% 7.6% ==============================================================================
COLUMBIA BANCORP AND SUBSIDIARY 23 Management's Discussion and Analysis (continued)
INTEREST SENSITIVITY PERIOD - ----------------------------------------------------------------------------------------------------------------- AFTER 3 AFTER 4 FAIR THROUGH THROUGH AFTER MARKET (DOLLARS IN THOUSANDS) 4 YEARS WAR (a) 5 YEARS WAR (a) 5 YEARS WAR (a) TOTAL WAR (a) VALUE - ----------------------------------------------------------------------------------------------------------------- Interest-earning assets: Federal funds sold $ -- --% $ -- --% $ -- --% $ 2,014 6.4% $ 2,014 Investment securities -- -- -- -- -- -- 64,971 5.9 65,150 Securities available-for sale -- -- -- -- 7 8.1 1,674 6.2 1,674 Residential mortgages originated for sale -- -- -- -- -- -- 6,557 6.9 6,557 Loans (b): Commercial 139 9.4 594 9.8 358 8.8 37,419 10.0 37,543 Real estate--development and construction -- -- -- -- -- -- 110,146 10.0 110,407 Real estate--mortgage Residential 161 8.3 267 8.0 5,373 8.3 11,077 8.5 12,228 Commercial 52 9.1 2,490 9.1 584 9.1 21,146 9.8 21,179 Retail 10,890 9.5 12,066 9.3 993 10.0 83,808 9.6 83,354 Credit card -- -- -- -- -- -- 1,639 14.9 1,639 --------------------------------------------------------------------------------- Total interest-earning assets 11,242 9.5 15,417 9.2 7,315 8.6 340,451 9.0 341,745 --------------------------------------------------------------------------------- Interest-bearing liabilities: Deposits: NOW accounts -- -- -- -- -- -- 31,418 1.9 31,418 Savings accounts -- -- -- -- -- -- 46,175 3.1 46,175 Money market accounts -- -- -- -- -- -- 37,850 3.1 37,850 Certificates of deposit 1,429 5.4 980 5.7 -- -- 141,329 5.4 141,613 Short-term borrowings -- -- -- -- -- -- 23,725 5.3 23,725 --------------------------------------------------------------------------------- Total interest-bearing liabilities 1,429 5.4 980 5.7 -- -- 280,497 4.3 280,781 --------------------------------------------------------------------------------- Interest sensitivity gap $ 9,813 $14,437 $ 7,315 $ 59,954 ================================================================= Cumulative interest sensitivity gap $38,202 $52,639 $59,954 ============================================= Cumulative interest sensitivity gap ratio 10.2% 14.1% 16.1% =============================================
(a) Tax equivalent weighted average rate at December 31, 1997. (b) Loans receivable are stated before deducting unearned income and allowance for credit losses. The balance also excludes nonaccrual loans totalling $599,000. The analysis provided in the table above includes the following significant assumptions: Fixed-rate loans and investments other than collateralized mortgage obligations and mortgage-backed securities are scheduled by contractual maturity, and variable-rate loans and investments other than collateralized mortgage obligations and mortgage-backed securities are scheduled by repricing date. Collateralized mortgage obligations and mortgage-backed securities are scheduled according to estimated maturity based upon the most recent monthly prepayment factors. Residential mortgage loans originated for sale are scheduled based on their expected sale dates, generally 10 to 14 days after settlement. Due to their liquid nature, the entire balance of NOW, savings and money market accounts is assumed to be immediately sensitive. 24 COLUMBIA BANCORP AND SUBSIDIARY Management's Discussion and Analysis (continued) Capital Adequacy The Federal Reserve Board has adopted risk-based guidelines for bank holding companies. As of December 31, 1997, the minimum ratio of capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) was 8.0%. At least half of the total capital must be comprised of common equity, retained earnings and a limited amount of perpetual preferred stock, after subtracting goodwill and making certain other adjustments ("Tier 1 capital"). The remainder may consist of perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and limited amounts of credit loss reserves ("Tier 2 capital"). The maximum amount of supplementary capital elements that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill and certain other intangible assets. The Federal Reserve Board also has adopted a minimum leverage ratio (Tier 1 capital to assets) of 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. The rule indicates that the minimum leverage ratio should be at least 1.0% to 2.0% higher for holding companies that do not have the highest rating or that are undertaking major expansion programs. Failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal bank regulatory agencies. The tables below present the Company's capital position relative to its various minimum statutory and regulatory capital requirements.
LEVERAGE CAPITAL RATIO DECEMBER 31, 1997 - ------------------------------------------------------------------------------------- PERCENT OF (DOLLARS IN THOUSANDS) AMOUNT AVERAGE ASSETS - ------------------------------------------------------------------------------------- Tier 1 capital (a) $ 34,202 9.3% Leverage capital ratio requirement 11,092 3.0 ---------------------------------- Excess $ 23,110 6.3% ================================== Quarterly average total assets $369,724 ========
RISK-BASED CAPITAL RATIO DECEMBER 31, 1997 - ------------------------------------------------------------------------------------- PERCENT OF RISK-BASED (DOLLARS IN THOUSANDS) AMOUNT ASSETS - ------------------------------------------------------------------------------------- Tier 1 capital (a) $ 34,202 11.3% Risk-based Tier 1 capital requirement 12,101 4.0 ----------------------------------- Excess $ 22,101 7.3% =================================== Tier 1 capital (a) $ 34,202 11.3% Tier 2 capital (b) 3,632 1.2 ----------------------------------- Total risk-based capital 37,834 12.5 Fully phased-in risk-based capital requirements 24,202 8.0 - ------------------------------------------------------------------------------------- Excess $ 13,632 4.5% =================================== Risk-based assets $302,519 ========
(a) Tier 1 capital is comprised of the following at December 31, 1997 GAAP capital $34,385 Less intangible assets (184) Add unrealized losses on securities available-for-sale, net of taxes 1 ------- $34,202 ======= (b) Tier 2 capital is comprised of the allowance for credit losses limited to 1.25% of risk-based assets, or $3,632. COLUMBIA BANCORP AND SUBSIDIARY 25 Management's Discussion and Analysis (continued) Year 2000 Action Plan In 1997, the Company adopted a Year 2000 Action Plan (the "Plan"). The Plan identifies the process by which the Company will address Year 2000 related issues. It also establishes a committee, lead by senior management, assigned the responsibility to complete Year 2000 preparations, with a targeted completion date of December 31, 1998.The Plan includes several phases as follows: awareness; assessment; renovation; validation; and implementation. The Company relies heavily upon its third party service bureau to provide its data processing services. The Company has reviewed the Year 2000 plan established by its data processing service bureau and regularly evaluates the progress being made. In addition, the Company is working with other vendors to ensure timely completion of the Year 2000 project. Costs associated with the Year 2000 project will primarily include costs incurred to upgrade existing software and hardware not currently Year 2000 compliant. The Company estimates that these costs will be incurred in the normal course of business as software and hardware is ordinarily upgraded to keep pace with technological advances. These costs could range to $200,000 over a period of eighteen months, much of which will be capitalized with the purchase of hardware and software. Recent Accounting Developments In June 1997, The Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. It requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed in equal prominence with other financial statements. It requires that an enterprise display an amount representing total comprehensive income for each period. It does not require per share amounts of comprehensive income to be disclosed. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. 26 COLUMBIA BANCORP AND SUBSIDIARY Independent Auditors' Report The Board of Directors Columbia Bancorp: We have audited the consolidated statements of condition of Columbia Bancorp and subsidiary as of December 31, 1997 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Columbia Bancorp and subsidiary as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP _________________________ January 22, 1998 Baltimore, MD COLUMBIA BANCORP AND SUBSIDIARY 27 Consolidated Statements of Condition December 31, 1997 and 1996
- ---------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (note 2) $ 13,497,010 $ 17,753,174 Federal funds sold 2,013,538 3,477,436 Investment securities--fair value $65,149,749 in 1997 and $39,839,135 in 1996 (note 3) 64,970,889 39,795,128 Securities available-for-sale (note 3) 1,674,464 4,353,884 Residential mortgage loans originated for sale 6,557,090 1,551,408 Loans (notes 4 and 5): Commercial 37,518,405 30,517,140 Real estate--development and construction 110,413,134 112,837,758 Real estate--mortgage: Residential 11,077,563 11,897,386 Commercial 21,146,275 14,470,139 Retail, principally residential equity lines of credit 84,039,255 67,730,804 Credit card 1,639,070 1,543,175 ---------------------------- Total loans 265,833,702 238,996,402 Less: Unearned income, net of origination costs 640,189 1,121,326 Allowance for credit losses 3,631,664 3,292,754 ---------------------------- Loans, net 261,561,849 234,582,322 Other real estate owned (notes 4 and 6) 4,621,873 447,550 Property and equipment, net (note 7) 9,125,396 7,683,598 Prepaid expenses and other assets (notes 8 and 13) 9,429,002 7,589,425 ---------------------------- Total assets $373,451,111 $317,233,925 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand deposits $ 56,584,646 $ 43,980,900 Interest-bearing deposits: Savings and checking 115,443,381 106,131,634 Certificates of deposit: Under $100,000 122,332,803 92,376,853 $100,000 and over 18,996,613 12,150,499 ---------------------------- Total deposits 313,357,443 254,639,886 Short-term borrowings (note 14) 23,725,237 30,127,073 Accrued expenses and other liabilities 1,983,617 1,492,127 ---------------------------- Total liabilities 339,066,297 286,259,086 ---------------------------- Stockholders' equity (notes 11, 12, 17 and 18): Common stock, $.01 par value per share; authorized 9,550,000 shares; outstanding 2,200,165 and 2,148,004 shares at December 31, 1997 and 1996, respectively 22,002 21,480 Additional paid-in capital 22,918,578 22,598,578 Retained earnings 11,445,351 8,363,390 Net unrealized loss on securities available-for-sale (1,117) (8,609) ---------------------------- Total stockholders' equity 34,384,814 30,974,839 ---------------------------- Commitments and contingent liabilities (notes 9 and 10) Total liabilities and stockholders' equity $373,451,111 $317,233,925 ============================
See accompanying notes to consolidated financial statements. 28 COLUMBIA BANCORP AND SUBSIDIARY Consolidated Statements of Income Years Ended December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Interest income: Loans $26,741,786 $23,447,203 $19,831,605 Federal funds sold 192,757 375,222 490,999 Investment securities 3,259,206 2,000,003 1,887,216 ------------------------------------------- Total interest income 30,193,749 25,822,428 22,209,820 ------------------------------------------- Interest expense: Deposits 10,094,380 8,048,878 7,085,219 Short-term borrowings 1,378,970 720,148 806,572 ------------------------------------------- Total interest expense 11,473,350 8,769,026 7,891,791 ------------------------------------------- Net interest income 18,720,399 17,053,402 14,318,029 Provision for credit losses 663,000 621,000 559,000 ------------------------------------------- Net interest income after provision for credit losses 18,057,399 16,432,402 13,759,029 ------------------------------------------- Noninterest income: Fees charged for services 1,226,708 964,463 731,531 Gains and fees on sales of loans 822,629 753,309 650,722 Gains on sales of other assets 15,758 4,178 -- Other 583,226 336,353 192,572 ------------------------------------------- Total noninterest income 2,648,321 2,058,303 1,574,825 ------------------------------------------- Noninterest expense: Salaries and employee benefits 7,335,340 6,040,464 5,085,616 Occupancy, net (notes 9 and 15) 1,419,858 1,104,441 657,358 Equipment 1,038,296 808,462 668,368 Data processing 597,367 572,617 325,141 Marketing 544,298 479,239 324,856 Cash management services 413,079 472,901 409,121 Professional fees 391,851 274,094 358,585 Net expense on other real estate owned (note 6) 133,938 11,040 78,798 Deposit insurance 111,949 686,754 344,450 Equity in net loss of limited partnerships -- 87,390 96,000 Loss on disposition of property -- -- 128,466 Other (note 16) 2,202,213 1,814,500 1,270,345 ------------------------------------------- Total noninterest expense 14,188,189 12,351,902 9,747,104 ------------------------------------------- Income before income taxes 6,517,531 6,138,803 5,586,750 Income tax provision (note 13) 2,350,000 2,386,921 2,158,000 ------------------------------------------- Net income $ 4,167,531 $ 3,751,882 $ 3,428,750 =========================================== Net income per common share: Basic $ 1.93 $ 1.75 $ 2.06 Diluted 1.82 1.66 1.80 ===========================================
See accompanying notes to consolidated financial statements. COLUMBIA BANCORP AND SUBSIDIARY 29 Consolidated Statements of Stockholders' Equity Years Ended December 31, 1997, 1996 and 1995
