<PAGE>
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, 1993
[ ] Transaction Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from_________ to __________
Commission File Number 1-9821
BALTIMORE BANCORP
(Exact name of registrant as specified in its charter)
Maryland 52-1351635
________________________________ ____________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 East Baltimore Street
Baltimore, Maryland 21202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 244-3360
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $5.00 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
6-3/4% Convertible Subordinated Debentures Due April 1, 2011
(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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if the 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. [ ]
Based upon the closing price of the Registrant's Common Stock as of
March 23, 1994, the aggregate market value of the voting stock held by non-
affiliates* of the registrant was $317,224,946.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:
Class: Common Stock, par value $5.00 per share
Issued and Outstanding at March 23, 1994: 16,683,931.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Stockholders for the year ended
December 31, 1993 are incorporated by reference in Parts I, II, and IV.
Portions of the definitive Proxy Statement for the annual meeting of
stockholders to be held on April 27, 1994 are incorporated by reference in
Part III.
*Excludes shares held by directors and executive officers.
<PAGE>
Form 10-K Cross Reference Index
<TABLE>
<CAPTION>
Stockholders
Annual
10-K Report
Page Page (A)
<S> <C> <C>
PART I.
Item 1. Business:
General Discussion . . . . . . . . . . . . . . . . . . . . . 1
Statistical Information Required by Guide 3:
Distribution of Assets, Liabilities,
and Stockholders' Equity; Interest
Rates and Interest Differential:
Average Balance Sheets . . . . . . . . . . . . . . . . 52
Net Interest Earnings. . . . . . . . . . . . . . . . . 52
Rate/Volume Analysis . . . . . . . . . . . . . . . . . 10
Investment Portfolio:
Amortized Cost of Investments. . . . . . . . . . . . . 4
Maturities of Investments. . . . . . . . . . . . . . . 14
Weighted Average Yields. . . . . . . . . . . . . . . . 14
Loan Portfolio:
Types of Loans . . . . . . . . . . . . . . . . . . . . 5
Maturities and Sensitivity to Changes
in Interest Rates. . . . . . . . . . . . . . . . . . 6
Nonaccrual, Delinquent, and Restructured Loans . . . . 17
Potential Problem Loans. . . . . . . . . . . . . . . . 20
Summary of Loan Loss Experience:
Analysis of the Allowance for
Possible Loan Losses . . . . . . . . . . . . . . . . 19
Distributions of Loans by Type . . . . . . . . . . . . 6
Allocation of the Allowance for
Possible Loan Losses . . . . . . . . . . . . . . . . 20
Deposits:
Average Balances . . . . . . . . . . . . . . . . . . . 52
Time Deposits Over $100,000. . . . . . . . . . . . . . 7
Return on Equity and Assets. . . . . . . . . . . . . . . . 55
Short-Term Borrowings. . . . . . . . . . . . . . . . . . . 7
Competition . . . . . . . . . . . . . . . . . . . . . . . . . 7
Regulation and Supervision. . . . . . . . . . . . . . . . . . 8
Capital Requirements . . . . . . . . . . . . . . . . . . . 10
Monetary Policy. . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 11 46
Item 4. Submission of Matters to a Vote of Security Holders. . . . 11
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 12
</TABLE>
<PAGE>
Form 10-K Cross Reference Index, Continued
<TABLE>
<CAPTION>
Stockholders
Annual
10-K Report
Page Page (A)
PART II.
<S> <C> <C>
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . . 14
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . 14 55
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 14 9-25
Item 8. Financial Statements and Supplementary Data. . . . . . . . 15 26-54
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . . 15
PART III.(B)
Item 10. Directors and Executive Officers of
the Registrant . . . . . . . . . . . . . . . . . . . . . . 15
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 15
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . 15
Item 13. Certain Relationships and Related Transactions . . . . . . 16
PART IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 16
(A) Incorporated by reference to Registrant's Annual Report to
Stockholders included herein.
(B) Incorporated by reference to Registrant's definitive proxy
statement for the annual meeting of stockholders to be held on
April 27, 1994, which proxy statement will be filed not later
than 120 days after the end of the fiscal year covered by this
Annual Report on Form 10-K.
</TABLE>
<PAGE>
BALTIMORE BANCORP 1993 ANNUAL REPORT ON FORM 10-K
PART I.
Item 1. BUSINESS
Baltimore Bancorp (the "Company" or "Bancorp") is a
Maryland corporation incorporated in 1984 and registered as a
bank holding company under the Bank Holding Company Act of 1956.
At December 31, 1993, Bancorp had consolidated assets of $2.232
billion, consolidated net loans and leases receivable of $1.270
billion, and consolidated deposits of $1.962 billion. Its
principal subsidiary is The Bank of Baltimore ("Bank"). At
December 31, 1993, Bancorp was the third largest bank holding
company headquartered in Maryland in terms of assets and
deposits. The Bank is a commercial bank chartered under the laws
of the State of Maryland, and is the surviving institution in the
1984 merger with The Savings Bank of Baltimore ("Savings Bank").
The Savings Bank operated as a Maryland-chartered mutual savings
bank, commencing operations in 1818. Bancorp and the Bank were
formed to facilitate the reorganization of the Savings Bank into
a holding company structure and to give it the ability to access
the capital markets.
The Bank is engaged in a general commercial and retail
banking business serving individuals, businesses, and
governmental units throughout the Mid-Atlantic region from
southern Pennsylvania to northern Virginia with primary emphasis
in Baltimore and in the Baltimore and Washington, D.C. suburbs.
The Bank operates 42 banking offices throughout 9 counties
in Maryland and in Baltimore City as follows: 16 in Baltimore
County, 13 in Montgomery County, 4 in Baltimore City, 3 in Anne
Arundel County, and 1 in each of Carroll, Charles, Harford,
Howard, Prince Georges and St. Mary's Counties.
Investment Activities
Bancorp's available-for-sale securities portfolio at
December 31, 1993 had a fair value of $542.2 million. Of the
total portfolio, 84% consists of mortgage-backed securities with
the balance primarily in U.S. Treasury and other government
agency obligations and other asset-backed securities.
Approximately 47% of the portfolio was represented by variable
rate securities.
Lending Activities
Bancorp, through its lending subsidiaries, provides various
credit facilities to large and small businesses and builders and
developers of commercial and residential real estate as well as
to individuals through a variety of consumer loans.
The commercial mortgage loan portfolio includes loans
secured by office buildings, shopping centers, hotels and motels,
warehouses and other industrial or business real estate as well
as land acquisition and development loans. In addition, the Bank
offers commercial demand and term loans, and asset-based loans to
finance working capital needs.
Loan programs for individuals include residential first
mortgage loans through the Bank's mortgage banking subsidiary
(Atlantic Residential Mortgage Corporation), second mortgage
loans and lines of credit, and installment loans for the purchase
of automobiles, mobile homes, pleasure boats, and home
improvements. The Bank also makes signature and passbook loans,
issues MasterCard and VISA credit cards, and establishes lines of
credit for its customers.
Baltimore Bancorp Leasing & Financial, Inc., a subsidiary
of the Bank, serves as an equipment finance and leasing company
specializing in high cost equipment transactions with major
corporations. Investments include tax and finance leases and
term loan transactions. These investments include production
equipment of various kinds, such as plant and mining equipment,
computers, office furniture and equipment, medical equipment and
corporate aircraft. Equipment is leased or financed in 34 states
throughout the country.
The Company's procedures for monitoring cash flows and the
financial condition of its borrowers depend upon the type of
loan. Construction loans call for a review of probable market
acceptance for the project planned, an appraisal of the property,
an estimate of absorption, and budget estimates based upon
anticipated revenues, cost to complete, the pace at which the
project will likely proceed, and the interest cost. Inspections
are made before each advance to determine the validity of the
request and compliance with the budget. Construction loans are
subject to routine internal reviews and periodic
updates for the senior loan review committee.
Commercial mortgages require the submission of periodic
operating reports, the frequency of which is dependent upon the
size of the loan. Actual results are compared with budgets where
appropriate, and variances must be satisfactorily explained by
project management. Annual financial statements must be
submitted by all commercial borrowers and guarantors.
Commercial mortgages for land acquisition and development
are generally made with loan to values not to exceed 60%. The
project must also be zoned and ready to begin development.
Improved commercial properties generally must have loan to values
of 80%, while commercial construction loan to values generally
must be 75% or less. Residential construction loans for land
advances are generally limited to 75% of the lower of cost or
market of the finished lots, with 80% overall finished unit
value. Unimproved land advances are generally held to a maximum
of 65%, are considered on an exception basis, and must be repaid
from a development loan and not from speculative sales.
Deposit and Other Banking Services
The Bank provides a wide variety of deposit accounts to
individual, business, and local government customers, including
checking and savings accounts, certificates of deposit, NOW
accounts, money market deposit accounts, and Keogh and
individual retirement accounts ("IRA") for retail and commercial
customers. The Bank also offers cash management services for its
business customers and private banking services, including
financial planning.
The Bank is a charter member of "Internet" and a
participating member of "CIRRUS", which operates automated
teller machine networks known as MOST and CIRRUS. This permits
customers to access their accounts at more than 30,000 electronic
terminals throughout North America. The Bank provides access to
credit card authorization services and, in certain cases, check
guarantee services for retail merchants through a point-of-sale
terminal network involving 880 terminals in Maryland and 30 other
states. Baltimore Bancorp Investment Services Inc., a subsidiary
of the Bank, offers discount brokerage services and full service
brokerage for government bonds, municipal bonds and mutual funds.
This subsidiary also offers various types of accounts, including
individual and corporate accounts, self-directed IRAs and Keoghs.
Insurance Activities
Atlantic Independent Insurance Agency, Inc. acts as agent
for various insurance products for the Bank's consumer and
commercial customers, including credit life, health and accident,
automobile, and mortgage insurance as well as a single premium
tax-deferred annuity product and other life insurance products.
Employees
At December 31, 1993, Bancorp and its subsidiaries had
1,163 full-time equivalent employees. Management believes that
relations with its employees are good.
Statistical Information
The following tables present statistical information on
various aspects of the operations of Bancorp and its
subsidiaries on a consolidated basis. Certain additional
statistical information is provided in the Financial Review in
Item 7. The tables should be read in conjunction with the
consolidated financial statements appearing in Item 8. Average
balances presented for 1990 through 1993 are based on average
daily balances. Average balances for 1989 are based upon average
month-end balances, which, in the opinion of management, is
generally representative of average daily balances.
Available-For-Sale and Investment Securities
At December 31, 1993, Bancorp maintained a portfolio of
available-for-sale securities with a fair value of $542.2 million.
The Company did not have any investment securities considered to be
held to maturity at that date. Additionally, the Company had no issues
which exceeded 10% of stockholders' equity at December 31, 1993.
<PAGE>
The following table sets forth the aggregate amortized cost
of the available-for-sale and investment securities portfolios
owned by Bancorp at the end of each of the last five years:
<TABLE>
<CAPTION>
December 31
(Thousands of dollars) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies
and corporations $ 77,065 $214,879 $109,752 $129,178 $ 62,463
Mortgage-backed
securities 452,564 367,428 597,016 672,830 778,749
Obligations of states and
political subdivisions 1,125 1,995 7,598 11,084
Foreign government debt 1,000
Floating rate notes 4,974 34,891 36,712 36,841
Corporate bonds 9 9 35,522 11,267
Corporate stocks 9,716 23,292 22,228
SBA pool 10,545
Other asset-backed securities 10,512
Other domestic securities 177 2,698 3,023
Total securities $541,141 $598,960 $753,556 $907,830 $925,655
</TABLE>
Loan Portfolio
Bancorp's total loans outstanding represented 61% of its total
consolidated assets at December 31, 1993. At December 31, 1993,
Bancorp had no concentrations of loans in any one industry
exceeding 10% of its total loan portfolio and no foreign loans.
The Company also has loans generated by the Bank's mortgage
banking subsidiary, which were classified as loans held for sale
in the Consolidated Statement of Financial Condition at December
31, 1993. Information concerning the distribution of Bancorp's
loan portfolio is contained in the following table:
<PAGE>
Consolidated Loan Balances by Type and Percentage Distribution
<TABLE>
<CAPTION>
December 31
(Thousands of dollars) 1993 % 1992 % 1991 % 1990 % 1989 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Construction $ 94,257 7.0 $ 152,611 9.6 $ 273,023 13.3 $ 346,712 14.7 $ 307,834 12.8
First mortgage:
Residential 52,696 3.9 69,093 4.4 82,185 4.0 201,604 8.5 217,128 9.0
Commercial 419,500 31.0 441,839 27.8 448,907 21.9 487,536 20.6 470,691 19.6
Second mortgage 301,799 22.3 355,930 22.4 602,066 29.3 383,951 16.2 300,289 12.5
Consumer 205,406 15.1 290,423 18.3 441,242 21.5 587,703 24.8 732,441 30.5
Credit card (1) 144,000 10.6 132,993 8.4 94,001 4.0 56,735 2.4
Commercial 64,207 4.7 65,135 4.1 100,280 4.9 133,328 5.6 164,384 6.8
Lease financing 73,673 5.4 79,547 5.0 103,855 5.1 132,289 5.6 150,966 6.4
Total loans 1,355,538 100.0 1,587,571 100.0 2,051,558 100.0 2,367,124 100.0 2,400,468 100.0
Less:
Unearned income 47,093 66,121 102,325 141,081 182,317
Total loans
(net of
unearned
income) $1,308,445 $1,521,450 $1,949,233 $2,226,043 $2,218,151
<FN>
(1) Excludes credit cards of $120,189 classified as loans held for sale at
December 31, 1991.
</TABLE>
The following table presents information required to be
disclosed regarding contractual maturities and interest rate
sensitivities of certain of Bancorp's loans. The data does not
include information concerning first and second mortgage loans
and consumer loans. Bancorp's experience has been that certain
loans will be renewed, rescheduled, or repaid prior to the stated
maturity. Accordingly, the foregoing presentation should not be
regarded as a forecast of future cash collections.