NET UNREALIZED LOSS ON ADDITIONAL SECURITIES TOTAL COMMON PREFERRED PAID-IN RETAINED AVAILABLE- STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS FOR-SALE EQUITY - ----------------------------------------------------------------------------------------------------- Balance December 31, 1994 $10,402 $ 4,500 $14,211,591 $ 2,965,132 $(318,548) $16,873,077 Cash dividends declared on Series A preferred stock -- -- -- (454,072) -- (454,072) Cash dividends declared on common stock -- -- -- (425,889) -- (425,889) Conversion of 444,000 shares of Series A preferred stock, net of cash in lieu of fractional shares 4,144 (4,440) 170 -- -- (126) Issuance of 685,903 shares of common stock, net of costs of issuance 6,859 -- 8,380,840 -- -- 8,387,699 Redemption for cash of 6,000 shares of Series A preferred stock -- (60) (62,940) -- -- (63,000) Stock options exercised 52 -- 47,277 -- -- 47,329 Net income -- -- -- 3,428,750 -- 3,428,750 Change in net unrealized loss on securities available-for-sale -- -- -- -- 269,786 269,786 ------------------------------------------------------------------- Balance December 31, 1995 21,457 -- 22,576,938 5,513,921 (48,762) 28,063,554 Cash dividends declared on common stock -- -- -- (902,413) -- (902,413) Stock options exercised 23 -- 21,640 -- -- 21,663 Net income -- -- -- 3,751,882 -- 3,751,882 Change in net unrealized loss on securities available-for-sale -- -- -- -- 40,153 40,153 ------------------------------------------------------------------- Balance December 31, 1996 21,480 -- 22,598,578 8,363,390 (8,609) 30,974,839 Cash dividends declared on common stock -- -- -- (1,085,570) -- (1,085,570) Stock options exercised 775 -- 708,295 -- -- 709,070 Common stock exchanged (253) -- (744,597) -- -- (744,850) Tax benefit of nonqualified stock options exercised -- -- 356,302 -- -- 356,302 Net income -- -- -- 4,167,531 -- 4,167,531 Change in net unrealized loss on securities available-for-sale -- -- -- -- 7,492 7,492 Balance ------------------------------------------------------------------- December 31, 1997 $22,002 $ -- $22,918,578 $11,445,351 $ (1,117) $34,384,814 ===================================================================
See accompanying notes to consolidated financial statements. 30 COLUMBIA BANCORP AND SUBSIDIARY Consolidated Statements Of Cash Flows Years Ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 4,167,531 $ 3,751,882 $ 3,428,750 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,048,239 780,494 623,804 Provision for credit losses 663,000 621,000 559,000 Provision for losses on other real estate owned 46,000 9,000 25,538 Gains on sales of loans (822,629) (753,309) (650,722) Gains on sales of other assets (15,758) (4,178) -- Loss on disposition of property -- -- 128,466 Equity in net loss of limited partnerships -- 87,390 96,000 Proceeds from sales of residential mortgage loans originated for sale 51,862,516 47,871,455 38,857,990 Disbursements for residential mortgage loans originated for sale (56,045,569) (47,624,384) (38,792,478) Increase (decrease) in unearned income, net of origination costs (481,137) 74,163 203,746 Increase in prepaid expenses and other assets (419,840) (1,097,306) (319,168) Increase (decrease) in accrued expenses and other liabilities 441,032 (51,343) 361,023 -------------------------------------------- Net cash provided by operating activities 443,385 3,664,864 4,521,949 -------------------------------------------- Cash flows provided by (used in) investing activities: Loan disbursements in excess of principal repayments (28,849,967) (52,747,681) (39,213,089) Loan purchases (5,408,162) (5,328,644) (2,106,148) Loan sales 3,020,780 10,096,479 12,446,446 Purchases of investment securities (35,956,664) (28,468,034) (8,985,710) Purchases of securities available-for-sale (17,600) -- -- Proceeds from maturities and principal repayments of investment securities 10,812,169 13,457,913 11,138,478 Proceeds from maturities and principal repayments of securities available-for-sale 2,709,111 6,284,853 1,222,221 Additions to other real estate owned (430,548) -- (142,004) Sales of other real estate owned 273,162 80,145 1,758,303 Proceeds from investments in limited partnerships -- 363,001 28,000 Purchases of property and equipment (2,489,295) (1,907,237) (905,520) Disposal of property and equipment 2,000 34,543 -- Purchase of life insurance (895,000) (2,835,000) -- Increase in cash surrender value of life insurance (178,262) (25,246) -- -------------------------------------------- Net cash used in investing activities (57,408,276) (60,994,908) (24,759,023) --------------------------------------------
(continued) COLUMBIA BANCORP AND SUBSIDIARY 31 Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995 (continued)
- -------------------------------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Cash flows provided by (used in) financing activities: Net increase in deposits $58,717,557 $36,478,364 $23,250,858 Increase (decrease) in short-term borrowings (6,401,836) 14,827,806 (1,596,443) Cash dividend distributed on Series A preferred stock -- -- (454,072) Cash dividend distributed on common stock (1,035,112) (859,228) (263,327) Net proceeds (disbursements) from stock options exercised and common stock exchanged (35,780) 21,663 47,329 Redemption of Series A preferred stock -- -- (63,000) Cash distribution in lieu of fractional shares upon conversion of Series A preferred stock -- -- (126) Purchase of deposits -- -- 5,492,853 Issuance of common stock, net of costs of issuance -- -- 8,387,699 -------------------------------------------- Net cash provided by financing activities 51,244,829 50,468,605 34,801,771 -------------------------------------------- Net increase (decrease) in cash and cash equivalents (5,720,062) (6,861,439) 14,564,697 Cash and cash equivalents at beginning of year 21,230,610 28,092,049 13,527,352 -------------------------------------------- Cash and cash equivalents at end of year $15,510,548 $21,230,610 $28,092,049 Supplemental information: ============================================ Interest paid on deposits and short-term borrowings $11,388,727 $ 8,747,962 $ 7,802,276 Income taxes paid 2,165,000 2,910,445 1,985,000 Transfers of loans to other real estate owned 4,062,937 447,550 -- ============================================
See accompanying notes to consolidated financial statements. 32 COLUMBIA BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Columbia Bancorp and subsidiary (the "Company") conform to generally accepted accounting principles. The following is a description of the more significant of these policies: ORGANIZATION The Company was formed November 16, 1987 and is a Maryland corporation chartered as a bank holding company. The Company holds all the issued and outstanding shares of common stock of The Columbia Bank (the "Bank"). The Bank is a Maryland trust company which engages in general commercial banking operations. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation. The Bank provides comprehensive and service-intensive commercial and retail banking services to individuals and small and medium-sized businesses. Services offered by the Bank include a variety of loans and a broad spectrum of commercial and consumer financial services. BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for credit losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for credit losses and other real estate owned, management prepares fair value analyses and obtains independent appraisals as necessary. Management believes that the allowance for credit losses is sufficient to address the risks in the current loan portfolio. While management uses available information to recognize losses on loans and other real estate owned, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for credit losses and other real estate owned. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain amounts for 1996 and 1995 have been reclassified to conform to the presentation for 1997. INVESTMENT SECURITIES The Company classifies its debt securities as trading securities, investment securities or securities available-for-sale. The Company has no trading securities. Investment securities are securities which the Company has the intent and ability to hold until maturity. All other securities are classified as securities available-for-sale. Investment securities are recorded at cost, adjusted for amortization of premium and accretion of discount. Securities available-for-sale are recorded at their fair value and unrealized holding gains or losses, net of the related tax effect, are excluded from earnings and reported as a separate component of stockholders' equity until realized. Transfers of securities between categories are recorded at fair value on the date of the transfer. The unrealized holding gains or losses included as a separate component of stockholders' equity at the time of a transfer of securities from securities available-for-sale to investment securities are amortized into earnings over the remaining life of the security as an adjustment to yield. A decline in the market value of any security which is deemed other than temporary is charged to earnings, resulting in a new cost basis for the security. Gains and losses on sales of securities are determined on a specific identification basis; purchases and sales of securities are recognized on a trade-date basis. COLUMBIA BANCORP AND SUBSIDIARY 33 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) FEDERAL FUNDS SOLD Federal funds sold are carried at cost which approximates market and are generally sold for one-day periods. RESIDENTIAL MORTGAGE LOANS ORIGINATED FOR SALE Residential mortgage loans originated for sale are carried at the lower of cost or the committed sale price, determined on an individual basis. LOANS RECEIVABLE Loans are stated at the amount of unpaid principal reduced by unearned income and the allowance for credit losses. Unearned income consists of commitment and origination fees, net of origination costs. Loans are placed in nonaccrual status when they are past-due 90 days as to either principal or interest or when, in the opinion of management, the collection of principal and interest is in doubt. Management may grant a waiver from nonaccrual status for a 90-day past-due loan which is both well secured and in the process of collection. A loan remains in nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current. A loan is determined to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest past-due. The Company generally considers a period of delay in payment to include delinquency up to 90 days. In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" ("SFAS No. 118"), the Company measures impairment (i) at the present value of expected cash flows discounted at the loan's effective interest rate; (ii) at the observable market price; or (iii) at the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, an impairment is recognized through a valuation allowance and corresponding provision for credit losses. SFAS No. 114 does not apply to larger groups of smaller-balance homogeneous loans such as consumer installment, residential first and second mortgage loans and credit card loans. These loans are collectively evaluated for impairment. The Company's impaired loans are therefore comprised primarily of commercial loans, including commercial mortgage loans, and real estate development and construction loans. In addition, impaired loans are generally loans which management has placed in nonaccrual status. The allocated valuation allowance, if any, is included in the Company's allowance for credit losses. An impaired loan is charged-off when the loan, or a portion thereof, is considered uncollectible. The Company recognizes interest income for impaired loans consistent with its method for nonaccrual loans. Specifically, interest payments received are recognized as interest income or, if the ultimate collectibility of principal is in doubt, are applied to principal. REAL ESTATE PROPERTIES ACQUIRED IN SATISFACTION OF LOANS Real estate properties acquired in satisfaction of loans are reported in other real estate owned and are recorded at the lower of cost or estimated fair value on their acquisition dates and at the lower of such initial amount or estimated fair value less selling costs thereafter. Subsequent write-downs are included in noninterest expense, along with operating income net of related expenses of such properties and gains or losses realized upon disposition. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are charged to operating expenses. Depreciation generally is computed on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are generally amortized over 34 COLUMBIA BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) the lesser of the terms of the related leases or the lives of the assets. Maintenance and repairs are expensed as incurred. Depreciation and amortization amounts are adjusted, if appropriate, at the time an asset is retired. Any gain or loss on the sale of an asset is treated as an adjustment to the basis of its replacement, if traded in, or as an income or expense item if sold. Leases are accounted for as operating leases since none meet the criteria for capitalization. INCOME TAXES The Company and its subsidiary file a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences of temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities. Deferred income taxes are provided on income and expense items when they are reported for financial statement purposes in periods different from the periods in which these items are recognized in the income tax returns. Deferred tax assets are recognized only to the extent that it is more likely than not that such amounts will be realized based upon consideration of available evidence, including tax planning strategies and other factors. NET INCOME PER COMMON SHARE The Company adopted SFAS No. 128, "Earnings per Share" ("SFAS No. 128") in 1997 and, as required by the Statement, earnings per share ("EPS") data presented for prior periods have been restated to conform to the new standard. In accordance with the provisions of SFAS No. 128, basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares outstanding during the period. The dilutive effects of options and warrants, discussed in notes 12 and 13, and their equivalents are computed using the "treasury stock" method. Information relating to the calculations of earnings per common share is summarized as follows:
YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------- BASIC DILUTED BASIC DILUTED BASIC DILUTED - --------------------------------------------------------------------------------------------------- Net income $4,167,531 $4,167,531 $3,751,882 $3,751,882 $3,428,750 $3,428,750 Less annual dividends on Series A preferred stock -- -- -- -- 184,072 -- --------------------------------------------------------------------- Adjusted earnings used in EPS computation $4,167,531 $4,167,531 $3,751,882 $3,751,882 $3,244,678 $3,428,750 ===================================================================== Weighted average shares outstanding 2,162,756 2,162,756 2,147,066 2,147,066 1,572,758 1,572,758 Dilutive securities -- 129,843 -- 112,896 -- 335,325 --------------------------------------------------------------------- Adjusted weighted average shares used in EPS computation 2,162,756 2,292,599 2,147,066 2,259,962 1,572,758 1,908,083 ===================================================================== Net income per common share $ 1.93 $ 1.82 $ 1.75 $ 1.66 $ 2.06 $ 1.80 =====================================================================