<TABLE>
<CAPTION>
Maturing
After One Year
Through 5 Years After 5 Years
In One Fixed Variable Fixed Variable
Year or Interest Interest Interest Interest
(Thousands of dollars) Less (1) Rates Rates (2) Rates Rates (2) Total
<S> <C> <C> <C> <C> <C> <C>
Real estate-construction $ 54,743 $ 7,192 $ 32,322 $ 94,257
Commercial 45,394 939 15,791 $ 2,083 64,207
Lease financing 16,771 20,862 19,009 $ 7,672 6,471 70,785(3)
<FN>
(1) Includes demand loans, loans having no stated schedule of repayment
and no stated maturity.
(2) The variable interest rate loans fluctuate according to various
indices, including rates on Treasury Securities of comparable
maturities, prime lending rates, and LIBOR.
(3) Excludes $2,888 of unguaranteed lease residual values.
</TABLE>
Of the $117 million of loans which have scheduled maturities
during 1994, $49 million consist of variable-rate construction
loans, $39 million consist of variable-rate commercial loans, and
$15 million consist of variable-rate leases. While these loans
are scheduled to mature in 1994, many are expected to be extended,
renewed or replaced by similar variable-rate loans in accordance
with the Company's business plan. Therefore, because of the
variable-rate nature of these assets, the expected impact on
earnings from these maturities is anticipated to be immaterial.
Deposits
The Bank has been able to maintain a competitive position
in attracting and retaining deposits. There are no foreign
deposits. At December 31, 1993, certificates of deposit and
other time deposits over $100,000 aggregated $67.807 million,
including $12.418 million in brokered deposits. The maturity
distribution of these deposits at December 31, 1993 is as
follows: $15.732 million due in three months or less, $5.701
million due over three months through six months, $23.866 million
due over six months through twelve months, and $22.508 million
due over twelve months.
Short-Term Borrowings
The following table presents additional information
regarding short-term borrowings by Bancorp. Short-term
borrowings consist primarily of securities sold under agreements
to repurchase with maturities ranging from one day to one month.
<TABLE>
<CAPTION>
Year Ended December 31
(Thousands of dollars) 1993 1992 1991
<S> <C> <C> <C>
Securities sold under agreements to
repurchase and other short-term
borrowings:
End of period outstanding $ 60,980 $13,804 $ 48,277
Highest month-end balance 83,385 76,856 285,653
Average balance 27,999 43,414 173,024
Weighted average rate of interest:
At end of period 3.30% 3.51% 4.71%
During period 2.60% 4.04% 6.51%
</TABLE>
Competition
Bancorp and its subsidiaries are subject to substantial
competition in all aspects of the business which they conduct.
Each of the other major commercial banks based in Maryland
conducts business in Bancorp's market area. In recent years,
larger out of state bank holding companies have acquired or
established banks in Maryland and this trend is expected to
continue. In addition, commercial banking institutions based in
Washington, D.C., Virginia, Pennsylvania, New York, North
Carolina and other locations outside of Maryland compete for
loans and other banking business in Bancorp's market area.
Bancorp also encounters competition from savings banks, savings
and loan associations, insurance companies, money market mutual
funds, small loan companies, credit unions, and other financial
institutions.
Regulation and Supervision
The Bank is a Maryland chartered commercial bank whose
deposits are insured by the Bank Insurance Fund (BIF) of the
Federal Deposit Insurance Corporation ("FDIC"), except for a
small portion of deposits which are insured by the Savings
Association Insurance Fund (SAIF) of the FDIC. The Bank is a
nonmember bank of the Federal Reserve System. The Bank is
subject to regulation principally by the Maryland Bank
Commissioner (the "Commissioner") and the FDIC. Various
provisions of laws and regulations administered by the Board of
Governors of the Federal Reserve System are applicable to
federally insured depository institutions such as the Bank.
Deposits, reserves, investments, loans, consumer loan compliance,
branch office openings, securities issuances, payments of
dividends, changes in control, mergers, consolidations,
substantial asset sales or liability assumptions, electronic
funds transfers, management practices, and other aspects of
operations are subject to comprehensive regulation by Federal and
state regulatory authorities.
The Bank is also subject to the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA").
Although the primary emphasis of FIRREA is on the restructuring
of the savings and loan industry, certain provisions affect
FDIC-insured commercial banks. A principal effect of FIRREA was
the restructuring of the federal deposit insurance system such
that all deposits will be insured either by the BIF for
commercial banks or the SAIF for savings institutions. Although
both the BIF and the SAIF funds will be administered by and are
part of the FDIC, these two funds are not commingled. FIRREA
also permits mergers and acquisitions between banks and savings
institutions. Under prior law, such transactions were generally
not permitted except in emergency situations.
Under the FDIC statutes and regulations, insurance of
accounts may be terminated by the FDIC, after an extensive notice
and hearing procedure, upon a finding that the insured
institution has engaged in unsafe or unsound practices, or is in
an unsafe or unsound condition to continue operations, or has
violated applicable laws, regulations, rules, orders, or
conditions imposed by the FDIC. Management of the Bank does not
know of any practice, condition, or violation that might lead to
termination of FDIC insurance.
Bancorp is registered as a bank holding company, and is
subject to supervision and examination by the Federal Reserve
Board under the Bank Holding Company Act of 1956, as amended.
Bancorp must receive approval from the Federal Reserve Board
before acquiring or establishing companies that are either banks
or engage in activities that the Federal Reserve Board has
determined to be closely related to banking. Apart from these
closely related activities, bank holding companies are not
generally permitted to engage in other business activities.
Among other things, bank holding companies must give prior
notice of certain securities redemptions and are prohibited from
engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property, or servicing
arrangement. The Federal Reserve Board also regulates changes in
control of bank holding companies and various other activities
which it may determine to involve threats to the safety and
soundness of subsidiary banks.
Maryland bank holding companies may generally participate in
reciprocal interstate affiliations with banks and bank holding
companies in the southeastern United States, which includes 14
states and the District of Columbia. Similar legislation is in
place in most of these jurisdictions.
See Note S - Regulatory Matters in the Notes to Consolidated
Financial Statements included in Item 8 hereof regarding a
written agreement (the "Agreement") effective July 31, 1992,
which Baltimore Bancorp entered into with the Federal Reserve
Bank of Richmond ("FRB") and the Commissioner as well as a
consent by the Bank to a Cease and Desist Order (the "Order")
issued by the FDIC and the Commissioner. Such information is
incorporated herein by reference. The Company has been informed
that the FDIC and the Commissioner, following their recent joint
annual examination, expect to terminate the Order. In addition,
the FRB and the Commissioner expect to terminate the Agreement.
The Company expects to receive written confirmation of the
terminations when effective.
Capital Requirements
The Federal Reserve Board and the FDIC require the Company
and the Bank, respectively, to maintain specific minimum amounts
of capital and additional amounts based upon the amount and
nature of their assets and commitments currently at risk. These
risk-based capital rules specify five categories of asset or
commitment risk, with each category being assigned a weight of 0%
through 100% depending upon the risk involved. Each asset or
commitment of the Company is categorized and weighted
appropriately. The capital of the Company is then compared to
the aggregate value of such risk-weighted assets or commitments
to determine the adequacy of capital levels.
In addition to the risk-based capital requirements, the
Federal Reserve Board and the FDIC have adopted regulations which
define a leverage ratio. The leverage ratio is a measure of
tangible capital compared to average tangible assets, regardless
of their risk weighting. Reference is made to the section
entitled "Capital and Dividends" on pages 21 and 22 of the
Company's Annual Report to Stockholders including Table 11 and to
Note S of the Notes to the Company's Consolidated Financial
Statements in Item 8 hereof.
Monetary Policy
The Bank is affected by monetary policies of regulatory
authorities, 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 the engaging in open
market transactions in United States government securities,
changing the discount rate on bank borrowings, and changing
reserve requirements against bank 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 monetary policies on the earnings of the Bank or
Bancorp cannot be predicted.
Item 2. PROPERTIES
Bancorp, through its principal subsidiary the Bank, owns and
leases various properties in the conduct of its business. The
Company owns three branch locations and a six-story office center
at 7-9 East Baltimore Street adjacent to its main branch office
building in Baltimore, Maryland. The Company leases space in the
Bank of Baltimore Building at 120 East Baltimore Street which
houses its executive offices and a banking office. The Company
also leases its operations center at 205 West Centre Street in
Baltimore, Maryland plus 39 branch office locations throughout
Maryland. The Bank of Baltimore Building lease has an initial
term of 10 years, expires in 1999, and contains renewal options.
The main branch office lease has an initial term of 20 years and
expires in 2008. The operations center lease expires in 2006.
Both the main branch office and operations center leases contain
renewal options.
Item 3. LEGAL PROCEEDINGS
See Note P - Litigation of the Notes to Consolidated
Financial Statements in Item 8 hereof, which is incorporated
herein by reference.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote of security
holders through a solicitation of proxies or otherwise during the
fourth quarter of the fiscal year ended December 31, 1993.<PAGE>
Executive Officers of the Registrant
The following table lists the names and ages of all
executive officers of Bancorp as of December 31, 1993 and
all persons chosen to become executive officers from
that date. All executive officers are elected to serve
for a one-year period. There are no arrangements or
understandings between such persons and any other persons
pursuant to which he was elected as an officer.
<TABLE>
<CAPTION>
Name and Age Positions with Bancorp Positions with Bank
<S> <C> <C>
Edwin F. Hale, Sr. Chairman of the Board and Chairman of the Board
(Age 47) Chief Executive Officer
Alan M. Leberknight President President and
(Age 52) Chief Executive Officer
Joseph A. Cicero Executive Vice President Executive Vice President
(Age 49) and Chief Financial Officer and Chief Financial Officer
E. Wayne Edwards Executive Vice President Executive Vice President
(Age 55)
Thomas M. Scott, III Executive Vice President Executive Vice President
(Age 63)
Larry D. Unger Executive Vice President Executive Vice President
(Age 45)
John P. Hollerbach Senior Vice President Senior Vice President
(Age 41) and Controller and Controller
Keith W. Stackhouse Senior Vice President Senior Vice President
(Age 55)
</TABLE>
There is no family relationship between any director,
executive officer, or person nominated or chosen by Bancorp to
become a director or executive officer.
Mr. Hale was elected Chairman of the Board of Bancorp and
the Bank in September 1991 and Chief Executive Officer of Bancorp
in September 1992. Mr. Hale is also the Chairman of the Board
and principal stockholder of Hale Intermodal Transport Company, a
Baltimore-based transportation company. Prior to becoming
Chairman of the Board of Bancorp and the Bank, such company or
its predecessors were Mr. Hale's principal occupation since 1975.
Mr. Leberknight joined the Company as President of Bancorp
and the Bank in November 1991 and since September 1992 has also
served as Chief Executive Officer of the Bank. Prior to joining
the Company, Mr. Leberknight was an Executive Vice President of
Signet Bank of Maryland. Mr. Leberknight had been with Signet
Bank of Maryland, or its predecessor, Union Trust Company of
Maryland, since 1981.
Mr. Cicero joined the Company as Executive Vice President
and Chief Financial Officer of Bancorp and the Bank in January
1992. From 1985 until joining the Company, Mr. Cicero was Senior
Executive Vice President and Chief Financial Officer of Perpetual
Savings Bank, FSB, Vienna, Virginia. Prior thereto, Mr. Cicero
had served as Senior Vice President and Chief Financial Officer
of Equitable Bank, N.A., Baltimore, Maryland.
Mr. Edwards joined the Bank in March 1992 as Senior Vice
President and was appointed Executive Vice President of Bancorp
and the Bank in February 1993. From 1985 until joining the Bank,
Mr. Edwards was Senior Vice President of Perpetual Savings Bank,
FSB, Vienna, Virginia. Mr. Edwards has been in banking since
1962.
<PAGE>
Mr. Scott joined the Bank in June 1991 and was appointed
Executive Vice President of Bancorp and the Bank in January 1992.
Previously, Mr. Scott had been an Executive Vice President of
Signet Bank of Maryland. Mr. Scott was with Signet Bank of
Maryland, or its predecessor Union Trust Company of Maryland,
from 1958 to 1991.
Mr. Unger joined the Company in 1984 as President of its
lease/finance subsidiary. He was appointed Executive Vice
President of the Bank in 1987 and Executive Vice President of
Bancorp in 1992. Previously, Mr. Unger had been Executive Vice
President of Maryland National Leasing Corporation, and has been
involved in the financial services industry since 1969.
Mr. Hollerbach joined the Company as special assistant to
the Chief Executive Officer in September 1991, was appointed
Senior Vice President and Controller in 1992 and Controller of
Bancorp in 1993. Mr. Hollerbach previously held management
positions with Citicorp and Maryland National Bank.
Mr. Stackhouse joined the Bank as President of Atlantic
Residential Mortgage Corporation in August 1989 and was appointed
Senior Vice President of the Bank in September 1992. Mr.
Stackhouse has 29 years of experience in the banking or mortgage
banking industry including 13 years with the Federal Home Loan
Mortgage Corporation where he served as Regional Vice President
for both the Western and Northeast Regions.
PART II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information required by this item is incorporated herein by
reference to the information appearing under the captions
"Dividends Declared" and "Stock Prices" in the table of
Consolidated Quarterly Results of Operations, Market Prices and
Dividends (Unaudited) on page 54 and under the captions "Stock
Listing" and "Number of Stockholders" on the inside back cover,
of the Company's Annual Report to Stockholders for the year ended
December 31, 1993. As to restrictions on the payment of
dividends, see the first three paragraphs under Note S of the
Notes to Consolidated Financial Statements on page 46 of such
Annual Report and Note K of the Notes to Consolidated Financial
Statements on page 40 of such Annual Report, which information is
also incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
Information required by this item is incorporated herein by
reference to the table of Selected Financial Data appearing on
page 55 of the Company's Annual Report to Stockholders for the
year ended December 31, 1993.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information required by this item is incorporated herein by
reference to the information appearing under the caption
"Financial Review" on pages 9 to 25 of the Company's Annual
Report to Stockholders for the year ended December 31, 1993.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item and the auditors' report
thereon are incorporated herein by reference to pages 26 to 54 of
the Company's Annual Report to Stockholders for the year ended
December 31, 1993.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of Bancorp is omitted
from the report as the Company will file a definitive proxy
statement not later than 120 days after the end of the fiscal
year covered by this Report, and the information to be included
therein is incorporated herein by reference. The information
required by this item with respect to Executive Officers of the
Registrant is included in Part I of this Report.