COLUMBIA BANCORP AND SUBSIDIARY 35 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) STOCK-BASED COMPENSATION The Company uses the intrinsic value method to account for stock-based employee compensation plans. Under this method, compensation cost is recognized for awards of shares of common stock to employees only if the quoted market price of the stock at the grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Information concerning the pro forma effects of using an optional fair value-based method to account for stock-based employee compensation plans is provided in note 11. STATEMENTS OF CASH FLOWS For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash and due from banks and federal funds sold. NOTE 2 RESTRICTIONS ON CASH AND DUE FROM BANKS The Bank is required by the Federal Reserve System to maintain certain cash reserve balances based principally on deposit liabilities. At December 31, 1997 and 1996, the required reserve balances were $3,310,000 and $3,669,000, respectively. The Bank is also required to maintain a compensating balance with the servicer of its credit card operation. The balance is calculated periodically based upon activity. At December 31, 1997 and 1996, the required compensating balances were $110,440 and $85,680, respectively. NOTE 3 INVESTMENT SECURITIES AND SECURITIES AVAILABLE-FOR-SALE The amortized cost and estimated fair values of investment securities and securities available-for-sale at December 31, 1997 were as follows:
1997 ----------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ------------------------------------------------------ Investment securities: U. S. Treasury securities $62,952,038 $201,552 $ 2,605 $63,150,985 Federal agency securities 1,515,152 -- 16,657 1,498,495 Collateralized mortgage obligations 503,699 -- 3,430 500,269 ------------------------------------------------------ Total $64,970,889 $201,552 $22,692 $65,149,749 Securities available-for-sale: ======================================================= Federal agency securities $ 500,000 $ -- $ 815 $ 499,185 Mortgage-backed securities 7,170 209 -- 7,379 Municipal securities 200,242 58 -- 200,300 Investment in Federal Home Loan Bank stock 967,600 -- -- 967,600 ------------------------------------------------------- Total $ 1,675,012 $ 267 $ 815 $ 1,674,464 =======================================================
36 COLUMBIA BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) The amortized cost and estimated fair values of investment securities and securities available-for-sale at December 31, 1996 were as follows:
1996 ------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ------------------------------------------------------- Investment securities: U. S. Treasury securities $36,967,588 $130,330 $30,923 $37,066,995 Federal agency securities 1,515,154 -- 41,451 1,473,703 Collateralized mortgage obligations 1,312,386 -- 13,949 1,298,437 ------------------------------------------------------- Total $39,795,128 $130,330 $86,323 $39,839,135 ======================================================= Securities available-for-sale: Federal agency securities $ 2,545,002 $ -- $14,233 $ 2,530,769 Collateralized mortgage obligations and mortgage-backed securities 171,288 1,952 553 172,687 Municipal securities 700,628 110 310 700,428 Investment in Federal Home Loan Bank stock 950,000 -- -- 950,000 ------------------------------------------------------- Total $ 4,366,918 $ 2,062 $15,096 $ 4,353,884 =======================================================
The amortized cost and estimated fair values of nonequity investment securities and securities available-for-sale at December 31, 1997 and 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
1997 1996 ------------------------------------------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE ------------------------------------------------------- Investment securities: Due in one year or less $28,503,671 $28,540,550 $ 9,994,199 $10,008,655 Due after one year through five years 35,963,519 36,108,930 28,488,543 28,532,043 Collateralized mortgage obligations and mortgage-backed securities 503,699 500,269 1,312,386 1,298,437 ------------------------------------------------------- Total $64,970,889 $65,149,749 $39,795,128 $39,839,135 ======================================================= Securities available-for-sale: Due in one year or less $ 700,242 $ 699,485 $ 2,545,002 $ 2,538,119 Due after one year through five years -- -- 700,628 693,078 Collateralized mortgage obligations and mortgage-backed securities 7,170 7,379 171,288 172,687 -------------------------------------------------------- Total $ 707,412 $ 706,864 $ 3,416,918 $ 3,403,884 ========================================================
There were no sales of investment securities or securities available-for-sale during 1997 or 1996. At December 31, 1997, investment securities and securities available-for-sale with an aggregate book value and fair value of $11,649,553 and $11,680,711, respectively, were pledged as collateral, primarily for short term borrowings. COLUMBIA BANCORP AND SUBSIDIARY 37 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1997 (continued) NOTE 4 NONPERFORMING ASSETS, IMPAIRED LOANS AND ALLOWANCE FOR CREDIT LOSSES Nonperforming assets and loans past-due 90 days or more but not in nonaccrual status were as follows at December 31: 1997 1996 -------------------------------------- Nonaccrual loans $ 599,076 $3,850,762 Other real estate owned 4,621,873 447,550 ------------------------------------- Total nonperforming assets $5,220,949 $4,298,312 ===================================== Loans past-due 90 days or more $ 63,209 $ 58,641 ===================================== At December 31, 1997, other real estate owned included a land development project consisting of 229 residential building lots with a carrying value of $3,058,424, a 24 unit residential condominium construction project with a carrying value of $980,701, two residential condominium building sites with a carrying value of $303,874 and certain other properties acquired in satisfaction of loans. The land development project is being completed under the direction of the Company. Currently, 107 lots are under contract, for settlement through July 2000, and the remainder of the project is being marketed for sale. Construction of the residential condominium project is complete and 18 units are under contract, for settlement in early 1998. The remaining units are being marketed for sale. The condominium building sites are under contract, for settlement in 1998. Impaired loans totalled $442,852 and $3,798,281 at December 31, 1997 and 1996, respectively, and were all collateral dependent loans. Collateral dependent loans are measured based on the fair value of the collateral. There were no impaired loans at December 31, 1997 or 1996 with an allocated valuation allowance. The average recorded investment of impaired loans, the amounts of income recognized, and the amounts of income recognized on a cash basis during the years ended December 31 were:
1997 1996 ----------------------- Average recorded investment in impaired loans $284,741 $1,344,800 Interest income recognized during impairment -- 54,347 Interest income recognized on a cash basis during impairment 2,651 52,416 =======================
An analysis of the allowance for credit losses is summarized as follows for the years ended December 31: 1997 1996 1995 ---------------------------------------------- Balance at beginning of year $3,292,754 $2,929,177 $2,578,499 Provision charged to expense 663,000 621,000 559,000 Charge-offs (365,560) (308,638) (258,783) Recoveries 41,470 51,215 50,461 ---------------------------------------------- Balance at end of year $3,631,664 $3,292,754 $2,929,177 ============================================== Ratio of allowance to loans, net of unearned income 1.37% 1.38% 1.54% ============================================== 38 COLUMBIA BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) NOTE 5 RELATED PARTY TRANSACTIONS The Bank has made loans to certain of its executive officers and directors. These loans were made on substantially the same terms, including interest rate and collateral requirements, as those prevailing at the time for comparable transactions with unrelated customers. The following schedule summarizes changes in amounts of loans outstanding to current executive officers and directors during 1997: Balance at January 1, 1997 $2,258,648 Additions 2,749,842 Repayments (1,593,254) ---------- Balance at December 31, 1997 $3,415,236 ========== The Bank has issued letters of credit totalling $5,845 at December 31, 1997 and 1996 on behalf of parties related to directors of the Company. At December 31, 1997 and 1996, all of the letters of credit were collateralized by deposits with the Bank. During 1996 and 1995, the Bank paid $9,000 and $149,870, respectively, to companies controlled by two directors for assistance with the disposition of other real estate owned, primarily residential building lots. The payments represented sales commissions, reimbursement of marketing expenses, and management fees, exclusive of costs to build. NOTE 6 OTHER REAL ESTATE OWNED Other real estate owned was $4,621,873 and $447,550 at December 31, 1997 and 1996, respectively. Net expense on other real estate owned for the years ended December 31 was: 1997 1996 1995 --------------------------------------------- Net gain on sales $(49,042) $(1,442) $(46,142) Operating expenses 136,980 3,482 99,402 Provision for losses 46,000 9,000 25,538 --------------------------------------------- Net expense $133,938 $11,040 $ 78,798 ============================================= NOTE 7 PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: 1997 1996 --------------------------- Land $ 2,070,000 $ 2,070,000 Buildings and leasehold improvements 5,713,785 4,372,747 Furniture and equipment 4,833,894 3,965,715 Software 377,459 203,960 Automobiles 103,782 95,221 --------------------------- 13,098,920 10,707,643 Less accumulated depreciation and amortization 3,973,524 3,024,045 --------------------------- $ 9,125,396 $ 7,683,598 =========================== COLUMBIA BANCORP AND SUBSIDIARY 39 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) NOTE 8 PREPAID EXPENSE AND OTHER ASSETS Prepaid expenses and other assets consisted of the following at December 31: 1997 1996 --------------------------- Accrued interest receivable $2,857,287 $ 2,532,870 Net deferred tax asset 1,518,467 1,211,930 Cash surrender value of life insurance 3,933,508 2,860,246 Other 1,119,740 984,379 --------------------------- $9,429,002 $ 7,589,425 =========================== NOTE 9 COMMITMENTS AND CONTINGENT LIABILITIES The Company occupies office space under lease agreements which are recorded as operating leases. A summary of the noncancellable long-term commitment is as follows at December 31, 1997: 1998 $939,398 1999 922,969 2000 907,975 2001 692,632 2002 600,628 The lease amounts represent minimum rentals, excluding property taxes, operating expenses or percentage rent which the Company may be obligated to pay. Rental expense was $843,967, $621,782 and $350,798 in 1997, 1996, and 1995, respectively. The Company utilizes a third party servicer to provide data processing services under terms of an agreement which expires in October 2004. Data processing costs are based upon account and transaction volume and currently approximate $50,000 monthly. The Company is also party to legal actions which are routine and incidental to its business. In management's opinion, the outcome of these matters will not have a material effect on the financial statements of the Company. NOTE 10 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK The Company is party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of customers. These financial instruments include commitments to extend credit, available credit lines and standby letters of credit. 40 COLUMBIA BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) Credit risk is the possibility of sustaining a loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit. The Company's exposure to credit risk is represented by the contractual amounts of those financial instruments. The Company applies the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the financial instruments with off-balance-sheet credit risk at December 31 is as follows:
1997 1996 -------------------------- Commitments to extend credit and available credit lines: Commercial $ 28,125,910 $ 19,289,869 Real estate--construction 95,466,749 90,181,159 Real estate--residential mortgage 1,015,321 1,999,000 Retail, principally home equity lines of credit 32,814,491 27,875,093 Credit card 6,840,599 5,180,140 -------------------------- 164,263,070 144,525,261 Standby letters of credit 14,588,281 14,328,062 Limited recourse on mortgage loans sold 5,765,550 4,817,850 -------------------------- $184,616,901 $163,671,173 ==========================