Item 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers and
directors is omitted from this Report as the Company will file a
definitive proxy statement not later than 120 days after the end
of the fiscal year covered by this Report, and the information
included therein (excluding the Compensation Committee Report on
Executive Compensation and the Comparative Company Performance)
is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by this item is omitted from this
Report as the Company will file a definitive proxy statement not
later than 120 days after the end of the fiscal year covered by
this Report, and the information included therein is incorporated
herein by reference.
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is omitted from this
Report as the Company will file a definitive proxy statement not
later than 120 days after the end of the fiscal year covered by
this Report, and the information included therein is incorporated
herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) The report of independent auditors and the following
consolidated financial statements of Bancorp and
subsidiaries are incorporated herein by reference to the
1993 Annual Report to Stockholders (page number
references are to the 1993 Annual Report to Stockholders
in Item 8).
Page
Report of Independent Auditors 26
Consolidated Statements of Financial Condition - December
31, 1993 and 1992 27
Consolidated Statements of Income - Years ended December
31, 1993, 1992 and 1991 28
Consolidated Statements of Changes in Stockholders' Equity
- Years ended December 31, 1993, 1992, and 1991 29
Consolidated Statements of Cash Flows - Years ended
December 31, 1993, 1992, and 1991 30-31
Notes to Consolidated Financial Statements 32-51
(a) (2) See schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
which are not required under the related instructions or are
inapplicable and therefore have been omitted.
(a) (3) Exhibits
The following is an index of the exhibits included in this
report:
3.1(i) Articles of Incorporation, as amended of
Baltimore Bancorp (incorporated by reference
from Quarterly Report on Form 10-Q for the
quarter ended June 30, 1988).
3.1(ii) By-laws of Baltimore Bancorp, as amended and
restated (incorporated by reference
from Current Report on Form 8-K dated February 18,
1994).
4.1 Indenture dated as of April 1, 1986 between
Baltimore Bancorp and Manufacturers
Hanover Trust Company, as Trustee (incorporated by
reference from Registration Statement on Form S-1;
file no. 33-4193).
4.2 First Supplemental Indenture dated as of December
15, 1987 between Baltimore Bancorp and
Manufacturers Hanover Trust Company, as Trustee
(incorporated by reference from Registration
Statement on Form S-3; file no. 33-18873).
10.1 1984 Stock Option Plan of Baltimore Bancorp
(incorporated by reference from Registration
Statement on Form S-1; file no. 2-92922).
10.2 Unfunded Deferred Compensation Plan for Non-
Employee Director of Baltimore Bancorp (incorporated
by reference from Registration Statement on Form S-1;
file no. 2-92922).
10.3 Incentive Compensation Plan of The Bank of
Baltimore (incorporated by reference from
Registration Statement on Form S-1; file no. 33-
4193).
10.4 Resolutions of the Board of Directors of Baltimore
Bancorp adopted March 12, 1986 relating to
employment matters (incorporated by reference from
Registration Statement on Form S-1; file no. 33-
4193).
10.5 Baltimore Bancorp 1988 Stock Incentive Plan
(included as an exhibit to the Proxy Statement for
the 1989 Annual Meeting of Stockholders).
10.6 Agreement of Lease dated July 2, 1987 between
Calvert-Baltimore Associates Limited Partnership
and The Bank of Baltimore (incorporated by
reference from 1987 Annual Report on Form 10-K).
10.7 Agreements of Sale and Purchase dated December 5,
1989 between Bethesda-BOB Limited Partnership,
Ruskaup Motors Corporation Simplified Employee
Pension Plan and The Bank of Baltimore
(incorporated by reference from 1989 Annual Report
on Form 10-K).
10.8 Lease Agreements dated December 5, 1989 Between
Bethesda-BOB Limited Partnership and The Bank of
Baltimore (incorporated by reference from 1989 Annual
Report on Form 10-K).
10.9 Baltimore Bancorp 1992 Stock Option Plan (included
as an exhibit to the Proxy Statement for the 1993
Annual Meeting of Stockholders).
10.10 Baltimore Bancorp Dividend Reinvestment and
Stock Purchase Plan (incorporated by reference
to the Prospectus dated September 17, 1992
included in Registration Statement on Form S-3;
file no. 33-51448)
10.11 Baltimore Bancorp Dividend Reinvestment and
Stock Purchase Plan (incorporated by reference
to the Prospectus dated May 28, 1993 included in
Registration Statement on Form S-3; file no. 33-
60370).
11 Statement Re: Computation of per share earnings
(filed herewith).
13 Annual Report to Stockholders for the year ended
December 31, 1993 (filed herewith).
21 Subsidiaries of Baltimore Bancorp (filed herewith).
23 Consent of Independent Auditors (filed herewith).
(b) No reports on Form 8-K were filed by Baltimore Bancorp
during the fourth quarter of 1993.
(c) Exhibits to this Form 10-K are attached.
(d) Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BALTIMORE BANCORP
(Registrant)
March 29, 1994 /s/ Joseph A. Cicero
__________________________
Joseph A. Cicero
Executive Vice President and
Chief Financial Officer
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacity and on the dates
indicated.
Principal Executive Officer:
March 16, 1994 /s/ Edwin F. Hale, Sr.
__________________________
Edwin F. Hale, Sr.
Chairman of the Board and
Chief Executive Officer
Principal Financial and
Accounting Officer:
March 16, 1994 /s/ Joseph A. Cicero
__________________________
Joseph A. Cicero
Executive Vice President and
Chief Financial Officer
A Majority of the Board of
Directors:
March 16, 1994 /s/ Barry B. Bondroff
__________________________
Barry B. Bondroff, Director
March 16, 1994 /s/ Conrad H. C. Everhard
__________________________
Conrad H. C. Everhard,
Director
March 16, 1994 /s/ Bruce H. Hoffman
__________________________
Bruce H. Hoffman, Director
March 16, 1994 /s/ Melvin S. Kabik
__________________________
Melvin S. Kabik, Director
March 16, 1994 /s/ R. Andrew Larkin, Jr.
__________________________
R. Andrew Larkin, Jr.,
Director
March 16, 1994 /s/ Alan M. Leberknight
__________________________
Alan M. Leberknight,
Director
March 16, 1994 /s/ James P. O'Conor
__________________________
James P. O'Conor, Director
March 16, 1994 /s/ Robert A. Pascal
__________________________
Robert A. Pascal, Director
March 16, 1994 /s/ Dennis F. Rasmussen
__________________________
Dennis F. Rasmussen,
Director
March 16, 1994 /s/ G. Gregory Russell
__________________________
G. Gregory Russell, Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
YEAR ENDED DECEMBER 31, 1993
BALTIMORE BANCORP
BALTIMORE, MARYLAND
Exhibit Sequential
Number Number
11 Statement Re: Computation of per share earnings 22
13 Annual Report to Stockholders for the year ended
December 31, 1993
21 Subsidiaries of Baltimore Bancorp 23-24
23 Consent of Independent Auditors 25
<PAGE>
BALTIMORE BANCORP
Exhibit 11 - Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991
<S> <C> <C> <C>
PRIMARY:
Average shares outstanding 15,529,154 12,795,931 12,749,570
Net effect of the assumed exercise of
stock options based on treasury
stock method (1)(2) 184,403 7,996
Total 15,713,557 12,803,927 12,749,570
Income (loss) before extraordinary item $10,270,000 $14,454,000 $(126,702,000)
Extraordinary item, net of taxes 56,000 213,000
Net income (loss) $10,270,000 $14,510,000 $(126,489,000)
Per share amounts:
Income (loss) before extraordinary item $ .66 $ 1.13 $ (9.94)
Extraordinary item, net of taxes .02
Earnings (loss) per share $ .66 $ 1.13 $ (9.92)
FULLY DILUTED:
Average shares outstanding 15,529,154 12,795,931 12,749,570
Net effect of the assumed exercise
of stock options - based on
treasury stock method (3) 380,844 8,158
Assumed conversion of Debentures (4) 200,115 200,115 204,033
Total 16,110,113 13,004,204 12,953,603
Income (loss) before extraordinary
item $10,270,000 $14,454,000 $(126,702,000)
Interest on Debentures, net of
income tax effect (4) 219,000 201,000 221,000
10,489,000 14,655,000 (126,481,000)
Extraordinary item, net of taxes 56,000 213,000
Net income (loss) $10,489,000 $14,711,000 $(126,268,000)
Per share amounts:
Income (loss) before extraordinary item $ .66 $ 1.13 $ (9.94)
Extraordinary item, net of taxes .02
Earnings (loss) per share $ .66 $ 1.13 $ (9.92)
<FN>
(1) Using average market price.
(2) Assumed exercise of stock options in 1991 is anti-dilutive.
(3) Using the higher of the average market price or the ending price.
(4) The Company's 6.75% Convertible Subordinated Debentures are included in the
calculation of fully diluted earnings per share. The 10.875% Subordinated
Capital Notes are not common stock equivalents for purposes of computing
earnings per share.
</TABLE>
<PAGE>
Exhibit 21 - Subsidiaries of Baltimore Bancorp
The following list sets forth the name of the Company and each
of its subsidiaries, the states or other jurisdictions under
which they are organized, and the percentage ownership of the
voting securities of each corporation by its immediate parent.
<TABLE>
<CAPTION>
NAME OF CORPORATION AND STATE PERCENT
UNDER WHICH ORGANIZED OWNED(1)
<S> <C>
Baltimore Bancorp (MD) ---
The Bank of Baltimore (MD) 100%
Atlantic Independent Insurance Agency, Inc. (MD) 100
Atlantic Residential Mortgage Corporation (MD) 100
Baltimore Bancorp Investment Services, Inc. (MD) 100
Baltimore Bancorp Leasing & Financial, Inc. (MD) 100
BBCMD Corporation (DE) 100
BOBD Corporation (DE) 100
BOB Title Holdings, Inc. (MD) 100
BOB Title I, Inc. (MD) 100
BOB Title II, Inc. (MD) 100
BOB Title III, Inc. (MD) 100
BOB Title IV, Inc. (MD) 100
BOB Title V, Inc. (MD) 100
BOB Title VI, Inc. (MD) 100
BOB Title VII, Inc. (MD) 100
BOB Title VIII, Inc. (MD) 100
BOB Title IX, Inc. (MD) 100
BOB Title X, Inc. (MD) 100
BOB Title XI, Inc. (MD) 100
BOB Title XII, Inc. (MD) 100
BOB Title XIII, Inc. (MD) 100
BOB Title XIV, Inc. (MD) 100
BOB Title XV, Inc. (MD) 100
BOB Title XVI, Inc. (MD) 100
BOB Title XVII, Inc. (MD) 100
BOB Title XVIII, Inc. (MD) 100
BOB Title XIX, Inc. (MD) 100
BOB Title XX, Inc. (MD) 100
BOB Title XXI, Inc. (MD) 100
BOB Title XXII, Inc. (MD) 100
BOB Title XXIII, Inc. (MD) 100
BOB Title XXIV, Inc. (MD) 100
BOB Title XXV, Inc. (MD) 100
BOB Title XXVI, Inc. (MD) 100
BOB Title XXVII, Inc. (MD) 100
BOB Title XXVIII, Inc. (MD) 100
BOB Title XXIX, Inc. (MD) 100
BOB Title XXX, Inc. (MD) 100
BOB Title XXXI, Inc. (MD) 100
BOB Title XXXII, Inc. (MD) 100
BOB Title XXXIII, Inc. (MD) 100
BOB Title XXXIV, Inc. (MD) 100
BOB Title XXXV, Inc. (MD) 100
BOB Title XXXVI, Inc. (MD) 100
BOB Title XXXVII, Inc. (MD) 100
BOB Title XXXVIII, Inc. (MD) 100
BOB Title XXXIX, Inc. (MD) 100
BOB Title XL, Inc. (MD) 100
Towson Service Corporation (MD) 100
Ashland Joint Venture (MD) 50
Silver Spring Station Joint Venture (MD) 50
Municipal Insurance Agency, Inc. (MD) 100
</TABLE>
(1) Percent of voting securities owned by parent.
<PAGE>
Exhibit 23 - Consent of Independent Auditors
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration
statements of Baltimore Bancorp on Form S-8 (File No. 33-584) and
Form S-8 (File No. 33-380490) of our report, dated January 28,
1994, which includes an explanatory paragraph noting the
Corporation changed its method of accounting for investments at
December 31, 1993 and accounting for income taxes in 1992, as
further described in Note A, on our audits of the consolidated
financial statements of Baltimore Bancorp as of December 31, 1993
and 1992 and for the three years in the period ended December 31,
1993, which report is incorporated by reference in the Annual
Report on Form 10-K.
COOPERS & LYBRAND
Baltimore, Maryland
March 22, 1994
<PAGE>
Baltimore Bancorp
Baltimore Bancorp is a $2.2 billion Baltimore-based community bank holding
company. Its principal subsidiary, The Bank of Baltimore, founded in 1818,
operates 42 branches within the Baltimore/Annapolis/Washington market.
Table of Contents
Financial Highlights 1
Letter to Shareholders 2
Financial Review 9
Report of Independent Auditors, 26
Coopers & Lybrand
Consolidated Financial Statements 27
Notes to Consolidated Financial Statements 32
Consolidated Average Balances 52
Consolidated Quarterly Results 54
Selected Financial Data 55
Board of Directors, Executive Officers 56
Stockholder Information inside back cover
<TABLE>
<CAPTION>
Financial Highlights
Baltimore Bancorp and Subsidiaries
Quarter Ended December 31 Year Ended December 31
(Thousands of dollars, except per share data) 1993 1992 % Change 1993 1992 % Change
<S> <C> <C> <C> <C> <C> <C>
Results of Operations
Net interest income $ 24,592 $ 20,506 20% $ 95,249 $ 85,617 11%
Provision for possible loan losses 4,000 6,000 (33) 22,000 29,881 (26)
Investment securities gains 1,564 1,031 3,877 (73)
Gain (loss) on available for sale
securities 3,448 (5) 9,549 (2,894)
Gain (loss) on sale of loans 10 5,929
Other operating income 6,770 8,001 (15) 29,739 44,537 (33)
Other operating expenses 30,221 23,808 27 105,733 92,331 15
Income taxes (benefits) (561) 12 (2,435) 400
Income before extraordinary item 1,150 256 349 10,270 14,454 (29)
Extraordinary item(1) 56 56
Net income 1,150 312 269 10,270 14,510 (29)
Per Share
Net income $.07 $.02 250% $ .66 $1.13 (42)%
Book value 9.73 9.38 4
Common stock closing price (NYSE) 14.25 6.875 107
Dividends paid .05 .05
At December 31
Loans held for sale $167,336 $65,101 157%
Available for sale securities(3) 542,196 178,294 204
Investment securities 420,666
Loans (net of unearned income) 1,308,445 1,521,450 (14)
Nonperforming assets 81,751 208,112 (61)
Earning assets 2,086,299 2,239,398 (7)
Total assets 2,232,191 2,429,329 (8)
Core deposits(2) 1,944,737 1,988,952 (2)
Total deposits 1,961,517 2,236,370 (12)
Stockholders' equity 162,285 126,405 28
Common shares outstanding 16,672 13,479 24
Average Balances
Mortgage loans held for sale(4) $ 171,960 $ 95,899 79% $ 103,549 $ 168,764 (39)%
Available for sale securities(3) 548,964 18,225 190,780 73,061 161
Investment securities 482,075 352,846 566,004 (38)
Loans (net of unearned income) 1,329,770 1,619,806 (18) 1,417,304 1,713,120 (17)
Earning assets 2,116,427 2,420,321 (13) 2,157,302 2,729,079 (21)
Total assets 2,279,700 2,530,598 (10) 2,318,310 2,865,895 (19)
Core deposits(2) 1,955,366 1,996,143 (2) 1,978,390 2,113,938 (6)
Total deposits 2,000,466 2,339,457 (14) 2,092,030 2,634,425 (21)
Stockholders' equity 161,207 123,300 31 149,055 116,136 28
Common shares outstanding 16,668 12,972 28 15,529 12,796 21
Earnings Ratios
Return on average total assets .20% .05% .44% .51%
Return on average stockholders' equity 2.85 1.01 6.89 12.49
Net yield on average earning assets 4.65 3.39 4.42 3.15
Credit Ratios
Nonperforming loans to total loans 2.59% 8.04%
Nonperforming assets to total assets 3.66 8.57
Allowance to total loans 2.96 4.33
Allowance to nonperforming loans 114.12 53.89
Net loan losses to average loans 3.04% 7.09% 3.47 2.41
Capital Ratios
Stockholders' equity to total assets 7.27% 5.20%
Tier 1 risk-based capital 9.67 6.81
Total risk-based capital 11.28 8.39
Bank only:
Leverage ratio 7.08% 5.10%
Tier 1 risk-based capital 9.72 7.12
Total risk-based capital 10.99 8.39
<FN>
(1) Gain, net of taxes, from early extinguishment of debt.
(2) Total deposits excluding jumbo certificates of deposit and brokered
deposits.
(3) At December 31, 1993 the Company adopted Statement of Financial Accounting
Standards No. 115.
(4) Credit cards are combined with mortgage loans held for sale during the first
three quarters of 1992.
</TABLE>
To Our Shareholders
Our progress for 1993 is embodied in the 107% increase in share
price and the 156% increase in the Company's market value since
the end of 1992. Since the end of 1991, a 171% increase in share
price and a 255% increase in market value are two-year gains that
rank among the highest in the banking industry. And as further
evidence of our achievements, as this Annual Report was going to
press, the Federal Deposit Insurance Corporation and the Maryland
Bank Commissioner, following their joint annual examination,
advised us that they expect to terminate a Cease and Desist Order
("Order") signed by the Bank in July 1992, and in a related action,
the Federal Reserve Bank of Richmond and the Maryland Bank
Commissioner expect to terminate an Agreement signed by the
Company in July 1992. Now, two years after embarking upon a plan
for survival, Baltimore Bancorp has reestablished its franchise
value in the fourth largest consumer market in the country.
The rest of this letter summarizes significant events and
transactions behind our progress for 1993, and discusses both our
plans for 1994 and our prospects for the future. The Financial
Review, beginning on page 9, offers a detailed analysis of our
financial operations and condition.
1993 -- A Year of Repair and Development
Following 1992, a period we earlier characterized as a year of
survival, we approached 1993 as a time for repair and development...
to be highlighted by higher capital ratios, lower nonperforming
assets, continued profitability and aggressive marketing.
Higher Capital Ratios
Under the Order, The Bank of Baltimore was required to have an
adjusted Tier 1 leverage capital ratio of 6.00% and 6.50%
at June 30, 1993 and June 30, 1994, respectively. Desiring to
stay in front of the requirements, the Bank increased its
leverage ratio to 6.77% at June 30, 1993, thereby exceeding the
final June 30, 1994 requirement one year in advance. The
leverage ratio increased further to 7.08% at December 31, 1993,
and by regulatory definition, the Bank has been "well-
capitalized" since June 30, 1993, with a Total risk-based capital
ratio increasing to 10.99% at year-end.
There were several important factors which contributed to the
improvement: (1) The Company raised nearly $30 million of
equity capital through a discount stock purchase plan and
contributed most of the proceeds to the Bank. (2) The Bank's
liabilities were reduced significantly, mostly through the
planned maturity of $229 million of high-cost brokered deposits,
which reduced the amount of supporting capital otherwise
required. (3) Finally and fundamentally, the Bank produced eight
quarters of uninterrupted earnings in the two years ended
December 31, 1993, sufficient to allow the Company to reinstate a
$.05 quarterly cash dividend in the fourth quarter.
Lower Nonperforming Assets
Following a 12% reduction in 1992, nonperforming assets were
reduced by 61% in 1993, to $81.8 million at year-end, from
$208.1 million at the end of 1992, and $237.3 million at the end
of 1991--two years of progress where we needed it most.
And although nonperforming assets were still high at 3.66% of
year-end assets compared with 8.57% at the end of 1992,
they've declined to a manageable level relative to capital and
reserves. But that doesn't mean we're finished resolving the
problems; we expect to further reduce nonperforming assets by
approximately 50% in 1994, to a level much closer to the
industry average.
Nonperforming assets have been a significant earnings deterrent
in terms of interest income not recognized, provisions for
losses on uncollectible balances, operating expense associated
with property acquired in foreclosure, personnel expense
and outside legal costs to support the workout and collection
process, and high FDIC and other insurance premiums
attributed to the Bank's risk profile. Significant reductions in
all of these costs are expected to contribute to increased
earnings in 1994 as we continue to resolve problem assets.
Continued Profitability
Although earnings have been hampered largely by nonperforming
assets, the Company reported its eighth consecutive
quarterly profit as of the end of 1993 testifying to a stable
base of operating earnings from the Company's core businesses.
Net income for 1993 amounted to $10.3 million, or $.66 per share,
compared with $14.5 million, or $1.13 per share, for
1992. The decrease related principally to higher nonrecurring
income realized in 1992. Per share results reflected an
additional 2.7 million average shares outstanding in 1993
attributed to sales of new common stock under a discount stock
purchase plan. Having fulfilled its purpose, the plan was
effectively terminated in July 1993.
Earnings for 1993 were assisted by the planned maturity of $229
million of high-cost brokered deposits and the $126 million
reduction in nonperforming assets, both of which contributed to
an increase of 1.27 percentage points in the net yield on
average earning assets (interest margin) to 4.42% for 1993, from
3.15% for 1992. We expect the interest margin to increase
further in 1994.
Aggressive Marketing
Progressing through the "repair" process to the business
"development" stage entailed a commitment to product
development, advertising and marketing which has helped the
Company reestablish a competitive presence in its primary
market. In 1993, we successfully marketed unique 18-month and
two-year CD products; we rolled out an auto refinance loan
which attracted higher-rate loans from competing institutions;
and we have actively promoted a home equity line of credit
product that continues to meet our volume expectations. In August
1993, we completed a consumer research study which
provided us with new information about what customers want from
their bank. With this additional information and new
support capability resulting from outsourcing our data processing
operations last October, we have developed responsive,
technology-based sales and service initiatives which we have
begun to implement in 1994.
1994--A Year for Development and Growth
Our plan for 1994 gets us back to the basics...increase the
Company's core operating earnings by selling and servicing the
products our customers want, expanding avenues for growth in
loans and fee income, and achieving operating
efficiencies--all within the context of safe and sound banking
practices oriented to active community service. Of course, the
plan also calls for further significant reductions in
nonperforming assets and the maintenance of capital ratios
commensurate with asset growth.
Growth Prospects
The Company is structured along three principal lines of
business: retail banking, which includes branch banking, consumer
lending, bank card and investment services; real estate banking,
which encompasses mortgage banking, residential
construction lending and commercial real estate; and commercial
banking, which includes commercial business lending,
lease financing, and commercial business services. In conjunction
with a strengthening economy in 1994, we are
emphasizing growth in credit card receivables, residential
construction lending, commercial business loans and lease
financing, consumer loans and fee-based services and products,
supported by expanded telemarketing, new automated
loan application systems and improved service across all business
lines.
Credit Quality
As we continue to spend less time with declining levels of
nonperforming assets, we have established review procedures
aimed at early detection and prevention toward the goal of
eliminating excess credit costs and optimizing credit-based
earnings. Established in an environment where experience has been
an excellent teacher, and with close regulatory
oversight, we believe our credit policy is sound and
well-administered. From regular monitoring by loan officers and
management committees, to monthly reviews and quarterly reserve
analyses conducted by outside directors, credit quality is
paramount.
Noninterest Income
The stability and dependability of our earnings can be improved
by increasing the proportion of recurring noninterest (fee)
income relative to total income. We intend to make progress in
1994 by keen and competitive pricing of products and
services; by actively promoting a variety of investment services
products including tax-deferred annuities, mutual funds,
stocks and bonds; and by maintaining strong origination
capability in our mortgage banking operations.
Operating Efficiency
In 1994, we will begin to realize the benefits of last year's
outsourcing initiative through gains in productivity and over $2
million in annual expense savings. A thorough study of our branch
system, completed in 1993 and focused on location and
profitability, led to a reduction of nine branches over the past
two years from a combination of sales, closures and
consolidations; core deposits per branch increased 9% to an
average of $46.3 million at the end of 1993, from $42.3 million
at year-end 1992. Lower nonperforming assets and a lower risk
profile are expected to result in 1994 expense reductions for
asset resolution and FDIC insurance premiums. And to help
establish expense control as a perpetual discipline, we intend to
conduct a far-reaching study of the Company's operations to
identify opportunities for additional cost savings and greater
efficiencies. At the same time, we are renewing our commitment to
improving the quality of service delivered to our
customers. To support this pledge, during the second quarter of
1994, we will begin to introduce companywide service
quality standards supported by employee training, a new reward
and recognition program, and feedback systems to
measure progress.
Marketing and Promotion
We completed a proprietary market research study in August 1993.
We surveyed our employees, our customers and our
competitors' customers to determine what they want from their
bank. With insight gained about how customers select a
bank, why they stay, and what would make them switch, we are
redesigning old products and developing new ones,
enhancing our delivery systems, and improving our sales and
service culture. Our PC-based Marketing Customer Insight
File provides us with a complete profile that allows us to
quickly and efficiently match products and services with the
specific needs of each customer segment we serve. And to
supplement our branch office and drive-up delivery systems, we're
evaluating the added convenience of expanded electronic banking
including screenphone technology, voice response
telephone banking and a national debit card.
Our research also confirmed the stability and loyalty of our
deposit customers and highlighted attractive opportunities to
cross-sell other products and services to our nearly 300,000
households, almost 80% of which use only one of our services
and have excellent cross-sell potential. Clearly, the value of
our banking franchise lies in the value of our customer base.
That value can be increased by selling more of what our customers
want, supported by the service they deserve.
Community Investment
An important part of our retail banking strategy addresses our
commitment to the communities we serve. In 1993, the Bank
closed over $100 million of CRA-related residential mortgages
including loans to low- and moderate-income borrowers. The
Bank participates in the State Community Development
Administration, the Housing Acquisition Rehabilitation Program,
the FNMA Community Home Buyers Program, and meets quarterly with
the Maryland Alliance for Responsible Investment.
Additionally, all employees, officers, and directors of the
Company are encouraged to participate in any way that can benefit
the general welfare of the many communities in which they live
and work. And many are members, officers, trustees or
directors of diverse civic, charitable, business and professional
organizations. In 1993, a formal employee volunteer
organization was established to oversee the Company's commitment
to and participation in community activities.
Termination of Order and Agreement
Bank regulators advised us that they expect to terminate the
Order and Agreement under which the Bank and the Company
have been operating since July 1992. We worked quickly to satisfy
the requirements of the Order and Agreement ahead of
schedule, focusing principally on raising capital ratios and
reducing classified assets. We have always been in complete
accord with the requirements, and they were compatible with our
own strategic initiatives launched in January 1992. We
view the termination of the Order and Agreement as a symbol of
the Company's progress and as an endorsement of our
improved financial condition.