The Company evaluates the creditworthiness of each customer on an individual basis. The amount of collateral obtained, if deemed necessary, upon the extension of credit is based on management's evaluation of the counterparty. Collateral obtained varies but may include: accounts receivable; inventory; property, plant and equipment; deposits held in financial institutions; other marketable securities; residential real estate; and, income producing commercial properties. Commitments to extend credit are agreements to extend credit to a customer so long as there is no violation of any contractual condition. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Historically, many of the commercial and retail commitments expire without being fully drawn, and the total commitment amounts therefore do not necessarily represent future cash requirements. Real estate development and construction commitments represent advances to be made based on established draw schedules. Due to the short-term nature and rapid turnover of the real estate development and construction portfolio, cash requirements are generally satisfied by principal repayments from sales of properties being financed. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. Credit lines generally have fixed expiration dates or other termination clauses. Since many of the credit lines are expected to expire without being fully drawn, the available amounts do not necessarily represent future cash requirements. Available commercial and residential construction credit lines generally do not extend for more than 18 months. Second mortgages and home equity credit lines generally extend for a period of 15 years and are reviewed annually. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. It is not likely that the letters of credit will be called because they principally guarantee the completion of development and construction work to be funded, subsequent to inspection, by scheduled loan advances issued by the Company on related loans. Limited recourse on mortgage loans sold relates to contractual provisions under which the Company may be required to repurchase such loans sold in the normal course of business which fail to perform in accordance with the provisions of the related mortgages during a specified period (generally the first six months or less). Management believes these arrangements represent insignificant exposure to the Company. A concentration of credit risk exists with borrowers whose principal occupation is residential real estate development and/or construction. Loans, unused credit lines, and letters of credit to such borrowers totalled approximately $94.9 million, $55.2 million, and $13.8 million, respectively at December 31, 1997. COLUMBIA BANCORP AND SUBSIDIARY 41 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) Generally, these extensions of credit are secured by the real estate under development and/or construction. Management believes that its underwriting practices, specifically collateral requirements, mitigate exposure to the Company. NOTE 11 EMPLOYEE BENEFITS PROFIT SHARING PLAN Retirement benefits are provided to employees meeting certain age and service eligibility requirements through a profit sharing plan with a cash or deferral arrangement qualifying under Section 401(k). Matching contributions made by the Company totalled $151,073 in 1997, $130,192 in 1996 and $101,020 in 1995. DEFERRED COMPENSATION PLAN The Company has a nonqualified deferred compensation arrangement for selected senior officers. Amounts paid under this plan will be partially or fully recovered through single premium life insurance policies purchased on the lives of the participants. The Company's matching contribution and interest credited to participant accounts totalled $83,379 in 1997 and $31,796 in 1996. STOCK OPTION PLANS The Company has stock option award arrangements which provide for the granting of options to acquire common stock to founders, directors and key employees. Option prices are equal to or greater than the market price of the common stock at the date of the grant. Employee options generally are not exercisable prior to one year from the date of grant. Thereafter, employee options are generally exercisable to the extent of 25%, 50%, 75% and 100% after one, two, three and four years, respectively, from the date of grant. Founder and director options may be exercised at any time after the date of grant. Options expire ten years after the date of grant. Information with respect to stock options is as follows for the years ended December 31:
1997 1996 1995 -------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE -------------------------------------------------------------------- Outstanding at beginning of year 149,829 $ 9.48 152,080 $9.49 153,933 $9.49 Exercised (69,618) 9.16 (2,251) 9.62 (1,853) 9.35 Granted 16,400 29.61 -- -- -- -- Forfeited (11) 9.09 -- -- -- -- -------------------------------------------------------------------- Outstanding at end of year 96,600 $13.14 149,829 $9.48 152,080 $9.49 ====================================================================
42 COLUMBIA BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) A summary of information about stock options outstanding at December 31, 1997 is as follows: OPTIONS OUTSTANDING ------------------------ WEIGHTED OPTIONS AVERAGE EXERCISABLE EXERCISE REMAINING ----------- PRICE SHARES LIFE (YEARS) SHARES ----------------------------------------------------- $ 9.09 46,655 2.5 46,655 9.65 20,080 5.8 20,080 10.00 4,720 6.0 4,720 12.50 605 2.2 605 13.64 8,140 1.6 8,140 22.00 6,000 9.2 -- 34.00 10,400 10.0 -- -------------------------------------- 96,600 4.5 80,200 ====================================== At December 31, 1997 and 1996, options to purchase 80,200 and 144,809 shares, respectively, were exercisable at weighted average prices of $9.77 and $9.48, respectively. The per share weighted average fair value of options granted during 1997 was $13.51. This value was estimated using the Black-Scholes option pricing model and the following assumptions: Dividend yield 1.75% Expected volatility 36.79% Risk-free interest rate 5.49% Expected lives 10 years The option price was equal to the market price of the common stock at the date of grant for all options granted in 1997 and, accordingly, no compensation expense related to options was recognized. If the Company had applied a fair value-based method to recognize compensation cost for the options granted, net income and net income per share would have been changed to the following pro forma amounts for the year ended December 31, 1997: Net income $4,031,529 Net income per share: ========== Basic $ 1.86 Diluted 1.76 ========== NOTE 12 WARRANTS Warrants to acquire 68,000 shares and 75,900 shares of common stock at $9.09 per share were outstanding and exercisable at December 31, 1997 and 1996, respectively. COLUMBIA BANCORP AND SUBSIDIARY 43 December 31, 1997, 1996 and 1995 (continued) NOTE 13 INCOME TAXES The provision for income taxes was composed of the following for the years ended December 31: 1997 1996 1995 ---------------------------------------------- Current: Federal $2,182,314 $2,264,916 $1,814,399 State 479,045 497,177 429,177 ---------------------------------------------- 2,661,359 2,762,093 2,243,576 Deferred: Federal (255,314) (307,641) (70,065) State (56,045) (67,531) (15,511) ---------------------------------------------- (311,359) (375,172) (85,576) ---------------------------------------------- Provision for income taxes $2,350,000 $2,386,921 $2,158,000 ============================================== The types of temporary differences that give rise to significant portions of the net deferred tax asset were as follows at December 31: 1997 1996 ------------------------ Deferred tax assets: Allowance for credit losses $1,290,397 $1,150,837 Deferred compensation 155,771 96,571 Deposits 58,831 32,658 Other 51,625 21,911 ------------------------ Total deferred tax assets 1,556,624 1,301,977 ------------------------ Deferred tax liabilities: Loans receivable -- 51,890 Federal Home Loan Bank stock dividends 38,157 38,157 ------------------------ Total deferred tax liabilities 38,157 90,047 ------------------------ Net deferred tax asset (included in prepaid expenses and other assets) $1,518,467 $1,211,930 ======================== A reconciliation between the provision for income taxes and the amount computed by multiplying income before income taxes by the federal income tax rate of 34% is as follows for the years ended December 31:
1997 1996 1995 --------------------------------------- Tax at federal statutory rate $2,215,961 $2,087,193 $1,899,495 State income taxes, net of federal income tax benefit 279,180 283,566 273,020 Other (145,141) 16,162 (14,515) --------------------------------------- $2,350,000 $2,386,921 $2,158,000 =======================================
44 COLUMBIA BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continue) NOTE 14 SHORT-TERM BORROWINGS Short-term borrowings consist of short-term promissory notes issued to certain qualified investors and borrowings from the FHLB. The short-term promissory notes are in the form of commercial paper, which reprice daily and have maturities of 270 days or less. Borrowings from the FHLB reprice daily, have maturities of one year or less and may be prepaid without penalty. Information with respect to short-term borrowings is as follows at December 31:
1997 1996 1995 ---------------------------------------------- Amount outstanding at year-end: Short-term promissory notes $20,725,237 $12,127,073 $15,299,267 Borrowings from FHLB 3,000,000 18,000,000 -- Weighted average interest rate at year-end: Short-term promissory notes 5.1% 4.8% 5.3% Borrowings from FHLB 6.5 6.7 -- Maximum outstanding at any month-end: Short-term promissory notes $22,831,150 $15,368,866 $15,299,267 Borrowings from FHLB 18,500,000 18,000,000 20,500,000 Average outstanding: Short-term promissory notes 18,176,518 12,089,582 7,503,140 Borrowings from FHLB 9,476,923 3,884,615 8,541,949 Weighted average interest rate during the year: Short-term promissory notes 4.8% 4.4% 4.6% Borrowings from FHLB 5.3 4.8 5.4
NOTE 15 NET OCCUPANCY EXPENSE Net occupancy expense is comprised of the following for the years ended December 31: 1997 1996 1995 ----------------------------------------------- Occupancy expense $1,599,399 $1,272,551 $850,501 Rental income (179,541) (168,110) (193,143) ----------------------------------------------- Net occupancy expense $1,419,858 $1,104,441 $657,358 =============================================== NOTE 16 OTHER EXPENSE Other expense is comprised of the following for the years ended December 31: 1997 1996 1995 ----------------------------------------------- Stationery and supplies $ 323,654 $ 260,631 $ 167,849 Postage 209,478 189,392 147,568 Director fees 119,000 118,738 119,913 ATM fees 100,195 148,609 131,443 Other (a) 1,449,886 1,097,130 703,572 ----------------------------------------------- $2,202,213 $1,814,500 $1,270,345 =============================================== (A) NO SINGLE ITEM INCLUDED IN THIS CATEGORY EXCEEDED ONE PERCENT OF TOTAL INCOME. COLUMBIA BANCORP AND SUBSIDIARY 45 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) NOTE 17 DIVIDENDS As a depository institution whose deposits are insured by the FDIC, the Bank may not pay dividends or distribute any of its capital assets while it remains in default on any assessment due the FDIC. The Bank currently is not in default under any of its obligations to the FDIC. As a commercial bank under the Maryland Financial Institution Law, the Bank may declare cash dividends from undivided profits or, with the prior approval of the Commissioner of Financial Regulation, out of surplus in excess of 100% of its required capital stock, and after providing for due or accrued expenses, losses, interest and taxes. The Company and the Bank, in declaring and paying dividends, are also limited insofar as minimum capital requirements of regulatory authorities must be maintained. The Company and the Bank comply with such capital requirements. Dividends declared per share on the Company's common stock were $.50, $.42 and $.25 for the years ended December 31, 1997, 1996 and 1995, respectively. Dividends declared per share on the Company's Series A preferred stock were $1.30 for the year ended December 31, 1995. On December 18, 1997, the Board of Directors of the Bank authorized a cash dividend of $308,000 to be paid to the Company on January 16, 1998. In addition, on December 18, 1997, the Board of Directors of the Company declared a $.14 per share cash dividend to shareholders of common stock of record on January 5, 1998, payable January 16, 1998. NOTE 18 REGULATORY MATTERS The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company'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 assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting procedures. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the FDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change the Bank's category. 46 COLUMBIA BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) Regulatory capital amounts and ratios for the Company and the Bank at December 31 were:
MINIMUM TO BE WELL REQUIREMENTS CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISION -------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ----------------------------------------------------------------------------------------------------- December 31, 1997 Total capital (to risk weighted assets): Consolidated $37,833,747 12.5% $24,201,432 8.0% $30,251,789 10.0% The Columbia Bank 36,093,606 12.0 24,164,825 8.0 30,206,032 10.0 Tier 1 capital (to risk weighted assets): Consolidated 34,202,083 11.3 12,100,716 4.0 18,151,074 6.0 The Columbia Bank 32,461,942 10.8 12,082,413 4.0 18,123,619 6.0 Tier 1 capital (to average assets): Consolidated 34,202,083 9.3 14,788,978 4.0 18,486,222 5.0 The Columbia Bank 32,461,942 8.9 14,649,269 4.0 18,311,586 5.0 December 31, 1996 Total capital (to risk weighted assets): Consolidated $33,940,561 13.2% $20,627,793 8.0% $25,784,742 10.0% The Columbia Bank 32,384,778 12.4 20,861,893 8.0 26,077,369 10.0 Tier 1 capital (to risk weighted assets): Consolidated 30,716,608 11.9 10,313,897 4.0 15,470,845 6.0 The Columbia Bank 29,124,698 11.2 10,430,948 4.0 15,646,421 6.0 Tier 1 capital (to average assets): Consolidated 30,716,608 10.1 12,153,105 4.0 15,191,381 5.0 The Columbia Bank 29,124,698 9.7 12,053,089 4.0 15,066,362 5.0 ===================================================================
NOTE 19 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument. CASH AND DUE FROM BANKS The carrying amount of cash and due from banks is a reasonable estimate of fair value. FEDERAL FUNDS SOLD The carrying amount of federal funds sold is a reasonable estimate of fair value. INVESTMENT SECURITIES AND SECURITIES AVAILABLE-FOR-SALE The fair value of securities held as investment and securities available-for-sale is based upon quoted market prices or dealer quotes. RESIDENTIAL MORTGAGE LOANS ORIGINATED FOR SALE The carrying amounts of residential mortgage loans originated for sale are reasonable estimates of fair value. COLUMBIA BANCORP AND SUBSIDIARY 47 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) LOANS RECEIVABLE The fair value of loans receivable is estimated by discounting future cash flows using current rates for which similar loans would be made to borrowers with similar credit history and remaining maturities. DEPOSIT LIABILITIES The fair value of demand deposits and savings accounts is the amount payable on demand at December 31, 1997. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS The carrying amount of short-term borrowings is a reasonable estimate of fair value. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL GUARANTEES WRITTEN The Company charges fees for commitments to extend credit. Interest rates on commitments to extend credit are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments. The estimated fair values of the Company's financial instruments at December 31 were as follows:
1997 1996 -------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------------------------------------------------------- Financial assets: Cash and due from banks $ 13,497,010 $ 13,497,010 $ 17,753,174 $ 17,753,174 Federal funds 2,013,538 2,013,538 3,477,436 3,477,436 Investment securities and securities available-for-sale 66,645,353 66,824,213 44,149,012 44,193,019 Residential mortgage loans originated for sale 6,557,090 6,557,090 1,551,408 1,551,408 Loans receivable, net of unearned income 265,193,513 237,875,076 Less allowance for credit losses 3,631,664 3,292,754 ----------- ----------- Loans, net 261,561,849 264,497,613 234,582,322 238,073,405 Financial liabilities: Deposits 313,357,443 313,641,395 254,639,886 255,324,798 Short-term borrowings 23,725,237 23,725,237 30,127,073 30,127,073 =======================================================