Sale Agreement Announced
On March 21, 1994, we announced a definitive merger agreement
with First Fidelity Bancorporation ("FFB") under which
they will pay $20.75 per share in cash for Baltimore Bancorp. FFB
is based in Lawrenceville, New Jersey and is the nation's
24th largest bank holding company with $34 billion in assets.
We have consistently held to the belief that our rapidly
improving financial condition could make the Company an
attractive acquisition candidate leading to higher shareholder
value. We believe this is an excellent transaction for our
shareholders, our employees, our customers, and the communities
we serve.
Following stockholder and regulatory approvals, we expect the
sale to close in late-1994. Proxy materials will be mailed in
advance of a stockholders' meeting expected in early-summer.
Outlook Summary
We expect a significant increase in earnings for 1994 driven by
lower credit costs, a higher net interest margin, improved
recurring noninterest income, and lower expenses. Our
assumptions include some compression in interest rate spreads,
loan growth in select portfolios, and further significant
reductions in nonperforming assets. We have an excellent customer
base and a strong branch franchise in the Baltimore/
Annapolis/Washington marketplace, the heart of the fourth most
populous consumer market in the United States. And consumer
confidence is on the rise.
Beyond 1994, we see the potential for steady long-term growth and
higher profitability owing to the characteristics of a large
and growing market and our ability to extract an appropriate
share of new business. The consumer population in our primary
market is relatively stable, highly-educated, and affluent. They
enjoy an unsurpassed quality of life with superior cultural,
recreational and sports activities. They are our present and
prospective customers; they are our franchise; they are the key
to higher shareholder value.
Edwin F. Hale, Sr. Alan M. Leberknight
Chairman of the Board and President
Chief Executive Officer
<PAGE>
Financial Review
Management's Discussion & Analysis--1993 Compared to 1992
Earnings Overview
Summary
Baltimore Bancorp (the "Company") reported net income of $10.3
million, or $.66 per share, for 1993, compared with net
income of $14.5 million, or $1.13 per share, for 1992. Average
common shares outstanding increased to 15.5 million for
1993 compared with 12.8 million for 1992, primarily due to sales
of common stock through a discount stock purchase plan.
The return on average assets was .44% for 1993, compared with
.51% for 1992. Net income for 1993 reflected continued
high loan loss provisions and loan workout expenses, as well as
expenses associated with the settlement of a lawsuit and
amortization of purchased mortgage servicing rights. Net income
for 1992 included $11.9 million of nonrecurring interest
income from an income tax settlement.
Core earnings (income before income taxes, excluding the
provision for possible loan losses, other real estate owned
expense and nonrecurring items) for 1993 were $30.5 million,
compared with $35.9 million for 1992. Higher outside data
processing expenses, commissions and benefits, and advertising,
along with lower trading account income and accelerated
amortization of purchased mortgage servicing rights, accounted
for the decline, partially offset by improvements in net
interest income. Nonrecurring items for the year ended December
31, 1993 primarily consisted of gains on sales of
securities. Nonrecurring and infrequent transactions are
discussed in subsequent sections.
The Company showed further progress in reducing nonperforming
assets in 1993, with the year-end total of $81.8 million
representing a decline of 61% from the 1992 year-end total of
$208.1 million. Much of this improvement came in the second
half of the year, thus nonperforming assets continued to have an
unfavorable impact on overall 1993 earnings. The
Company expects to realize significant earnings improvements in
1994 due to the reduction of these nonperforming assets,
as well as the related lower loan loss provisions and workout
expenses.
Net Interest Income
The Company's principal source of revenue, net interest income,
is measured by the difference between interest income
earned on loans and investments and interest expense incurred on
deposits and borrowings. Net interest income on a fully
tax equivalent basis increased to $95.4 million for 1993,
compared with $86.0 million for 1992, an increase of 11%. Changes
in net interest income are a function of changes in yield spreads
(rate changes) and changes in the level of earning assets
and funding sources (volume changes). The Company continued to
benefit from the maturity of high-cost brokered deposits,
lower interest rates paid on deposits, and reduced nonperforming
assets. Table 1 displays the component changes in net
interest income for 1993 compared with 1992.
The Company continued its planned reduction in total assets and
liabilities in an effort to improve capital ratios and redirect
resources to more profitable business segments. Commercial real
estate and certain consumer lending activities have been
curtailed, while the Company's credit card, business lending and
residential construction portfolios grew. Much of the
reduction of assets for 1993 has occurred in nonperforming
assets, while liabilities declined primarily in brokered deposits
and retail CDs. In 1993, average earning assets decreased by 21%,
and average interest-bearing liabilities decreased
by 23%.
The net yield on average earning assets (margin) increased by 127
basis points to 4.42% for 1993, from 3.15% for 1992. In
addition to the positive effect of the resolution of $126 million
in nonperforming assets and a more favorable mix of earning
assets, the Company benefited from the maturity of $229 million
in brokered deposits, which had an average cost of 7.32%
for 1993, significantly higher than the average rate earned on
funds used to pay off maturing deposits.
The net interest spread for 1993, which increased by 124 basis
points over 1992, is the difference between the yield on
average earning assets, which decreased by two basis points, and
the average cost of interest-bearing liabilities, which
decreased by 126 basis points. The increase in the yield on
average earning assets resulted from a more favorable mix of
assets and lower average nonperforming assets, which combined to
offset the impact of declining rates. The decline in rates
paid on interest-bearing liabilities in 1993 reflects reductions
in high cost brokered deposits and a decision to reduce the cost
of retail deposits.
<TABLE>
<CAPTION>
Table 1--Rate/Volume Analysis (Fully taxable equivalent basis)
1993 over 1992 1992 over 1991
Due to Change in Due to Change in
(Thousands of dollars) Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $(26,389) $ 7,394 $(18,995) $(49,419) $(26,070) $(75,489)
Interest and dividends on
securities:
Available-for-sale 6,877 (206) 6,671 4,224 77 4,301
Taxable (13,081) (6,691) (19,772) (11,778) (6,816) (18,594)
Tax-exempt (175) 5 (170) (582) 250 (332)
Equity securities (374) (374) (765) (330) (1,095)
Other (6,532) (6,804) (13,336) 15,131 (215) 14,916
Total interest income (39,674) (6,302) (45,976) (43,189) (33,104) (76,293)
Interest Expense:
Interest on deposits (25,783) (28,189) (53,972) (16,795) (57,057) (73,852)
Interest on securities sold under
agreements to repurchase and
other short-term borrowings (512) (513) (1,025) (6,313) (3,197) (9,510)
Interest on long-term
borrowings (367) (34) (401) (1,131) 137 (994)
Total interest expense (26,662) (28,736) (55,398) (24,239) (60,117) (84,356)
Net interest income $(13,012) $ 22,434 $ 9,422 $(18,950) $ 27,013 $ 8,063
</TABLE>
The relative changes in the components of net interest margin are shown
in Table 2.
Table 2 -- Components of Net Interest Margin
(Averages) 1993 1992 1991
Interest-bearing liabilities/
earning assets 92.36% 95.02% 93.48%
Yield on earning assets 7.94 7.96 9.20
Cost of interest-bearing
liabilities 3.81 5.07 7.23
Net interest rate spread 4.13 2.89 1.97
Net yield on earning assets 4.42 3.15 2.44
Provision For Possible Loan Losses
The Company recorded $22.0 million in provisions for possible
loan losses for 1993, compared with $29.9 million for 1992.
The continuing high level of provisions related to the reduction
of $88 million in nonperforming loans over the course of
1993, and also led to a loan loss reserve coverage of remaining
nonperforming loans of 114% at year-end 1993 compared
with 54% at the end of 1992.
Other factors considered in the determination of an appropriate
provision are discussed under Asset Quality and Allowance
for Possible Loan Losses, page 17, and Note A--Allowance for
Possible Loan Losses, Notes to Consolidated Financial
Statements, page 33.
<PAGE>
Other Operating Income
Other operating income decreased to $40.3 million for 1993,
compared with $51.4 million for 1992, a decline of 22%.
Included in the 1992 results was a nonrecurring recovery of $11.9
million in interest on an income tax settlement. Excluding
all nonrecurring and infrequent income, the Company's other
operating income decreased by $4.7 million or 14%, due
primarily to liquidation of the trading account portfolio, as
illustrated in Table 3.
Table 3--Other Operating Income
(Thousands of dollars) 1993 1992 1991
Recurring Income:
Service charges on
deposit accounts $ 6,869 $ 6,878 $ 5,507
Mortgage banking income
Sale of mortgages in
secondary markets 8,679 6,997 2,159
Sale of servicing rights 7,713 4,311 1,374
Servicing income 8,415 7,749 4,596
Amortization of purchased
mortgage servicing rights (8,629) (2,569) (1,470)
Total mortgage banking
income 16,178 16,488 6,659
Trading account income 3,905 2,270
Other 6,423 6,869 6,378
Total recurring income 29,470 34,140 20,814
Nonrecurring or
Infrequent Income:
Gain/(loss) on available-
for-sale securities 9,549 (2,894) 1,782
Gain/(loss) on sale of
investment securities 1,031 3,877 (5,731)
Interest on federal
tax recovery 11,897 2,916
Gain on loan sales 5,929
Provision for possible losses
on joint venture interests 225 (1,500) (742)
Other 44 837
Total other
operating income $40,319 $51,449 $19,876
Mortgage banking income declined by 2% for 1993, due to higher
amortization of purchased mortgage servicing rights associated
with mortgage refinancing activity, offset by higher profits on
the sale of mortgages and mortgage servicing. Increased gains
on sales of mortgages resulted from higher originations of residential
mortgage loans, which amounted to $1.266 billion for 1993, compared
with $1.102 billion for 1992. Continued low interest rates as well
as two new mortgage banking offices accounted for the increase in
the volume of loans originated. Gains from the sale of servicing
amounted to $7.7 million for 1993 compared with $4.3 million for 1992.
The Company previously invested in mutual funds which held U.S.
Government securities, the trading in which resulted in
gains in 1992 and 1991. The Company sold its remaining investment
in trading account assets in late 1992.
The 1993 gain on available-for-sale securities was due to the
sale of mortgage-backed securities during the year at profits of
$9.5 million. In 1992, the Company recognized losses of $2.9
million, $1.5 million of which was due to a market decline in
the first quarter.
Investment securities gains declined to $1.0 million for 1993,
from $3.9 million for 1992, as the Company completed its
restructuring of the portfolio. Higher gains for 1992 were
related primarily to sales of collateralized mortgage obligations
defined as "high risk" by the Federal Financial Institutions
Examination Council.
Interest on federal tax recovery amounted to $11.9 million for
1992. Following a favorable U.S. Supreme Court decision, the
Company recorded an initial settlement estimate of $2.9 million
for 1991. The decision related to a previously disallowed loss
deduction on a mortgage loan swap in 1981, and refund calculations
spanning the intervening years were completed in 1992.
The gain on loan sales for 1992 of $5.9 million resulted from the
sale of $173 million of home equity loans completed in the
first half of the year.
Provisions for possible losses on joint ventures amounted to
$1.5 million for 1992. In 1993, the joint ventures sold the
majority of their assets at higher-than-expected prices,
resulting in a $225 thousand recovery. The joint ventures involve
residential housing projects acquired with the purchase of a
savings and loan in 1985.
Other Operating Expense
Other operating expenses totaled $105.7 million for 1993,
compared with $92.3 million for 1992, an increase of 15%. Major
items contributing to the variance were higher real estate owned
expense due to an accelerated workout plan, higher
compensation due primarily to higher mortgage volume, equipment
expense, largely associated with the outsourcing of data
processing operations, and the settlement of a class-action
lawsuit. Table 4 compares 1993 expense components with the
previous two years.
Table 4--Other Operating Expense
(Thousands of dollars) 1993 1992 1991
Recurring Expense:
Salaries and employee
benefits $ 47,378 $42,816 $ 38,086
Net occupancy expense
of premises 8,840 8,379 8,361
Equipment expense 8,959 8,464 8,560
FDIC insurance 6,656 6,428 6,075
Other real estate owned
expense, net 10,932 7,964 11,652
Other:
Advertising 3,340 2,638 3,296
Legal fees 1,660 2,426 1,775
Audits and examinations 475 592 810
Professional services 3,400 2,802 2,168
Data processing services 5,175 3,076 2,515
Other 7,168 6,246 5,025
Total recurring expense 103,983 91,831 88,323
Nonrecurring/Infrequent
Expense:
Settlement of class-action
lawsuit 1,750
Restructuring 1,050
Amortization and write-
off of goodwill 38,150
Severance 500 2,195
Proxy contest expenses 4,010
Total other operating
expense $105,733 $92,331 $133,728
Salaries and employee benefits increased by $4.6 million for
1993, or 11% over 1992, due to higher staffing levels and
commissions in mortgage banking, and higher pension and medical
benefits expense and incentive plan costs. Excluding
mortgage banking, where 74 full-time equivalent positions were
added during 1993, the Company realized staff reductions
related largely to the outsourcing of data processing operations
or through attrition. The Company also instituted an
employee 401(k) plan which contributed to higher employee
benefits expense.
Occupancy expense increased to $8.8 million for 1993, or 6%
higher than 1992, due largely to adjustments in accounting
lives of leasehold improvements in the Company's primary
locations. Equipment expense grew to $9.0 million, a 6%
increase over 1992, due to the accelerated write-offs of data
processing equipment made obsolete by the outsourcing of
backoffice operations. Cost savings from the outsourcing
conversion are expected to be realized beginning in 1994.
FDIC insurance rose to $6.7 million for 1993 from $6.4 million
for 1992, due to the full-year impact of higher rates. The
Company's improved financial condition has led to a reduction in
rates in late 1993, the benefit of which will be realized in 1994.
Other real estate owned expense (OREO) increased by 37% to $10.9
million for 1993, from $8.0 million for 1992, as a result
of accelerated resolution of nonperforming assets. OREO balances
declined to $47.9 million at year-end 1993 from $85.8 million at
year-end 1992. The cost of operating foreclosed properties amounted
to $3.7 million for 1993, compared with $.6 million for 1992.
Data processing services increased to $5.2 million for 1993,
compared with $3.1 million for 1992, largely due to expenses
associated with outsourcing. Other expenses increased by $.9
million due to higher expense in several categories, including
supplies, travel and entertainment and contributions.
Among nonrecurring items in 1993, the Company settled a class-action
lawsuit for $1.8 million which had been initiated in 1990.
Income Taxes
Income taxes include provisions for federal and state tax
expense. The amounts reported do not necessarily reflect taxes
currently payable or recoverable for the period because of
temporary differences in the recognition of certain income and
expense items for financial and tax purposes. The Company
reported a tax benefit of $2.4 million for 1993, compared with
tax expense of $.4 million for 1992. In 1993, the Company reduced
its valuation allowance for deferred tax assets which it
had established with the adoption of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
The Company expects to use more deferred tax benefits than
initially anticipated as a result of a higher level of taxable
income for 1993 and a higher degree of certainty regarding
projected future income. The ratio of income tax expense to
income before taxes was 2.7% for 1992, and represented state
taxes only. At December 31, 1993, remaining capital loss
carryforwards amounted to $4.1 million and state net operating
loss carryforwards amounted to $110.4 million. Additional
information may be found in Note L--Income Taxes, Notes to
Consolidated Financial Statements, on page 42.
Changes in Financial Condition
Summary
The Consolidated Statements of Financial Condition, read in
conjunction with the Consolidated Statements of Cash Flows,
offer the reader data by which to analyze, in general terms,
significant changes in financial position between two points in
time. For purposes of the following discussion, however, the
Company believes that the average balances as presented in
Consolidated Average Balances found on page 52 are more useful in
analyzing important trends and are used extensively,
but not exclusively, throughout the Financial Review.
Earning Assets
Average earning assets declined by 21% for 1993 to $2.157 billion
from $2.729 billion for 1992, as the Company continued to reduce
liabilities and improve capital ratios. Much of the corresponding
reduction in average earning assets resulted from amortization of
consumer loans and the full year impact of loan sales in 1992.
Loans remained the largest component of earning assets, comprising
66% of the total for 1993, compared with 63% for 1992. Investment
securities, available-for-sale securities, and loans held for sale
comprised the balance of earning assets.
Temporary Investments
Temporary investments are short-term funds which are readily
convertible into cash and consist of federal funds sold, other
short term investments, and trading account assets. These
investments are highly sensitive to changes in interest rates and
are important tools in the management of interest rate risk and
balance sheet liquidity. In 1993, a significant portion of the
temporary portfolio was liquidated in conjunction with the
maturity of brokered deposits, with the remaining balance
reinvested in investment securities or available-for-sale
securities. In 1992 and earlier, the Company invested in mutual
funds holding U.S. Government securities and classified them as
trading account securities in the financial statements.
Trading in these shares resulted in periodic capital gains,
recorded in other operating income, which were used to offset
capital losses carried forward from prior years. See Liquidity
Management, page 16.
Loans Held for Sale
Average loans held for sale, which were $104 million for 1993
compared to $169 million for 1992, consist of residential mortgages
and other loans designated for sale. Residential mortgages are
routinely warehoused and securitized for sale. At December 31, 1991,
the Company reclassified its $120 million credit card portfolio and
carried it in loans held for sale through the third quarter of 1992.
As of September 30, 1992, the Company determined that such a sale
would no longer be considered and reclassified the credit card
portfolio to the loan portfolio.
Available-for-Sale Securities and Investment Securities
Average investment securities were $353 million for 1993 compared
with $566 million for 1992, and represented the
securities portfolio through the first three quarters of 1993,
with full comparison with the preceding two years. During the
fourth quarter of 1993, management reclassified investment
securities to available-for-sale securities and subsequently
adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, on December 31, 1993. The combined average balance
for the investment securities and available-for-sale
portfolios decreased to $544 million for 1993 from $639 million
for 1992. The portfolio at December 31, 1993 consisted
primarily of high quality fixed-and variable-rate Treasuries,
agencies, and mortgage-backed securities. At year-end 1993, the
variable rate component represented 47% of the total
available-for-sale portfolio.
Table 5 displays the composition of the securities portfolio at
December 31, 1993, by security type and maturity, together
with respective yields. Mortgage backed securities, which
represented 84% of the total portfolio, are more sensitive to
changes in interest rates because of their longer average
maturities, which make them more susceptible to prepayment.
<TABLE>
<CAPTION>
Table 5--Analysis of Available-for-Sale Securities Portfolio
December 31, 1993
Maturing
After After
1 Year 5 Years
In 1 Year through through After
or Less 5 Years 10 Years 10 Years Total
(Thousands of dollars) Variable Fixed Variable Fixed Variable Fixed
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 1,994 $ 1,994
Federal agency obligations $29,919 30,031 $4,956 $ 9,950 74,856
Asset backed securities(1) 7,507 3,009 10,516
Foreign government debt 1,000 1,000
Mortgage-backed securities(1) 9 3,735 $216,779 $233,307 453,830
Total _ $30,919 $39,541 $4,956 $16,694 $216,779 $233,307 $542,196
U.S. Treasury securities 4.39% 4.39%
Federal agency obligations 5.45% 5.29 8.00% 5.56% 5.57
Asset backed securities 4.25 4.45 4.31
Foreign government debt 5.50 5.50
Mortgage-backed securities 7.63 5.71 4.82% 6.30% 5.59
Total _ 5.45% 5.05% 8.00% 5.39% 4.82% 6.30% 5.56%
<FN>
(1) These represent nominal maturities. Actual maturities will vary depending
on prepayment experience.
</TABLE>
Loans
Average loans, net of unearned income, were $1.417 billion for
1993, a decrease of 17% from an average of $1.713 billion
for 1992. Loan sales, resolutions and disposals of nonperforming
loans and payments exceeded new loan originations. The
credit card portfolio was classified as loans held for sale until
September 30, 1992. At that time, the Company concluded that
a sale or securitization of credit card receivables was no longer
necessary or desirable.
Average real estate construction loans decreased by $167 million
for 1993, related largely to charge-offs of nonperforming
loans and reclassifications to commercial mortgages or to other
real estate owned. Average residential real estate loans
decreased by $13 million due to payments and refinancings.
Commercial mortgages grew by 6% due to reclassifications of
completed projects from construction loans during the year. The
Company is not actively pursuing new commercial mortgage loans.
Average balances for second mortgages and home equity loans
declined by 25% for 1993 due to refinancing of home
mortgages, as well as the full-year impact of the sales of home
equity loans in early 1992. Average consumer loans declined
by 34% for 1993 due to amortization of the indirect automobile
loan portfolio and to continuing low consumer loan demand in
the face of heavy home mortgage refinancing activity. The
Company's credit card portfolio, including the portion carried in
assets held for sale for the first nine months of 1992, increased
by $16 million for 1993 related primarily to growth in affinity
group membership. Average commercial loans and lease financing
receivables declined by $30 million for 1993, due
primarily to amortization and continued low demand.
Of the total loan portfolio, $868 million, or 66%, were
collateralized by first mortgages on residential and commercial
real estate at December 31, 1993, compared with 64%, or $1.019
billion, at December 31, 1992. Table 6 sets forth the composition
of the commercial real estate portfolio by property type and
geographic location.
Table 6--Commerical Real Estate Portfolio By Property Type and Location
December 31, 1993
(Thousands of dollars) In Market(1) Total
Land acquisition and
development $ 2,536 $ 2,536
Shopping centers 77,685 89,101
Office buildings 98,640 106,248
Hotel/motel 66,805 69,607
Warehouses 41,514 41,514
All others 112,429 126,166
Total $399,609 $435,172
(1) Maryland, Virginia, Washington, D.C., Pennsylvania and Delaware.
Funding
The Company may obtain funds from a variety of sources including
core deposits, both interest-bearing and noninterest-bearing,
mortgage escrow balances, large certificates of deposit,short- and
long-term borrowings, and equity capital. Funding sources were
adequate in 1993 to support the Company's lending and investment activities.
Average total deposits for 1993 decreased by $542 million, or
21%, from 1992 due to the maturity of brokered deposits and
high-rate retail CDs. These maturities and run-offs were
consistent with the Company's objective of improving net interest
income and capital ratios.
Average noninterest-bearing demand deposits grew 36% in 1993 over
1992 due to the retention of higher levels of mortgage
banking escrow deposits. Overall noninterest-bearing deposits
grew to 7% of total deposits for 1993 as compared to 4% for
1992. The Company's history as a converted savings bank, combined
with a limited portfolio of small business and middle
market commercial banking activity, accounted for the relatively
low level of noninterest-bearing deposits.
Brokered deposits were reduced in 1993 to a year-end total of $12
million. On average, these deposits declined by 78% for
1993 compared with 1992. The average cost of the $229 million of
brokered deposits which matured during 1993 was 7.32%. The maturity
of these deposits began to have a positive effect on the Company's
net yield on average earning assets in late 1993.
Average other time deposits, including money market accounts,
declined for 1993 to $1.460 billion, compared with an
average of $1.666 billion for 1992, as depositors continued to
seek better returns through alternative investments. The
Company responded to this market trend by further developing its
investment services business and increasing its visibility
in bank branches.
Average borrowings decreased by 30% to $47 million for 1993, from
$66 million for 1992. The greatest proportion of the reduction was
in securities sold under agreements to repurchase and other short-term
borrowings related to the continuing low demand for loans.
In 1993, net income of $10.3 million, as well as an additional
$25.4 million of common stock sold through the Company's
discount stock purchase plan were the primary components of the
increases in stockholders' equity. The Company received
approval from the Federal Reserve Bank and Maryland Bank
Commissioner to declare and pay a $.05 per share dividend in
the fourth quarter of 1993 out of accumulated cash in the holding
company. Average stockholders' equity increased to $149
million for 1993, compared with $116 million for 1992. At
year-end 1993, stockholders' equity of $162 million represented
an increase of 28% from year-end 1992.
Liquidity Management
Liquidity management ensures that adequate funds are on hand or
are readily available to meet normal and seasonal loan demand,
satisfy deposit withdrawal requirements, and fulfill other
financial commitments in a planned and organized manner.
Liquidity planning has a high priority in financial management
and has sources in both assets and liabilities. Asset liquidity
is derived from sales of assets, amortization or maturity of
investment securities, loan repayments and maturities, and cash
flow from operations. Principal sources of liability liquidity
include access to retail deposits, the ability to sell large CDs
and the capacity to borrow short- and long-term funds.
At December 31, 1993, the Company held cash, available-for-sale
securities, and other short-term investments totaling $637
million, compared with $288 million at December 31, 1992. The
principal component of the change was the reclassification
of the remaining investment securities portfolio to
available-for-sale securities in the fourth quarter of 1993.
Available-for-sale securities amounted to $542 million at year-end
1993, compared with $178 million at year-end 1992. With the inclusion
of loans held for sale and marketable investment securities in both
years, liquid assets amounted to $804 million or 36% of total assets
at December 31, 1993, compared with $774 million, or 32% of total
assets at year-end 1992.
The available-for-sale securities portfolio also supports
liquidity through its use as collateral for short-term
borrowings. At December 31, 1993, $366 million, or 67% of the total
portfolio value of $542 million was available for pledging.
Sources of liability liquidity have included brokered deposits,
CDs of $100,000 or more, and short-term borrowings. At December 31,
1993, these sources totalled $78 million, or 3% of total liabilities
plus equity, down from $261 million, or 11% of liabilities plus equity
at the end of 1992. The change is due to the planned maturity of $229
million in brokered deposits during 1993. The Company had reduced its
reliance on these sources of funds by $680 million since the end of 1991.
The FDIC requires insured financial institutions to maintain
liquidity measured by the percentage of net deposits and short-
term liabilities that is represented by net cash, short-term and
marketable assets. The Bank of Baltimore's (the "Bank")
liquidity ratio under this formula was 33% at December 31, 1993,
compared with 32% at December 31, 1992.
Asset Quality and Allowance for Possible Loan Losses
Table 7 shows the composition and changes in the level of
nonperforming assets over the past five years. Total
nonperforming assets at December 31, 1993 were $81.8 million,
compared with $208.1 million at year-end 1992. The $126
million reduction was achieved through loan restructurings,
payments, and dispositions of problem assets.
Performing restructured loans of $39.2 million at December 31,
1993 consisted of six loans which had been restructured in
accordance with Statement of Financial Accounting Standards No.
15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings. As a result of those restructurings, $5.2 million
was charged to the allowance for possible loan losses in 1993.
<TABLE>
<CAPTION>
Table 7--Nonperforming Assets and Past Due Loans
December 31
(Thousands of dollars) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Nonaccruing Loans
Real estate $19,338 $101,940 $104,944 $29,603 $11,210
Other 5,561 11,336 4,072 10,730 1,944
Restructured Loans
Real estate 9,000 9,000 59,218 4,299 6,350
Other 149
Total nonperforming loans 33,899 122,276 168,234 44,632 19,653
Assets acquired in foreclosure
Real estate 47,392 84,781 67,703 24,311 6,213
Other 460 1,055 1,363 2,096 3,729
Total nonperforming assets $81,751 $208,112 $237,300 $71,039 $29,595
Loans past due 90 days or more
and accruing $11,412 $ 29,614 $ 14,088 $24,404 $12,671
Performing restructured loans 39,220 56,250
Ratios
Nonperforming assets to total assets 3.66% 8.57% 7.45% 2.01% .85%
Nonperforming assets to loans plus
assets acquired in foreclosure 6.03 12.95 11.76 3.15 1.33
Allowance to nonperforming loans 114.12 53.89 45.99 79.54 85.79
</TABLE>
At year-end 1993, 93% of nonperforming assets were collateralized
by real estate, compared with 94% at December 31, 1992. Nonperforming
assets as a percentage of total assets declined to 3.66% at the end of 1993,
compared with 8.57% one year earlier.