48 COLUMBIA BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) NOTE 20 FINANCIAL INFORMATION OF PARENT COMPANY The following is financial information of Columbia Bancorp at and for the years ended December 31 (parent company only): BALANCE SHEETS 1997 1996 ----------------------------- Assets: Cash and temporary investments $21,955,941 $13,808,287 Investment in The Columbia Bank 33,000,975 29,461,929 Other assets 696,588 148,579 ----------------------------- $55,653,504 $43,418,795 ============================= Liabilities and Stockholders' Equity: Short-term borrowings $20,725,237 $12,127,073 Other liabilities 543,453 316,883 Stockholders' equity 34,384,814 30,974,839 ----------------------------- $55,653,504 $43,418,795 ============================= STATEMENTS OF INCOME
1997 1996 1995 --------------------------------------- Income: Interest income $ 970,482 $ 613,892 $ 405,641 Dividend income from subsidiary 1,085,570 901,860 795,889 Management fees from subsidiary 120,000 120,000 160,000 --------------------------------------- 2,176,052 1,635,752 1,361,530 --------------------------------------- Expenses: Interest expense on short-term borrowings 897,867 532,042 342,635 Compensation expense 86,000 83,150 86,238 Other expenses 247,906 273,108 292,468 --------------------------------------- 1,231,773 888,300 721,341 --------------------------------------- Income before taxes and equity in undistributed net income of The Columbia Bank 944,279 747,452 640,189 Income tax benefit 48,000 59,200 59,900 --------------------------------------- Income before equity in undistributed net income of The Columbia Bank 992,279 806,652 700,089 Equity in undistributed net income of The Columbia Bank 3,175,252 2,945,230 2,728,661 --------------------------------------- Net income $4,167,531 $3,751,882 $3,428,750 =======================================
COLUMBIA BANCORP AND SUBSIDIARY 49 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (continued) STATEMENTS OF CASH FLOWS
1997 1996 1995 ----------------------------------------------- Cash flows from operating activities: Income before undistributed net income of The Columbia Bank $ 992,279 $ 806,652 $ 700,089 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization 13,072 13,700 7,200 Increase (decrease) in other liabilities 176,112 (112,876) (149,553) Decrease (increase) in other assets (561,081) 210,464 (144,675) ------------------------------------------------ Net cash provided by operating activities 620,382 917,940 413,061 ------------------------------------------------ Cash flows used in investing activity--equity investment in The Columbia Bank -- -- (6,500,000) ------------------------------------------------ Cash flows provided by (used in) financing activities: Increase (decrease) in short-term borrowings 8,598,164 (3,172,194) 11,903,557 Cash dividends distributed on Series A preferred stock -- -- (454,072) Cash dividends distributed on common stock (1,035,112) (859,228) (263,327) Redemption of Series A preferred stock -- -- (63,000) Cash distributed in lieu of fractional shares upon conversion of Series A preferred stock -- -- (126) Issuance of common stock, net of costs of issuance -- -- 8,387,699 Net proceeds (disbursements) from stock options exercised and common stock exchanged (35,780) 21,663 47,329 ------------------------------------------------ Net cash provided by (used in) financing activities 7,527,272 (4,009,759) 19,558,060 ------------------------------------------------ Net increase (decrease) in cash and temporary investments 8,147,654 (3,091,819) 13,471,121 Cash and temporary investments at beginning of year 13,808,287 16,900,106 3,428,985 ------------------------------------------------ Cash and temporary investments at end of year $21,955,941 $13,808,287 $16,900,106 ================================================
50 COLUMBIA BANCORP AND SUBSIDIARY Selected Quarterly Financial Data A summary of selected quarterly financial data for the years ended December 31 is as follows:
- -------------------------------------------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------------------------- 1997: Interest income $6,888,259 $7,507,563 $7,870,862 $7,927,065 Net interest income 4,352,640 4,743,789 4,836,888 4,787,082 Provision for credit losses 210,000 185,000 234,000 34,000 Income before income taxes 1,590,654 1,633,665 1,600,798 1,692,414 Net income 971,554 999,165 1,085,398 1,111,414 Net income per common share: Basic $ 0.45 $ 0.47 $ 0.50 $ 0.51 Diluted 0.43 0.44 0.47 0.48 1996: Interest income $6,057,036 $6,322,505 $6,540,053 $6,902,834 Net interest income 3,985,479 4,279,435 4,324,732 4,463,756 Provision for credit losses 184,600 175,400 189,501 71,499 Income before income taxes 1,674,017 1,650,625 1,229,770 1,584,391 Net income 1,023,017 1,009,625 751,370 967,870 Net income per common share: Basic $ 0.48 $ 0.47 $ 0.35 $ 0.45 Diluted 0.45 0.45 0.33 0.43
COLUMBIA BANCORP AND SUBSIDIARY 51 Recent Common Stock Prices and Stock Performance Graph RECENT COMMON STOCK PRICES The Company's Common Stock is traded on the National Association of Securities Dealers' Automated Quotation System ("Nasdaq") National Market tier of The Nasdaq Stock MarketSM under the symbol "CBMD". The following table presents high and low sale prices of the Company's Common Stock for the periods indicated. LOW HIGH ------------------------------------------------------ 1997: Fourth quarter $27.50 $38.50 Third quarter 23.25 29.25 Second quarter 21.25 23.88 First quarter 20.75 23.13 1996: Fourth quarter $18.50 $22.00 Third quarter 17.25 19.00 Second quarter 18.50 20.00 First quarter 16.00 20.00 As of December 31, 1997 there were 307 common stockholders of record holding an aggregate of 2,200,165 shares. The Company believes there to be in excess of 2,000 beneficial owners of the Company's Common Stock. STOCK PERFORMANCE GRAPH The following graph compares the cumulative total return on the Company's Common Stock during the five years ended December 31, 1997 with that of a broad market index (Nasdaq, U.S. Companies) and an industry peer group index (all publicly traded banks in Maryland, Pennsylvania, Virginia and the District of Columbia with total assets less than $1 billion). The graph assumes $100 was invested on December 31, 1992 in the Company's Common Stock and in each of the indices and assumes reinvestment of dividends. Five Year Cumulative Total Return [GRAPH APPEARS HERE--SEE PLOT POINTS BELOW] Columbia Bancorp NASDAQ Peer Group ---------------- ------ ---------- 12/31/92 100 100 100 12/31/93 135.63 114.8 133.03 12/31/94 200.11 112.21 146.21 12/31/95 259.65 158.7 184.48 12/31/96 326.95 195.19 220.59 12/31/97 532.91 239.53 370.51 52 COLUMBIA BANCORP AND SUBSIDIARY Directors and Officers COLUMBIA BANCORP DIRECTORS James R. Moxley, Jr. CHAIRMAN Columbia Bancorp PRESIDENT Security Development Corp. Herschel L. Langenthal VICE CHAIRMAN Columbia Bancorp MANAGING PARTNER Langenmyer Co. Anand S. Bhasin PRESIDENT Gemini Ventures Corp. John M. Bond, Jr. PRESIDENT AND CHIEF EXECUTIVE OFFICER Columbia Bancorp Garnett Y. Clark, Jr. PRESIDENT GYC Group Ltd. James Clark, Jr. RETIRED PRESIDENT Maryland State Senate Hugh F.Z. Cole, Jr. PARTNER Brantly Development Group, Inc. G. William Floyd GENERAL PARTNER Venture Associates Robert J. Gaw RETIRED PRESIDENT Ryland Mortgage Co. Mary T. Gould William L. Hermann Harry L. Lundy, Jr. PRESIDENT Williamsburg Builders, Inc. Richard E. McCready CHAIRMAN AND CHIEF EXECUTIVE OFFICER REM Enterprises, Inc. Patricia T. Rouse VICE PRESIDENT AND SECRETARY The Enterprise Foundation Maurice M. Simpkins VICE PRESIDENT The Ryland Group, Inc. Mary S. Scrivener Robert N. Smelkinson RETIRED CHAIRMAN Smelkinson Sysco Theodore G. Venetoulis PUBLISHER/POLITICAL CONSULTANT DIRECTOR EMERITUS Osborne A. Payne PRESIDENT Broadway-Payne, Inc. THE COLUMBIA BANK SENIOR OFFICERS John M. Bond, Jr. PRESIDENT AND CHIEF EXECUTIVE OFFICER Michael T. Galeone EXECUTIVE VICE PRESIDENT Charles C. Holman EXECUTIVE VICE PRESIDENT John A. Scaldara, Jr. EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY Robert E. Dael SENIOR VICE PRESIDENT Adelbert D. Karfonta SENIOR VICE PRESIDENT Robert W. Locke, III SENIOR VICE PRESIDENT Scott C. Nicholson SENIOR VICE PRESIDENT COLUMBIA BANCORP AND SUBSIDIARY 53 THE COLUMBIA BANK ADVISORY BOARD COLUMBIA Andrew N. Adams, III PRESIDENT/TREASURER Ten Oaks Nursery Randolph W. Brinton SENIOR VICE PRESIDENT Ferris, Baker Watts, Inc. Edward J. Brody PRESIDENT Brody Truck Rental, Inc. Edward J. Brush PRESIDENT Fountainhead Title Group Dwight A. Burrill, Ph.D. RETIRED PRESIDENT Howard Community College Ryland O. Chapman, III HEADMASTER Glenelg Country School C. Joan Cochran REALTOR Long & Foster Realtors Robert E. Cook OWNER Laurel Hardware Co., Inc. Steve Dubin CHIEF FINANCIAL OFFICER Martek Biosciences Corp. Joel D. Fedder PRESIDENT The Fedder Company John W. Garrison SENIOR PARTNER Garrison, Mathieson, Cosgray & Falk William M. Ginder RETIRED VICE CHAIRMAN Crown Central Petroleum Corp. Dr. Lenneal J. Henderson PROFESSOR University of Baltimore Richard V. Hoenes VICE PRESIDENT Cromwell Farms Stanley M. Levy RETIRED Administrative Law Judge D. Terrence MacHamer PRESIDENT The MacHamer Co. Donald C. Miller RETIRED Miller Chevrolet William H. Munn PRESIDENT BGE Home Products & Services S. Zeke Orlinsky PUBLISHER Patuxent Publishing Co. H. Canfield Pitts, II RESIDENT MANAGER Merrill Lynch Pierce Fenner & Smith, Inc. Samuel A. Rittenhouse RETIRED MANAGER Electric Engineering BGE Doris Stromberg Thompson RETIRED Newspaper Editor John L. Troutman PRESIDENT Troutman Company E. David Walter, Jr. VICE PRESIDENT Ferris, Baker Watts, Inc. Johannes Willenpart PAST PRESIDENT Austronic Security Systems, Inc. THE COLUMBIA BANK ADVISORY BOARD BALTIMORE COUNTY Albert H. Dudley, III, M.D. ORTHOPEDIC SURGEON Four East Madison Orthopedics Associates, Inc. Carol J. Glusman ADMINISTRATOR Pathology Associates Laboratories, Inc. Edmund F. Haile, P.E. CHAIRMAN Daft McCune Walker, Inc. Lawrence E. Holder, M.D. F.A.C.R. CHIEF Division of Nuclear Medicine University of Maryland Hospital John J. Kent, Jr. CHIEF OPERATING OFFICER Sheppard & Enoch Pratt Hospital Douglas L. Miller, Sr. PRESIDENT C&D Corporation, Inc. 54 COLUMBIA BANCORP AND SUBSIDIARY Corporate Information BRANCH LOCATIONS BLAKEHURST 1055 W. Joppa Road Towson, MD 21204 Phone: (410) 494-6148 COLUMBIA TOWN CENTER 10480 Little Patuxent Parkway Columbia, MD 21044 Phone: (410) 730-5000 CROSS KEYS 5100 Falls Road, Suite 96 Baltimore, MD 21210 Phone: (410) 433-1990 ELLICOTT CITY 9151 Baltimore National Pike Ellicott City, MD 21042 Phone: (410) 465-4800 HARMONY HALL 6336 Cedar Lane Columbia, MD 21044 Phone: (410) 531-6000 HARPER'S CHOICE 5485 Harper's Farm Road Columbia, MD 21044 Phone: (410) 730-5085 HEAVER PLAZA 1301 York Road Lutherville, MD 21093 Phone: (410) 296-0490 LONG GATE 4450 Long Gate Parkway Ellicott City, MD 21042 Phone: (410) 203-2345 OAKLAND MILLS 5865 Robert Oliver Place Columbia, MD 21045 Phone: (410) 992-9411 RIVER HILL 6030 Daybreak Circle Clarkesvillle, MD 21029 Phone: (410) 531-7000 ROLAND PARK PLACE 830 West 40th Street Baltimore, MD 21211 Phone: (410) 366-1314 VANTAGE HOUSE 5400 Vantage Point Road Columbia, MD 21044 Phone: (410) 740-4066 WILDE LAKE 10451 Twin Rivers Road Columbia, MD 21044 Phone: (410) 884-6800 RESIDENTIAL MORTGAGE LENDING OFFICES COLUMBIA TOWN CENTER 10480 Little Patuxent Parkway Columbia, MD 21044 Phone: (410) 730-5000 HEAVER PLAZA 1301 York Road Lutherville, MD 21093 Phone: (410) 769-8070 OLNEY 18200 Georgia Avenue Olney, MD 20832 Phone: (301) 924-9240 ANNUAL MEETING The Annual Meeting of Stockholders will be held on Monday, April 27, 1998 at 5:30 p.m. at: The Columbia Inn Wincopin Circle Columbia, MD 21044 TRANSFER AGENT AND REGISTRAR Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 Attn: Investor Relations Phone: 1-800-368-5948 INDEPENDENT AUDITORS KPMG Peat Marwick LLP 111 S. Calvert Street Baltimore, MD 21202 GENERAL COUNSEL Piper & Marbury L.L.P. 36 S. Charles Street Baltimore, MD 21201 CORPORATE HEADQUARTERS 10480 Little Patuxent Parkway Columbia, MD 21044 Phone: (410) 465-4800 Fax: (410) 750-0105 Internet: www.columbank.com STOCK EXCHANGE LISTING The Common Stock of Columbia Bancorp is traded on the Nasdaq National Market tier of the Nasdaq Stock Market(SM) under the symbol "CBMD." ADDITIONAL INFORMATION A copy of Columbia Bancorp's annu- al report to the SEC on Form 10-K may be obtained without charge upon written request to: Columbia Bancorp 9151 Baltimore National Pike Ellicott City, MD 21042 Attention: John A. Scaldara, Jr. Phone:(410) 465-4800 E-mail: jscaldara@columbank.com [COLUMBIA BANCORP LOGO] Columbia Bancorp 10480 Little Patuxent Parkway Columbia, MD 21044 (410) 465-4800 Internet: http://www.columbank.com EX-23 9 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Columbia Bancorp: We consent to the incorporation by reference in the registration statement (No. 333-10231) on Form S-8 of Columbia Bancorp of our report dated January 22, 1998, relating to the consolidated statements of condition of Columbia Bancorp and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Columbia Bancorp. /s/ KPMG Peat Marwick LLP ____________________________ KPMG PEAT MARWICK LLP Baltimore, Maryland March 27, 1998 EX-27 10 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1997 DEC-31-1997 13,497,010 0 2,013,538 0 1,674,464 64,970,889 65,149,749 265,833,702 (3,631,664) 373,451,111 313,357,443 23,725,237 1,983,617 0 0 0 22,002 34,362,812 373,451,111 26,741,786 3,259,206 192,757 30,193,749 10,094,380 11,473,350 18,720,399 663,000 0 14,188,189 6,517,531 4,167,531 0 0 4,167,531 1.93 1.82 5.94 599,076 63,209 0 2,230,474 (3,292,754) 365,560 41,470 (3,631,664) (3,631,664) 0 0