Table 8 illustrates the quarterly changes in the composition of
nonperforming assets between year-end 1993 and year-end 1992.
<TABLE>
<CAPTION>
Table 8--Changes in Nonperforming Assets
Quarter Ended
(Millions of dollars) March 31 June 30 September 30 December 31 Total 1993
<S> <C> <C> <C> <C> <C>
Beginning balance $208.1 $207.3 $177.6 $132.6 $208.1
Charge-offs/Write-downs 13.1 6.8 13.1 11.6 44.6
Resolutions/Paydowns 5.7 27.7 32.0 39.5 104.9
Additions 18.0 4.8 .1 .3 23.2
Ending balance $207.3 $177.6 $132.6 $ 81.8 $ 81.8
</TABLE>
Assets acquired in foreclosure decreased to $47.9 million at
December 31, 1993, from $85.8 million at the end of 1992.
Loans are transferred to assets acquired in foreclosure at the
lower of book value or fair market value. Losses recognized in
arriving at fair market value are charged against the allowance
for possible loan losses at the time of transfer. Any
subsequent reductions in the value of foreclosed assets are
recorded as other real estate owned expense. Other real estate
owned expense for 1993 included $3.7 million in operating
expense, compared with $.6 million for 1992. The remaining
expense in both years was related to write-downs in the market
values of property owned, or losses on final disposition.
Accruing loans past due 90 days or more declined to $11.4 million
at December 31, 1993, from $29.6 million at the end of
1992. Approximately $6.9 million of the year-end 1993 total
represented consumer loans or loans collateralized by
residential real estate, about the same level as a year earlier.
The remaining amounts for each year were composed primarily of
commercial real estate loans which were well collateralized and in
the process of collection. Loans past due 90 days or more may, or may not,
from time to time, become nonperforming assets.
Table 9 displays activity in the allowance for possible loan
losses. As shown, the allowance decreased to $38.7 million at
December 31, 1993, compared with $65.9 million at the end of 1992.
<TABLE>
<CAPTION>
Table 9--Consolidated Analysis of Loan Loss Experience
(Thousands of dollars) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Loan Balances (net of unearned income):
Year-end balance of loans $1,308,445 $1,521,450 $1,949,233 $2,226,043 $2,218,151
Average balance of loans 1,417,304 1,713,120 2,262,975 2,258,486 2,191,514
Allowance for possible loan
losses at beginning of year 65,899 77,368 35,502 16,860 16,158
Charge-offs during year:
Real estate:
Construction 10,739 20,184 41,459 221 900
First mortgage:
Residential 12 59 18 28
Commercial 27,636 12,919 20,689 400 253
Consumer(1) 6,044 7,323 11,608 7,664 5,985
Credit card 5,408 4,487 4,407 1,436 885
Commercial 2,775 1,488 4,403 51
Lease financing 1,899 134 3,822 710 221
Total charge-offs 54,513 46,594 86,406 10,459 8,295
Recoveries on loans previously charged-off:
Real estate:
Construction 1,641 714
First mortgage:
Residential 35 20
Commercial 1,951 1,484
Consumer(1) 1,132 1,737 2,536 3,625 1,449
Credit card 373 155 98 114 134
Commercial 70 1,005 176 16 2
Lease financing 96 129 94 226 71
Total recoveries 5,298 5,244 2,904 3,981 1,656
Net charge-offs 49,215 41,350 83,502 6,478 6,639
Additions to allowance from earnings
(provision for possible loan losses) 22,000 29,881 125,368 25,120 7,341
Allowance for possible loan losses
at end of year $ 38,684 $ 65,899 $ 77,368 $ 35,502 $ 16,860
Ratios:
Total recoveries as a percentage
of charge-offs 9.72% 11.25% 3.36% 38.06% 19.96%
Net charge-offs as a percentage of:
Average loans, net of unearned income 3.47 2.41 3.69 .29 .30
Allowance for possible loan losses
at end of year 127.22 62.75 107.93 18.25 39.38
Provision for possible loan losses 223.71 138.38 66.61 25.79 90.44
Allowance for possible loan losses to
period end loans, net of unearned
income 2.96 4.33 3.97 1.59 .76
<FN>
(1) Includes second mortgage loans.
</TABLE>
The allowance for possible loan losses decreased to 2.96% of
total loans at December 31, 1993, compared with 4.33% a
year earlier. The lower ratio was a result of significant
charge-offs of nonperforming loans during 1993. The coverage
ratio of the allowance to nonperforming loans was increased to 114% at
December 31, 1993, compared with 54% at December 31,
1992, as nonperforming loans decreased by 72% in 1993.
Net charge-offs increased to 3.47% of average total loans in
1993, from 2.41% for 1992, also due to the substantial charge-
offs of nonperforming loans.
<PAGE>
Table 10 sets forth the allocation of the allowance for possible
loan losses by portfolio. The allocations are estimates based
on the Company's assessment of risk characteristics, but the
entire allowance is available to absorb losses occurring in any
category. The allocation is based on a number of factors
discussed earlier, which are subject to change, so the allocation
is not necessarily indicative of the amount of future losses that
may be experienced in a particular category.
<TABLE>
<CAPTION>
Table 10--Allocation of Allowance for Possible Loan Losses
December 31
1993 1992 1991 1990 1989
Percent Percent Percent Percent Percent
to Total to Total to Total to Total to Total
(Thousands of dollars) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Construction $ 2,290 7.0% $23,677 9.6% $29,895 13.3% $ 7,811 14.7% $ 3,224 12.8%
First mortgage:
Residential 105 3.9 138 4.4 500 4.0 100 8.5 100 9.0
Commercial 14,986 31.0 21,257 27.8 26,702 21.9 7,878 20.6 3,530 19.6
Consumer(1) 4,669 37.4 5,880 40.7 8,820 50.8 4,250 41.0 5,949 43.0
Credit card(2) 5,231 10.6 4,421 8.4 - - 2,350 4.0 1,135 2.4
Commercial 2,139 4.7 2,146 4.1 2,889 4.9 5,727 5.6 1,129 6.8
Lease financing 954 5.4 2,648 5.0 3,562 5.1 355 5.6 1,793 6.4
Unallocated 8,310 5,732 5,000 7,031
Allowance for possible
loan losses $38,684 100.0% $65,899 100.0% $77,368 100.0% $35,502 100.0% $16,860 100.0%
<FN>
(1) Includes second mortgage loans.
(2) Credit cards of $120,189 were classified as loans held for
sale at December 31, 1991.
</TABLE>
Problem asset resolution continues to be a high priority. Every
loan (except consumer loans), including all classified and
nonperforming assets, is assigned to a loan officer who is
responsible for monitoring the loan on a continuous basis. Each
loan is reviewed monthly by the loan officer, and quarterly by
the loan officer's supervisor. Each classified asset, which
includes nonperforming assets, is reviewed monthly by an
executive management committee, and all of the Company's
lending activities, including the status of nonperforming assets,
are reviewed periodically by the Portfolio Review Committee
of the Board of Directors.
The Company believes that the allowance for possible loan losses
of $38.7 million, or 114% of nonperforming loans, is
adequate at December 31, 1993. There is evidence that the
commercial real estate market has stabilized, however
unforeseen factors or a downturn in the economy could require
additional provisions for possible loan losses or write-downs
of the remaining assets acquired in foreclosure.
The Company has been closely monitoring the disposal of
residential properties associated with a real estate development
joint venture acquired in a thrift acquisition in 1985. In the
third quarter of 1993, the Company reversed $225 thousand of
valuation reserves against these properties upon the sales of
units above book value. The Company believes that the
remaining book value on these units is appropriate, and expects
the remaining units to be sold by the end of 1994.
The Company is not aware of any significant environmental
liability represented by real estate owned or in foreclosure
proceedings at December 31, 1993.
Capital and Dividends
Stockholders' equity as a percent of total assets increased to
7.27% at December 31, 1993 from 5.20% at December 31,
1992. The increase was attributable largely to $10.3 million in
net income for the year, as well as to $25.4 million in new
equity capital received from sales of the Company's common stock
through a discount stock purchase plan. In addition, total
assets declined by $197 million or 8% over the one-year period.
<PAGE>
Capital adequacy has continued to be a primary focus of bank
regulators. Federal guidelines provide that a "well-capitalized"
institution should have an adjusted Tier 1 risk-based capital
ratio of at least 8%, and a Total risk-based capital ratio of at
least 10%. The Bank exceeded these standards in both categories
as of December 31, 1993. These Federal guidelines
measure risk inherent in the Bank's assets and include
off-balance sheet items such as funding commitments and hedging
instruments. Within the framework for evaluating capital
adequacy, all assets are assigned to risk categories. The
regulatory capital position of the Company and the Bank is summarized in
Table 11.
<TABLE>
<CAPTION>
Table 11--Regulatory Capital Position
December 31, 1993
(Millions of dollars) Consolidated The Bank of Baltimore
<S> <C> <C>
Total assets $2,232.2 $2,227.7
Total average assets -- fourth quarter 2,279.7 2,274.7
Total risk-weighted assets 1,678.6 1,656.2
Stockholders' equity 162.3 161.0
As a percent of total assets 7.27% 7.23%
Tier 1 capital 162.3 161.0
As a percent of average assets
(Leverage ratio) 7.12% 7.08%
Tier 1 risk-based capital 162.3 161.0
As a percent of risk-weighted assets 9.67% 9.72%
Required* 4.00% 4.00%
Total risk-based capital 189.4 181.9
As a percent of risk-weighted assets 11.28% 10.99%
Required* 8.00% 8.00%
<FN>
*Required ratios for an adequately capitalized institution
</TABLE>
In addition to risk-based guidelines, banking regulators have
increased the leverage standard so that a banking company is
generally required to possess a minimum capital- to-assets ratio
of 4%. The leverage ratio is calculated by dividing adjusted
Tier 1 capital, essentially total stockholders' equity at period
end, by average total assets for the quarter then ended. The
minimum requirement is adjusted upward by bank regulators based
upon their assessment of the unique risk and growth
characteristics of each bank. Under a Cease and Desist Order
("Order") issued in July 1992 by the FDIC and the Maryland
Bank Commissioner, the Bank was required to maintain a minimum
adjusted Tier 1 leverage capital ratio of 4.50%, 6.00%
and 6.50% at December 31, 1992, June 30, 1993, and June 30, 1994,
respectively. The Bank exceeded each of these requirements ahead of
schedule, as well as all other specific requirements of the
Order. A summary of the Order is presented in Note S--Regulatory
Matters, Notes to Consolidated Financial Statements, on page 46.
As this Annual Report was going to press in March 1994, the FDIC
and the Maryland Bank Commissioner advised the Bank
that they expect to terminate the Order based upon the results of
their recently completed joint annual examination of the Bank.
The Bank was able to exceed the new leverage and risk-based
capital requirements prior to year-end 1993 by following the
strategies presented to the banking regulators in its 1992
Capital Plan. These strategies included an aggressive schedule
for the resolution of nonperforming assets, the generation of equity
capital through earnings and a discount stock purchase plan, and by
changing the mix of the Bank's assets, particularly through a restructuring
of the Company's investment portfolio and amortization of loans.
The Company's discount stock purchase plan, which was initially
registered in September 1992, sold all 2,000,000 shares
by March 31, 1993. A second registration for 1,675,000 shares
sold out by July 1993. Together, the two offerings generated
$28.6 million in new capital for the Company, with $25.4 million
being invested in the Bank.
In light of the Company's improved financial condition, the board
of directors declared a cash dividend of $.05 per share for
the fourth quarter, which was paid on December 29, 1993 to
shareholders of record as of December 15, 1993, following
regulatory approval. The dividend was funded by cash available in
the holding company after management had demonstrated to the Federal
Reserve and Maryland Bank Commissioner that sufficient cash would
remain in the Company to fund several years of long-term debt service
without reliance on a resumption of dividends by the Bank to the holding
company. The Bank is prohibited from paying cash dividends to the
holding company until the current Order by the FDIC
and the Maryland Bank Commissioner has been removed. Under a
written agreement (the "Agreement") entered into in July
1992 with the Federal Reserve Bank and the Maryland Bank
Commissioner, the Company is required to obtain prior
regulatory approval for any dividends until the Agreement has
been terminated. See Note S--Regulatory Matters, Notes to
Consolidated Financial Statements, page 46, for a discussion of
dividend restrictions.
As this Annual Report was going to press in March 1994, the
Federal Reserve Bank of Richmond and the Maryland Bank
Commissioner advised the Company that they expect to terminate
the Agreement based upon the results of the recently
completed joint annual examination of the Bank.
Interest Rate Risk Management
Interest rate risk arises from mismatches in the repricing or
maturity characteristics between assets and liabilities. The
Company's Funds Management and Asset/Liability Management
Committees monitor the projected maturities of loans,
investments, deposits and borrowings with a computer model that
simulates the dynamics of frequent changes in interest
rates and maturity patterns. Using the model as a guide, the
committees manage interest rate risk by adjusting the size and
maturity characteristics of the loan, investment, and
held-for-sale portfolios, altering the composition and maturity
characteristics of deposits and borrowings, and less frequently,
by hedging through the use of interest rate swaps and caps,
options, and futures contracts. See Note O--Financial
Instruments With Off-Balance Sheet Risk, Notes to Consolidated
Financial Statements, page 44.
Static gap repricing is but one tool used to provide an
indication of interest rate risk at a point in time. Table 12
summarizes the Company's interest rate sensitivity position at December 31,
1993 for four different time periods using a static gap
analysis. In assigning assets and liabilities to these periods,
assumptions are made with regard to prepayments of loans and
securities based on historical trends. While this table shows the
opportunity to reprice assets and liabilities, it does not
reflect the fact that all interest rates do not move in equal increments.
For example, consumer deposit rates typically lag changes in
market interest rates.
An institution with more assets repricing than liabilities over a
given time frame is considered asset sensitive. On the other
hand, liability sensitivity results from more liabilities
repricing than assets. An asset sensitive institution will
generally benefit from rising interest rates, and a liability sensitive
institution will generally benefit from falling rates.