EX-99 11 EXHIBIT 99.1 [COLUMBIA BANCORP LOGO] COLUMBIA BANCORP 10480 LITTLE PATUXENT PARKWAY COLUMBIA, MARYLAND 21044 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 27, 1998 Notice is hereby given that the Annual Meeting of Stockholders of Columbia Bancorp will be held at The Columbia Inn, Wincopin Circle, Columbia, Maryland 21044 on Monday, April 27, 1998, at 5:30 p.m. for the following purposes: 1. To elect five directors to serve until their terms of office expire and until their successors are duly elected and qualified. 2. To transact such other business as may properly come before the meeting or any adjournment thereof. The Board of Directors has fixed the close of business on March 17, 1998 as the record date for the determination of stockholders entitled to notice of and to vote at the meeting or any adjournments or postponements thereof. Your Proxy is enclosed. You are encouraged to complete, date, sign and return promptly the Proxy in the envelope provided even though you may plan to attend the meeting. No postage is necessary for mailing in the United States. Returning the Proxy will not limit your right to vote in person or to attend the Annual Meeting, but will insure your representation if you cannot attend. If you attend the meeting, you may revoke your Proxy and vote in person. By Order of the Board of Directors /s/ John A. Scaldara, Jr. _________________________ JOHN A. SCALDARA, JR. Corporate Secretary Columbia, Maryland March 27, 1998 PROXY STATEMENT INTRODUCTION This Proxy Statement is furnished on or about March 27, 1998 to stockholders of Columbia Bancorp (the "Company") in connection with the solicitation of proxies by the Company's Board of Directors to be used at the annual meeting of stockholders described in the accompanying notice and at any adjournments or postponements thereof. The purposes of the meeting are set forth in the accompanying notice of annual meeting of stockholders. PROXIES AND VOTING The accompanying proxy is solicited by the Board of Directors of the Company. The Board of Directors has selected John M. Bond, Jr. and Robert N. Smelkinson, or either of them, to act as proxies with full power of substitution. Any stockholder executing a proxy has the power to revoke the proxy at any time before it is voted. This right of revocation is not limited or subject to compliance with any formal procedure. Any stockholder may attend the meeting and vote in person whether or not he or she has previously given a proxy. The record date for stockholders entitled to notice of and to vote at the annual meeting was the close of business on March 17, 1998. At that date there were outstanding and entitled to vote 2,216,186 shares of Common Stock, par value $.01 per share, of the Company. In the election of directors each share is entitled to one vote for each director to be elected; however, cumulative voting is not permitted. For all matters except the election of directors, each share is entitled to one vote. The cost of solicitation of proxies and preparation of proxy materials will be borne by the Company. The solicitation of proxies will generally be by mail and by directors, officers and employees of the Company and its subsidiary, The Columbia Bank (the "Bank"), without additional compensation to them. In some instances solicitation may be made by telephone or telegraph, the costs of which will be borne by the Company. The Company may also reimburse brokers, custodians, nominees and other fiduciaries for reasonable out-of-pocket and clerical expenses for forwarding proxy materials to principals. The Annual Report of the Company, including financial statements for the fiscal year ended December 31, 1997, has been mailed to all stockholders with this Proxy Statement. PROPOSAL 1 - ELECTION OF DIRECTORS The charter and by-laws of the Company provide that the directors shall be classified into three classes as equal in number as possible, with each director serving a three year term. Directors are elected by a plurality of the votes cast by the holders of shares of Common Stock present in person or represented by proxy at the meeting with a quorum present. Abstentions and broker non-votes are not considered to be votes cast. 1 NOMINEES Unless otherwise indicated in the enclosed proxy, the persons named in such proxy intend to nominate and vote for the election of the following five nominees for the office of director of the Company, to serve as directors for three years or until their respective successors have been duly elected and qualified. All such nominees are currently serving as directors. The Board of Directors is not aware that any nominee named herein will be unable or unwilling to accept nomination or election. Should any nominee for the office of director become unable to accept nomination or election, the persons named in the proxy will vote for the election of such other persons, if any, as the Board of Directors may recommend. The names and ages (as of March 17, 1998) of persons nominated by the Board of Directors, their principal occupations and business experience for the past five years, and certain other information are set forth below. Unless otherwise noted, each has served as a director of the Company and the Bank since inception of the Company in 1987 and the Bank in 1988. NAME OF NOMINEE INFORMATION REGARDING NOMINEE - --------------- ----------------------------- Nominees for Directors to be elected at the 1998 Annual Meeting to serve until the 2001 Annual Meeting (Class II) Hugh F.Z. Cole, Jr. Mr. Cole is 56 years old. He is Chairman and CFO of Brantly Development Group, Inc., a real estate development company. Mr. Cole has served as a director of the Company and Bank since July, 1988. G. William Floyd Mr. Floyd is 66 years old. He is a general partner of Venture Associates, a commercial real estate investment firm. Herschel L. Langenthal Mr. Langenthal is 69 years old. He is the managing partner of Langenmyer Company, an investment company. Mr. Langenthal is also Vice-Chairman of the Company. Richard E. McCready Mr. McCready is 64 years old. He is Chairman and CEO of REM Enterprises, Inc., a food brokerage company. James R. Moxley, Jr. Mr. Moxley is 67 years old. He is President of Security Development Corporation, a real estate development company. Mr. Moxley is also Chairman of the Company. CONTINUING DIRECTORS The following information is provided with respect to directors who will continue to serve as directors of the Company until the expiration of their terms at the times indicated. Unless otherwise noted, each has served as a director of the Company and the Bank since inception of the Company in 1987 and the Bank in 1988. 2 NAME OF DIRECTOR INFORMATION REGARDING DIRECTOR - ---------------- ------------------------------ Directors to serve until the 1999 Annual Meeting (Class III) John M. Bond, Jr. Mr. Bond, Jr. is 54 years old and has served as a director and President, Chief Executive Officer, and Treasurer of the Company and the Bank since inception. William L. Hermann Mr. Hermann is 57 years old and is President of William L. Hermann, Inc., a financial management company. Mr. Hermann was also General Manager of the Glenmore office of the Bank until December 1997. He has served as a director of the Company and the Bank since June 1989. Harry L. Lundy, Jr. Mr. Lundy is 57 years old. He is President and owner of Williamsburg Group, LLC, Williamsburg Builders, Inc. and Hallmark Builders, Inc. He is Executive Vice President and owner of Patriot Homes, Inc. Each of the aforementioned companies is a residential construction company. Mary S. Scrivener Mrs. Scrivener is 60 years old. She is Secretary of Calvert General Contractors, a commercial construction company. Theodore G. Venetoulis Mr. Venetoulis is 63 years old. He is a former Baltimore County Executive, the County's senior elected official, and has been publisher of the Orioles Gazette and political analyst for WBAL-TV in Baltimore, Maryland. Directors to serve until the 2000 Annual Meeting (Class I) Anand S. Bhasin Mr. Bhasin is 60 years old. He is President of Gemini Ventures Corporation, an international trading company. Mr. Bhasin has served as a director of the Company since November, 1990 and the Bank since April, 1992. Garnett Y. Clark, Jr. Mr. Clark is 55 years old. He is President of GYC Group Ltd., a building and development company. He is also President of Clark & Associates Realtors, Inc. Robert J. Gaw Mr. Gaw is 64 years old. He is the retired President of Ryland Mortgage Company and is a founding director of The Ryland Group, Inc., a residential home builder and mortgage finance company. Maurice M. Simpkins Mr. Simpkins is 52 years old. He is Vice President for Public Affairs at The Ryland Group, Inc., a residential home builder and mortgage finance company, and has been with Ryland since 1971. Mr. Simpkins has served as a director of the Company and Bank since April, 1997. Robert N. Smelkinson Mr. Smelkinson is 68 years old. He is the retired Chairman of Smelkinson Sysco, a distribution company. 3 DIRECTOR EMERITUS Directors James Clark, Jr., Mary T. Gould and Patricia Rouse have been appointed by the Boards of Directors of the Company and the Bank, in recognition of their distinguished service to each organization, to serve in the position of Director Emeritus for a period of two years upon their retirement effective April 27, 1998. As a Director Emeritus, each is eligible to receive compensation and perquisites offered to directors generally and may participate in discussion at Board meetings of the Company and the Bank, but may not vote and may not be counted for purposes of determining a quorum. The membership of Directors Emeritus J. Clark, Jr., Gould and Rouse on committees of the Boards of Directors of the Bank and the Company will cease effective with retirement. Mr. Osborne A. Payne is currently serving as a Director Emeritus, with a term that expires April, 1999. BOARD AND COMMITTEE MEETINGS The Board of Directors held ten meetings during 1997. Directors Floyd and McCready attended fewer than 75% of the sum of the total number of Company meetings of the Board of Directors and of committees of the Board of Directors on which each served during 1997. The Board of Directors has six standing committees. The committees are the Executive; Acquisition, Development and Construction; Audit; Asset/Liability Management; Community Reinvestment Act ("CRA") Advisory; and Personnel, Compensation and Stock Option committees. The Board of Directors has not established a Nominating Committee. The functions customarily attributable to a Nominating Committee are performed by the Board of Directors as a whole. In addition, the Board of Directors, from time to time, establishes special committees which have a limited duration. Directors are appointed to each committee, except the Executive Committee, for a one-year term. Directors are appointed to the Executive Committee on a rotational basis with terms ranging from three months to one year. The Chairman and Vice-Chairman of the Board of Directors are ex-officio members of all committees, with the exception of the Audit Committee. The President is an ex-officio member of all committees except the Audit and Personnel, Compensation and Stock Option committees. The Executive Committee held forty-seven meetings during 1997. The Executive Committee currently consists of Directors Bhasin, Bond, Jr., G. Clark, J. Clark, Jr., Cole, Langenthal (Chairman), Lundy, Moxley, Smelkinson and Venetoulis. The Committee is responsible for evaluating and approving credits exceeding the lending authority of officers of the Bank; reviewing on a regular basis financial information, operational statistics, loan delinquencies and potential problem loans; and taking other actions as may be required in the absence of the full Board of Directors. Effective January 1, 1998, the Board of Directors established the Acquisition, Development and Construction Committee, consisting of Directors Bond, Jr., G. Clark, Gaw, Langenthal, Lundy, Moxley (Chairman) and Simpkins. The Committee is responsible for monitoring business development strategies and market trends specific to the Company's acquisition, development and construction portfolio. The Audit Committee held two meetings during 1997. The Audit Committee consists of Directors Bhasin, J. Clark, Jr., Cole (Chairman), Floyd, Hermann, Rouse and Venetoulis. The Committee is responsible for overseeing of the Company's internal accounting controls; recommending to the Board of Directors the selection of the Company's independent auditors; reviewing the annual audit plan, annual report and results of the independent audit; reviewing supervisory examination reports; and initiating other special reviews when deemed necessary. The Asset/Liability Management Committee held four meetings during 1997. The Asset/Liability Management Committee consists of Directors Bhasin, Bond, Jr., Floyd, Gaw (Chairman), Hermann, 4 Langenthal, Moxley and Scrivener. The Committee monitors quarterly operating results, liquidity, asset mix, loan pricing and deposit rate policies of the Company. In addition, the Committee directs the investment strategies of the Company and makes recommendations of such to the Board of Directors when strategies are outside its approval authority. The CRA Advisory Committee held six meetings during 1997. The CRA Advisory Committee consists of Directors Bhasin, Bond, Jr., Langenthal, Moxley, Rouse, Simpkins (Chairman) and Venetoulis and certain officers of the Bank. The Committee provides oversight and guidance to the development of CRA programs and affordable housing initiatives of the Company. This includes providing mortgage financing conduits for low-to-moderate income housing, fair lending policies for minorities, encouragement for first-time homebuyers, and education to the community to foster affordable housing opportunities. The Personnel, Compensation and Stock Option Committee held three meetings during 1997. The Personnel, Compensation and Stock Option Committee consists of Directors Gaw, Gould, Langenthal, Lundy, McCready, Moxley, Smelkinson (Chairman), Simpkins and Venetoulis. The Committee oversees the compensation of all employees, except the compensation of the President and directors; reviews the compensation of the President and directors, and makes recommendations of changes to such compensation to the Board of Directors for approval; monitors personnel related matters of the Company; reviews and authorizes employee related benefit plans; and administers the Company's Stock Option Programs. COMPENSATION OF DIRECTORS Non-employee directors of the Company and the Bank will receive $150 and stock options to purchase twenty-five shares of Common Stock of the Company for each Board and committee meeting attended during 1998. Chairpersons of committees, other than Mr. Langenthal and Mr. Moxley, will receive an additional $25 for each committee meeting attended during 1998. Directors Moxley and Langenthal, serving in the capacities of Chairman and Vice-Chairman of the Company, respectively, will receive annual fees of $29,000 and $27,000, respectively, in addition to fees paid and stock options granted for meeting attendance. These amounts are unchanged from those received during 1997. The Chairman and Vice-Chairman are also eligible for a bonus to be awarded at the discretion of the Board of Directors, although no bonus was awarded for 1997. On January 26, 1998, Directors Moxley and Langenthal were granted stock options to purchase 5,000 and 3,000 shares of Common Stock of the Company, respectively, at $33.75 per share, the then current market price. Total director fees paid by the Company and the Bank for 1997 service were $119,000, inclusive of annual fees paid the Chairman and Vice-Chairman. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Act") requires that the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of change in ownership of Common Stock of the Company. The same persons are also required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, and written representations that no other reports were required during the fiscal year ended December 31, 1997, all Section 16(a) filing requirements applicable to the Company's executive officers, directors and greater than 10% beneficial owners were complied with, except that Director Moxley inadvertently failed to file a report (representing a transaction) required by Section 16(a) of the Act on a 5 timely basis, and Director Simpkins failed to file a report (representing the initial filing of ownership) required by Section 16(a) of the Act on a timely basis. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Bank has made loans to certain of its executive officers, directors and related parties. These loans were made on substantially the same terms, including interest rate and collateral requirements, as those prevailing at the time for comparable transactions with unrelated customers and did not involve more than the normal risk of collectibility or present other unfavorable features. At December 31, 1997, these loans totaled $3.4 million, or approximately 10.5% of the total equity capital of the Bank. PRINCIPAL BENEFICIAL OWNERS OF THE COMPANY'S COMMON STOCK CERTAIN BENEFICIAL OWNERS No persons were known by the Company to own beneficially, directly or indirectly, more than 5% of the Company's Common Stock outstanding on December 31, 1997. BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS AND NOMINEES The following table lists the number of shares of Common Stock of the Company beneficially owned by directors and named Executive Officers of the Company and the Bank, directly or indirectly, as of March 17, 1998. Shares of Stock Options % of Common Stock and Warrants (1) Class ------------ ---------------- ----- Directors: Anand S. Bhasin (2) 23,349 639 1.08 John M. Bond, Jr. (3)(4) 86,155 13,790 4.49 Garnett Y. Clark, Jr 18,296 5,064 1.05 James Clark, Jr 16,589 678 * Hugh F.Z. Cole, Jr. (5) 21,476 1,522 1.04 G. William Floyd 14,098 -- * Robert J. Gaw 27,587 1,706 1.32 Mary T. Gould (6)(7) 90,705 7,204 4.41 William L. Hermann (8) 26,980 -- 1.22 Herschel L. Langenthal (9) 59,508 6,054 2.95 Harry L. Lundy, Jr. (10) 55,741 4,574 2.72 Richard E. McCready 19,459 4,438 1.08 James R. Moxley, Jr 20,533 9,587 1.36 Patricia T. Rouse 28,982 4,308 1.50 Mary S. Scrivener 18,082 8,159 1.18 Maurice M. Simpkins 5,587 -- * Robert N. Smelkinson 55,533 5,198 2.74 Theodore G. Venetoulis (11) 12,983 4,351 * Executive Officers: Michael T. Galeone 1,856 8,500 * Charles C. Holman (12) 4,570 6,750 * Robert W. Locke (13) 13,232 3,000 * John A. Scaldara, Jr. (14)(15) 33,156 7,750 1.84 ====== ====== ==== 6 BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS AND NOMINEES, (continued) Shares of Stock Options % of Common Stock and Warrants (1) Class ------------ ---------------- ----- All directors and executive officers (22 persons) (16) 622,721 103,272 31.3% ======= ======= ==== Company totals 2,212,845 137,020 ========= ======= * Less than 1% (1) Represents number of shares of Common Stock subject to stock options and warrants currently exercisable. (2) Includes 2,044 shares of Common Stock owned by Mr. Bhasin's children. (3) Includes 19,106 shares of Common Stock, 3,300 warrants and 1,690 stock options for which Mr. Bond, Jr. is a co-trustee and remainder beneficiary. (4) Includes 31,736 shares of Common Stock held by the Company's 401(k) Plan and Trust on December 31, 1997 for which Mr. Bond, Jr. and Mr. Scaldara serve as trustees. Beneficial ownership of such shares is expressly disclaimed, except as to approximately 8,745 shares held for the account of Mr. Bond, Jr. (5) Includes 2,121 shares of Common Stock for which Mr. Cole is a trustee. (6) Includes 31,237 shares of Common Stock owned by a partnership of which Mrs. Gould is a 5% general partner; the beneficial ownership of such shares is expressly disclaimed. (7) Includes 27,434 shares of Common Stock and 6,600 warrants owned by spouse; the beneficial ownership of such shares is expressly disclaimed. (8) Includes 2,364 shares of Common Stock owned by a corporation of which Mr. Hermann owns an interest. (9) Includes 24,603 shares of Common Stock for which Mr. Langenthal is a trustee and 20,695 shares of Common Stock owned by two partnerships and a corporation of which Mr. Langenthal owns an interest. (10) Includes 29,246 shares of Common Stock owned by a corporation and a limited partnership of which Mr. Lundy owns interests. (11) Includes 12,912 shares of Common Stock held by a trust; the beneficial ownership of such shares is expressly disclaimed. (12) Includes approximately 829 shares of Common Stock held for the account of Mr. Holman in the Company's 401(k) Plan and Trust. (13) Includes approximately 1,176 shares of Common Stock held for the account of Mr. Locke in the Company's 401(k) Plan and Trust. (14) Includes 154 shares of Common Stock for which Mr. Scaldara is trustee. (15) Includes 31,736 shares of Common Stock held by the Company's 401(k) Plan and Trust on December 31, 1997 for which Mr. Bond, Jr. and Mr. Scaldara are trustees. Beneficial ownership of such shares is expressly disclaimed, except as to approximately 3,907 shares held for the account of Mr. Scaldara. (16) Includes 31,736 shares of Common Stock held by the Company's 401(k) Plan and Trust for which Mr. Bond, Jr. and Mr. Scaldara are trustees. 7 EXECUTIVE COMPENSATION COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The following report is submitted by the Personnel, Compensation and Stock Option Committee of the Board of Directors (the "Committee"). The report addresses the executive compensation policies of the Bank and the Company (collectively, the "Company") for 1997. The Committee establishes the compensation of senior officers of the Company with the exception of Mr. Bond, Jr., the President and Chief Executive Officer. Mr. Bond, Jr.'s compensation is established by the Board of Directors of the Company based upon data provided by and recommendations of the Committee. The Board of Directors also establishes the compensation of the Chairman and Vice Chairman of the Board of Directors based on the recommendations of the Committee. In addition, the Committee generally reviews all personnel related issues, including salary administration related to all other employees, and administers the Company's 1987 Stock Option Plan, as amended, 1997 Stock Option Plan, 1990 Director Stock Option Plan, 401(k) Plan and Trust, and Deferred Compensation Plan. The overall goal of the Committee is the establishment and administration of compensation policies directly related to attainment of corporate operational and financial goals which provide the ability to attract, motivate, reward and retain qualified senior officers. In 1993, the Company commissioned an independent consultant to assist in establishing a company-wide salary administration plan, which included senior officer positions. Development of the plan included creating job descriptions for all positions; rating the overall responsibility of each position based on characteristics including, job knowledge, problem-solving, accountability, human relations, communications, supervision of others and marketing; assigning each position to a salary grade based on level of overall responsibility; and, developing salary ranges for each salary grade based on market information available for similar positions at financial institutions both in the communities where the Company does business and outside the Company's market area. These results are updated annually by the Company's human resources staff using current market data which reflects marketplace changes, inflation, and, if applicable, corporate performance. This information is considered by the Committee. The individual components of the Company's compensation program include: (a) BASE SALARY. Base salary levels are established for senior officers primarily based upon evaluation of the historical performance, degree of responsibility, level of experience and number of years with the Company. In addition, the Committee considers compensation data available through various surveys, including the Sheshunoff Bank Executive and Director Compensation Survey, SNL Executive Compensation Review, Bank Administration Institute Bank Cash Compensation and Key Executive Compensation Surveys, Chesapeake Human Resources Association Annual Benefits and Compensation Survey, and Starkey & Beall Regional Financial Industry Salary Survey. With respect to the base salary of $215,000 granted to Mr. Bond, Jr. for the year 1997, the Committee took into account the Company's performance during 1996 and survey information referred to above. Particular emphasis was placed on Mr. Bond, Jr.'s individual performance, including his leadership role through a period of continued aggressive growth. (b) ANNUAL INCENTIVES/BONUSES. Bonuses are generally granted senior officers based on the extent to which the Company achieves annual performance objectives, as established by the Board of Directors. Such performance objectives include net income, earnings per share and return on equity goals. Bonuses may also be awarded to other officers and employees based on recommendations by supervisors. 8 While the Company achieved many operational goals in 1997, financial performance did not meet internal expectations. As such, no bonuses were awarded senior officers. (c) STOCK OPTION AWARDS. The Committee believes that the granting of stock options is the most appropriate form of long term compensation for senior officers, since awards of equity encourage ownership in the success of the Company. Stock option grants are discretionary and are limited by the terms and conditions of the Company's 1987 Stock Option Plan, as amended, and the 1997 Stock Option Plan. In February 1997, Mr. Scaldara was granted an incentive stock option for the purchase of 3,000 shares of the Company's common stock. The grant was reflective of performance during 1996. Section 162(m) of the Internal Revenue Code of 1986, as amended, provides with certain exceptions, for an annual $1,000,000 limitation on the deduction that an employer may claim for compensation of certain executives. In light of the current level of compensation for the Company's named executive officers, the Committee has not adopted a policy with respect to the foregoing deductibility limit, but will adopt such a policy should it become relevant. R. Smelkinson, Chairman R. McCready R. Gaw J. Moxley M. Gould M. Simpkins H. Langenthal T. Venetoulis H. Lundy COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The table below provides the aggregate balance at December 31, 1997 of loans in excess of $60,000 issued by the Bank to members of the Compensation Committee. These loans were made in the ordinary course of business, made on substantially the same terms, including interest rate and collateral requirements, as those prevailing at the time for comparable transactions with unrelated customers and did not involve more than a normal risk of collectibility or present other unfavorable features. Aggregate Loan Balance at December 31, 1997 ---------------------------- Richard E. McCready $ 88,790 James R. Moxley, Jr. 1,404,615 SUMMARY COMPENSATION TABLE The table below presents a summary of compensation for the last three fiscal years of the chief executive officer of the Company and the other most highly paid executive officers of the Company and the Bank whose total annual salary and bonus exceeded $100,000 during the year ended December 31, 1997. 9
Annual Compensation (a) Shares of Common Name and -------------------------- Stock Underlying All Principal Position Year Salary Bonus Options Awarded Compensation(b) - ------------------ ---- ------ ----- --------------- --------------- John M. Bond, Jr. 1997 $215,000 $ - - $16,857 President and CEO 1996 200,000 - - 19,464 1995 175,000 60,000 - 4,821 Michael T. Galeone 1997 $154,000 $ - - $ 8,368 Executive Vice President 1996 148,000 - - 4,213 1995 143,000 40,000 - 2,754 Charles C. Holman 1997 $152,000 $ - - $12,138 Executive Vice President 1996 144,000 - - 10,801 1995 139,000 50,000 - 4,821 Robert W. Locke 1997 $109,000 $ - - $ 8,967 Senior Vice President 1996 106,000 - - 9,071 1995 103,000 15,000 - 4,821 John A. Scaldara, Jr. 1997 $120,000 $ - 3,000 $ 9,722 Executive Vice President, 1996 100,000 - - 9,361 Chief Financial Officer 1995 90,000 25,000 - 4,821 and Corporate Secretary
(a) No officer named above received any perquisites and other personal benefits the aggregate amount of which exceeded the lesser of $50,000 or 10% of the total annual salary and bonus reported for 1997 for such officer in the Summary Compensation Table. (b) Represents discretionary matching contributions made by the Company and allocated forfeitures resulting from employee terminations as determined under terms of the Company's 401(k) Plan and Trust. All employees participating in the Company's 401(k) Plan and Trust receive matching contributions and forfeitures on equivalent terms. Also includes discretionary matching contributions made by the Bank as determined under terms of the Bank's Deferred Compensation Plan. OPTION GRANTS IN LAST FISCAL YEAR The table below provides analysis of all individual grants of stock options made during the year ended December 31, 1997 to the named Executive Officers:
Percent of Number of Total Options Securities Granted to Underlying Employees in Exercise or Grant Date Name Options Granted Fiscal Year Base Price Expiration Date Value (a) - ---- --------------- ----------- ---------- --------------- --------- John A. Scaldara, Jr. 3,000 18.3% $22.00 February 24, 2007 $30,114
(a) Estimated using the Black-Scholes option pricing model and the following assumptions: Dividend yield 1.75% Expected volatility 36.79% Risk free interest rate 5.49% Expected life 10 years 10 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The table below provides an analysis of aggregated stock options exercised during 1997 and outstanding stock options as of December 31, 1997 for the named Executive Officers. There were no adjustments or amendments to the exercise price of stock options previously awarded to any named Executive Officer during 1997.
Shares of Common Stock Underlying Value of Unexercised Unexercised Options In-The-Money Shares of Common at Fiscal Year-End Options at Fiscal Year-End Stock Acquired Value ---------------------------- ---------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- John M. Bond, Jr. 49,500 $1,004,779 5,500 - $133,925 - Michael T. Galeone 5,500 80,630 8,500 - 204,434 - Charles C. Holman - - 6,750 - 167,443 - Robert W. Locke 7,750 230,063 6,250 - 150,235 - John A. Scaldara, Jr. - - 7,000 3,000 170,188 36,000
RETIREMENT PLANS AND SUPPLEMENTAL COMPENSATION ARRANGEMENTS Named Executive Officers, like other employees of the Company, or its subsidiaries, are eligible to participate in the Columbia Bancorp 401(k) Plan and Trust adopted January 1, 1989 (the "401(k) Plan"). Under terms of the 401(k) Plan, eligible employees may defer a portion of their total compensation on a pretax basis. In order to be eligible to participate in the 401(k) Plan, an employee must have completed one year of service in which 1,000 hours were worked. The maximum percentage of total compensation eligible for deferral and the voluntary matching employer contribution are established annually by the Board of Directors of the Company and are currently 15% and 50%, respectively. An employee is vested in the matching employer contribution as follows: (i) 20% after three years of service, (ii) 40% after four years of service, (iii) 60% after five years of service, (iv) 80% after six years of service and (v) 100% after seven years of service. Employees can direct the investment of their contribution and the matching employer contribution into any one or more of seven investment options which include a Bank money market account, five mutual funds managed by Fidelity Investments, or Common Stock of the Company. The vested portion of matching employer contributions made to the 401(k) Plan during 1997 for the named Executive Officers was follows: Mr. Bond, Jr., $4,750; Mr. Galeone, $4,750; Mr. Holman, $4,750; Mr. Scaldara, Jr., $4,750; and Mr. Locke, $4,750. Effective September 27, 1996, the Bank also established a nonqualified deferred compensation arrangement (the "Deferred Compensation Plan") for selected senior officers, including the named Executive Officers, of the Bank and the Company or subsidiaries thereof (the "Senior Officers"). The Deferred Compensation Plan provides supplemental retirement benefits for the Senior Officers restricted from receiving further benefits under the 401(k) Plan as a result of the limitations on pretax contributions imposed by the Internal Revenue Code. Under the Deferred Compensation Plan, Senior Officers can continue to make pretax contributions in excess of the IRS limits imposed on the 401(k) Plan and receive matching employer contributions identical to what they would have received in the 401(k) Plan if there were no IRS limitations. The maximum amount that a Senior Officer may defer under the Deferred Compensation Plan, when added to that deferred under the 401(k) Plan cannot exceed the maximum percentage compensation deferral (currently 15%) as established by the Board of Directors. Senior Officers may direct earnings on their contributions. The matching employer contributions may be calculated based on (i) the Bank's prime rate of interest in effect as of December 15 of the preceding year, 11 (ii) the performance of the Company's Common Stock, as if contributions and matching employer contributions were used to purchase shares of the Company's Common Stock and dividends were reinvested, or (iii) a combination of (i) and (ii). The vested portion of the matching employer contributions made to the Deferred Compensation Plan during 1997 for named Executive Officers were as follows: Mr. Bond, Jr., $11,345; Mr. Holman, $6,626; Mr. Scaldara, Jr., $4,210; Mr. Galeone, $2,942; and Mr. Locke, $3,455. The Deferred Compensation Plan may also provide for payment of a death benefit in the event that a Senior Officer dies while in active service. At January 1, 1998, the death benefit for each of the named Executive Officers was as follows: Mr. Bond, Jr., $953,000; Mr. Holman, $62,000; Mr. Scaldara, Jr., $692,000; Mr. Galeone, $688,000; and Mr. Locke, $314,000. In order to partially offset the costs associated with the Deferred Compensation Plan, the Bank has purchased life insurance contracts on the lives of the participating Senior Officers, with the Bank as beneficiary. EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS The Company and the Bank (collectively, the "Companies") entered into an employment agreement dated February 26, 1996 with John M. Bond, Jr. (the "Agreement"). The Agreement supersedes the prior employment agreement. The terms of the Agreement continue until the earlier of (i) the close of business on the date which is three years after the date on which either party provides written notice of termination, other than for "cause", as defined in the Agreement, but no later than the close of business on the sixty-fifth birthday of Mr. Bond, Jr., or (ii) the date on which Mr. Bond, Jr.'s employment is otherwise terminated pursuant to the provisions of the Agreement. Under terms of the Agreement, Mr. Bond, Jr. serves as President and Chief Executive Officer of the Companies with a minimum annual base compensation of $225,000, which is subject to normal periodic review, at least annually, for increases based on the salary policies of the Companies and Mr. Bond, Jr.'s contributions to the Companies. Mr. Bond, Jr. is also entitled to participate in all incentive and benefit programs offered by the Companies. If Mr. Bond, Jr.'s employment is terminated, other than for "cause", the Companies are required to continue to provide benefits to him and pay his salary for a predetermined period plus, under certain circumstances, pay an annual bonus as determined in accordance with the terms of the Agreement. The Agreement also contains a non-competition provision which prohibits Mr. Bond, Jr., during his employment with the Companies, or for a period of three years following voluntary resignation or termination for "cause", from directly or indirectly engaging in activities competitive with the business of the Companies. The Agreement also provides that in the event of (i) termination, other than for "cause", (ii) resignation due to a significant change in the nature or scope of authority and duties, or (iii) resignation as a result of not having been offered a new employment agreement with similar terms, 90 days prior to, or within one year after, any "change in control" (as defined in the Agreement) of the Companies, Mr. Bond, Jr., within 15 days of termination, will be paid a lump sum payment equal to three times the sum of his annual base compensation and the average of the bonuses paid to him over the past three years. In the event of voluntary resignation 90 days prior to, or within one year after, any "change in control" of the Companies, Mr. Bond, Jr., within 15 days of resignation, will be paid a lump sum payment equal to the sum of his annual base salary and the average of the bonuses paid to him over the past three years. Any payments made in connection with a "change in control" of the Companies after Mr. Bond, Jr. reaches 62 years of age will be pro-rated to age 65. Messrs. Galeone, Holman and Scaldara also have employment agreements specifying minimum annual base compensation of $160,000, $157,000 and $130,000, respectively. The other terms of these agreements are similar to those of the Agreement, except that the duration is a two-year continuous period and the lump sum payment payable in the event of (i) termination other than for "cause", (ii) resignation 12 due to a significant change in the nature and scope of authorities and duties, or (iii) resignation as a result of not having been offered a new employment agreement with similar terms, 90 days prior to, or within one year after, any "change in control" of the Companies is equal to two times the sum of the applicable officer's base annual compensation and the average of such officer's bonuses for the past three years. In addition, any payments made in connection with a "change in control" of the Companies after reaching 63 years of age will be pro-rated to age 65. The Companies entered into a change in control agreement dated February 26, 1996 with Mr. Locke. The change in control agreement provides that in the event of (i) termination, other than for "cause", or (ii) resignation due to a significant change in the nature or scope of authority and duties, 90 days prior to, or within one year after, any "change in control" of the Companies, Mr. Locke, within 15 days of termination, will be paid a lump sum payment equal to two times the sum of his annual base compensation and the average of the bonuses paid to him over the past three years. In the event of voluntary resignation 90 days prior to, or within one year after, any "change in control" of the Companies, Mr. Locke, within 15 days of resignation, will be paid a lump sum payment equal to the sum of his annual base salary and the average of the bonuses paid to him over the past three years. Any payments made in connection with a "change in control" after Mr. Locke reaches 63 years of age will be pro-rated to age 65. The Company's 1987 Stock Option Plan, as amended, 1990 Stock Option Plan, 1997 Stock Option Plan, 401(k) Plan, and the Bank's Deferred Compensation Plan, all provide that in the event of a "change in control" (as defined by each of the plans), all amounts not fully vested become immediately 100% vested. STOCKHOLDER RETURN PERFORMANCE GRAPH The following graph compares the cumulative total return on the Company's Common Stock during the five years ended December 31, 1997 with that of a broad market index (Nasdaq, U.S. Companies) and an industry peer group index (all publicly traded banks in Maryland, Pennsylvania, Virginia and the District of Columbia with total assets of less than $1 billion). The graph assumes $100 was invested on December 31, 1992 in the Company's Common Stock and in each of the indices and assumes reinvestment of dividends. Five Year Cumulative Total Return [GRAPH APPEARS HERE--SEE PLOT POINTS BELOW] Index Data: 1992 1993 1994 1995 1996 1997 ---- ------ ------ ------ ------ ------ Columbia Bancorp 100 135.63 200.11 259.65 326.95 532.91 Nasdaq, US Companies 100 114.80 112.21 158.70 195.19 239.53 Peer Group 100 133.03 146.21 184.48 220.59 370.51 13 INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors of the Company has selected KPMG Peat Marwick LLP, independent public accountants, to audit the Company's financial statements for the year ending December 31, 1998. KPMG Peat Marwick LLP has performed the annual audits of the Company since its inception. Representatives of KPMG Peat Marwick LLP plan to attend the Annual Meeting and will be available to answer appropriate questions. The representatives will have the opportunity to make a statement at the meeting if they so desire. OTHER MATTERS The Board of Directors of the Company knows of no matters to be presented for action at the Annual Meeting other than those mentioned above; however, if any other matters properly come before the Annual Meeting, it is intended that the persons named in the accompanying proxy will vote on such other matters in accordance with their judgment of the best interests of the Company. Other than the election of directors, each matter to be submitted to the stockholders requires the affirmative vote of a majority of all the shares voted at the meeting or a majority of all the shares outstanding and entitled to be voted. Abstentions and broker non-votes are treated as shares not voted. STOCKHOLDER PROPOSALS All stockholder proposals intended to be presented at the 1999 Annual Meeting of Stockholders must be received by the Company not later than November 26, 1998 for inclusion in the Company's proxy statement and proxy relating to that meeting. REPORT ON FORM 10-K The Annual Report on Form 10-K and applicable exhibits are available to stockholders free of charge upon written request. Requests should be sent to Columbia Bancorp, 10480 Little Patuxent Parkway, Columbia, Maryland 21044, Attention: John A. Scaldara, Jr. (E-mail: jscaldara@columbank.com) By Order of the Board of Directors /s/ John A. Scaldara, Jr. _________________________ John A. Scaldara, Jr. Corporate Secretary March 27, 1998 14 REVOCABLE PROXY COLUMBIA BANCORP [ ]PLEASE MARK VOTES AS IN THIS EXAMPLE THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned stockholder of Columbia Bancorp hereby appoints John M. Bond, Jr. and Robert N. Smelkinson, or either of them, the lawful attorneys and proxies of the undersigned, with several powers of substitution, to vote all shares of Common Stock of Columbia Bancorp which the undersigned is entitled to vote at the Annual Meeting of Stockholders to be held April 27, 1998, and at any and all adjournments and postponements thereof. Any and all proxies heretofore given are hereby revoked. Please be sure to sign and date this Proxy in the box below. For Withhold For All Except 1. Election of Directors [ ] [ ] [ ] H. Cole, W. Floyd, H. Langenthal, R. McCready, J. Moxley INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK "FOR ALL EXCEPT" AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW. - -------------------------------------------------------------------------------- 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND IN THE BEST JUDGMENT OF THE PROXY HOLDERS ON ALL OTHER MATTERS. Please sign exactly as your name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. 15 -----END PRIVACY-ENHANCED MESSAGE-----