<TABLE>
<CAPTION>
Table 12--Interest Rate Sensitivity Analysis
Period from December 31, 1993
in which assets/liabilities
are subject to repricing
0-90 91-180 181-365 1-5 Over
(Millions of dollars) Days Days Days Years 5 Years
<S> <C> <C> <C> <C> <C>
Assets
Short-term investments $ 53
Loans held for sale 167
Available-for-sale
--adjustable 217 $ 25 $ 10
--fixed 11 $ 14 25 225 $ 15
Loans 540 38 74 374 283
Other assets 21 140
Total assets $1,009 $ 52 $ 124 $609 $438
Liabilities and Equity
Noninterest-bearing deposits(1) $170
Savings and money market accounts(1) 762
Other interest-bearing deposits 412 $ 134 $ 331 $137 $ 15
Borrowed funds 61 1 1 17
Other liabilities 29
Stockholders' equity 162
Total liabilities and equity $1,405 $ 135 $ 331 $138 $223
Interest Sensitivity Gap
Amount for period $ (396) $ (83) $(207) $471 $215
Cumulative amount (396) (479) (686) (215)
Cumulative percent of assets (17.7)% (21.5)% (30.7)% (9.6)%
<FN>
(1) Noninterest-bearing deposits and savings, taken together,
include $434 million in the 0-90 days category which the Company
considers to be long-term core deposits in the management
of its interest rate sensitivity.
</TABLE>
Effects of Inflation
The impact of inflation upon bank holding companies differs
substantially from the impact on nonfinancial institutions.
Banks, as financial intermediaries, have assets which are primarily
monetary in nature and change corresponding to movements in
the inflation rate. The precise impact of inflation upon the
Company is difficult to measure. Inflation may cause noninterest
expense items to increase at a more rapid rate than earning
sources. Inflation may also affect the borrowing needs of
consumers, thereby affecting the growth rate in the Company's
assets. Inflation may also affect the general level of interest
rates, which can have an effect on the Company's profitability.
Summary
The Company reported net income of $14.5 million or $1.13 per
share, for 1992, compared with a net loss of $126.5 million,
or $9.92 per share, for 1991. Net income for 1992 included $11.9
million in nonrecurring interest income from an income tax
settlement. The loss for 1991 reflected $125.4 million in loan
loss provisions related to the identification of over $160
million of nonperforming assets by new management following a successful
proxy contest, and the amortization and write-off of
$38.2 million in goodwill associated with the 1987 acquisition of
Metropolitan Savings and Loan.
Net interest income, on a fully taxable equivalent basis,
increased for 1992 to $86.0 million, from $77.9 million for 1991.
The increase was driven mostly by a decrease in interest rates on
time deposits. The most significant factor contributing to an
improvement in net yield on average earning assets to 3.15% for
1992, from 2.44% for 1991, was the maturity of $450.9 million of
brokered deposits and jumbo CDs having an average cost of 7.91%,
significantly higher than the average rate earned on funds used to
pay the deposit maturities.
The provision for possible loan losses was $29.9 million for 1992
compared with $125.4 million for 1991. The lower provision
recorded in 1992 reflected a stabilization of the portfolio of
nonperforming assets, much of which were identified and
provided for in 1991.
Other operating income increased to $51.4 million for 1992, an
increase of 159% from $19.9 million for 1991. Excluding
nonrecurring and infrequent income (primarily investment
securities gains, interest on a federal tax recovery and gains on
loan sales), other operating income increased by 64% for 1992
over 1991 attributed largely to increases in mortgage
banking and trading account income. Mortgage banking income
increased by $9.8 million or 148% for 1992 compared with
1991 as a result of a near tripling in residential mortgage loan
production and a $2.9 million increase in gains from the sale
of servicing.
Other operating expense decreased to $92.3 million for 1992 from
$133.7 million for 1991, a reduction of 31%. Excluding a
$44.9 million decrease in nonrecurring and infrequent expense
related primarily to the $38.2 million amortization and write-
off of goodwill recorded for 1991, other operating expense
increased 4% in 1992 versus 1991. This increase was primarily
attributable to salaries and benefits due principally to mortgage
banking operations.
Income taxes for 1992 amounted to $.4 million or 2.7% of income
before taxes and represented only state income taxes.
There was no federal income tax expense for 1es and represented
only state income taxes. There was no federal income
tax expense for 1992. Income taxes for 1991 amounted to a net
benefit of $35.5 million, or 22% of the loss before income taxes.
Average earning assets declined by 15% for 1992 to $2.729
billion, from $3.192 billion for 1991, following the Company's
business plan to reduce the size of the Company and increase its
capital ratios. The principal component of earning assets
is the loan portfolio, which averaged 63% of earning assets for
1992 compared with 71% for 1991. Also, to help meet the
Company's objective for increased liquidity, temporary
investments were increased in 1992 to an average of $192.1
million compared with $138.6 million for 1991.
Average total deposits for 1992 decreased by $241.0 million, or
8% from 1991, related largely to the maturity of brokered
deposits and term CDs. The high volume of maturities was
compatible with the Company's objective to increase capital
ratios. Average noninterest-bearing demand deposits increased by
8% in 1992 to $107.7 million, from $100.0 million for
1991, and represented 4% of total deposits. Brokered and jumbo
deposits amounting to $450.9 million matured for 1992 and
were not replaced, contributing to the increase in the Company's
net yield on earning assets. Average other time deposits
declined by $115.8 million for 1992 as depositors sought higher
interest rates through alternative investments.
Average borrowings decreased by 68% to $66.4 million for 1992,
from $208.8 million for 1991. The most significant
reductions were achieved in securities sold under agreements to
repurchase and other short-term borrowings, and were
related directly to downsizing the Company.
Stockholders' equity increased 18% to $126.4 million at December
31, 1992 compared with $107.2 million at December 31,
1991. Sources of this increase in stockholders' equity were net
income of $14.5 million, $3.2 million of new common stock
sold through the Company's discount stock purchase plan, and $1.5
million of new common stock issued in exchange for
previously outstanding capital notes.
<PAGE>
Report of Coopers & Lybrand, Independent Auditors
Stockholders and Board of Directors
Baltimore Bancorp
We have audited the accompanying consolidated statements of
financial condition of Baltimore Bancorp and subsidiaries as
of December 31, 1993 and 1992, and the related consolidated
statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended
December 31, 1993. These financial statements are the
responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan
and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Baltimore Bancorp and subsidiaries as of December
31, 1993 and 1992, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1993
in conformity with generally accepted accounting principles.
As described in Note A, Notes to Consolidated Financial
Statements, the Company changed its method of accounting for
investments at December 31, 1993 and its method of accounting for
income taxes in 1992.
Baltimore, Maryland
January 28, 1994
<PAGE>
Consolidated Statements of Financial Condition
Baltimore Bancorp and Subsidiaries
December 31
(Thousands of dollars) 1993 1992
Assets
Cash and due from banks $ 41,905 $ 72,016
Federal funds sold and securities purchased
under resale agreements 41,500 37,000
Other short-term investments 11,067 960
Loans held for sale 167,336 65,101
Available-for-sale securities 542,196 178,294
Investment securities 420,666
Loans:
Real estate-construction --residential 78,585 57,433
--commercial 15,672 95,178
Real estate-first mortgage--residential 52,696 69,093
--commercial 419,500 441,839
Real estate-second mortgage and home equity 301,799 355,930
Consumer installment 205,406 290,423
Credit card 144,000 132,993
Commercial 64,207 65,135
Lease financing 73,673 79,547
Total loans 1,355,538 1,587,571
Less: Allowance for possible loan losses 38,684 65,899
Unearned income 47,093 66,121
Net loans 1,269,761 1,455,551
Premises and equipment, net 31,013 32,280
Assets acquired in foreclosure 47,852 85,836
Other assets 79,561 81,625
Total assets $2,232,191 $2,429,329
Liabilities and Stockholders' Equity
Liabilities
Noninterest-bearing deposits $ 169,714 $ 113,603
Interest-bearing deposits:
Checking accounts 125,461 115,710
Money market 497,665 542,384
Savings 263,914 243,546
Other time 887,983 973,709
Brokered 12,418 241,781
Jumbo certificates of deposit 4,362 5,637
Total deposits 1,961,517 2,236,370
Securities sold under agreements to repurchase and
other short-term borrowings 60,980 13,804
Long-term borrowings 18,246 19,563
Accrued taxes, interest and other liabilities 29,163 33,187
Total liabilities 2,069,906 2,302,924
Commitments and Contingencies
Stockholders' Equity
Common stock ($5.00 par value) shares authorized
50,000,000; shares outstanding
16,672,049 and 13,479,288 at December 31, 1993
and 1992, respectively 83,360 67,397
Capital surplus 27,839 18,045
Retained earnings 50,400 40,963
Unrealized gain on available-for-sale securities 686
Total stockholders' equity 162,285 126,405
Total liabilities and stockholders' equity $2,232,191 $2,429,329
See notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Income
Baltimore Bancorp and Subsidiaries
<TABLE>
<CAPTION> Year ended December 31
(Thousands of dollars, except per share data) 1993 1992 1991
<S> <C> <C> <C>
Interest income
Interest and fees on loans $127,746 $147,984 $ 221,994
Interest and dividends on securities:
Taxable interest 29,521 40,597 59,158
Interest exempt from federal income taxes 27 140 383
Dividends 275 1,080
Other interest income 13,948 28,012 10,123
Total interest income 171,242 217,008 292,738
Interest Expense
Interest on deposits 73,613 127,584 201,436
Interest on securities sold under agreements to
repurchase and other short-term borrowings 727 1,753 11,263
Interest on long-term borrowings 1,653 2,054 3,048
Total interest expense 75,993 131,391 215,747
Net interest income 95,249 85,617 76,991
Provision for possible loan losses 22,000 29,881 125,368
Net interest income (loss) after provision for
possible loan losses 73,249 55,736 (48,377)
Other Operating Income
Service charges on deposit accounts 6,869 6,878 5,507
Mortgage banking income 16,178 16,488 6,659
Trading account income 3,905 2,270
Gains (losses) on available-for-sale securities 9,549 (2,894) 1,782
Gains (losses) on investment securities 1,031 3,877 (5,731)
Interest on federal tax recovery 11,897 2,916
Other 6,692 11,298 6,473
Total other operating income 40,319 51,449 19,876
Other Operating Expense
Salaries and employee benefits 47,378 43,316 40,281
Net occupancy expense of premises 8,840 8,379 8,361
Equipment expense 8,959 8,464 8,560
FDIC insurance 6,656 6,428 6,075
Other real estate owned expense, net 10,932 7,964 11,652
Amortization and write-off of goodwill 38,150
Other 22,968 17,780 20,649
Total other operating expense 105,733 92,331 133,728
Income (loss) before income taxes and
extraordinary item 7,835 14,854 (162,229)
Income taxes (benefit) (2,435) 400 (35,527)
Income (loss) before extraordinary item 10,270 14,454 (126,702)
Extraordinary item, net of taxes - early
extinguishment of debt 56 213
Net income (loss) $ 10,270 $ 14,510 $(126,489)
Per Share
Income (loss) before extraordinary item $.66 $1.13 $(9.94)
Extraordinary item, net of taxes .02
Net income (loss) $.66 $1.13 $(9.92)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
Baltimore Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Unrealized Unrealized
Shares Loss on Gain on
of Common Marketable Available- Total
Stock Common Capital Retained Equity for-sale Stockholders'
(Thousands of dollars) Outstanding Stock Surplus Earnings Securities Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991 12,750,436 $63,753 $17,069 $158,042 $(3,576) $235,288
Net income (loss) (126,489) (126,489)
Dividends declared
($.39 per share) (4,980) (4,980)
Redemption of stockholder
rights ($.01 per share) (120) (120)
Stock options exercised 900 5 1 6
Cancellation of certain
restricted stock shares (14,539) (74) 74
Other (86) 3,576 3,490
Balance at December 31, 1991 12,736,797 63,684 17,058 26,453 107,195
Net income 14,510 14,510
Common stock sold 516,179 2,581 627 3,208
Stock options exercised 1,960 10 4 14
Debt to equity conversion 224,352 1,122 356 1,478
Balance at December 31, 1992 13,479,288 67,397 18,045 40,963 126,405
Net income 10,270 10,270
Common stock sold 3,158,821 15,794 9,591 25,385
Common stock issued under
401(k) plan 24,606 123 170 293
Stock options exercised 11,200 56 23 79
Dividends declared
($.05 per share) (833) (833)
Cumulative effect of
accounting change (Note A) $ 686 686
Cancellation of certain
restricted stock shares (1,866) (10) 10
Balance at December 31, 1993 16,672,049 $83,360 $27,839 $ 50,400 $ _ $ 686 $162,285
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
Baltimore Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31
(Thousands of dollars) 1993 1992 1991
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 10,270 $ 14,510 $(126,489)
Adjustments to reconcile net income (loss) to
net cash provided by
(used for) operating activities:
Provision for possible loan losses 22,000 29,881 125,368
Provision for depreciation and amortization 4,573 3,960 4,090
Amortization and write-off of goodwill 38,150
Amortization of purchased servicing 8,629 2,569 1,470
Amortization of excess servicing 1,290 398 58
Amortization of discount on securities 3,361 4,398 1,749
Other amortization 832 687 10
Market value decline on available-for-sale securities 1,481
Market value decline on investment securities 3,028
Realized losses (gains) on available-for-sale securities (9,549) 1,413 (1,782)
Realized losses (gains) on investment securities (1,031) (3,877) 2,703
Gain on sale of servicing (7,713) (4,311) (1,374)
Gain on sale of deposits (398)
Gain on sale of home equity loans (5,929)
Gain on early extinguishment of debt (91) (347)
Contribution of common stock under 401(k) plan 293
Deferred income tax provision (benefit) 1,502 (1,108) (13,672)
Decrease (increase) in trading account securities 37,046 (37,046)
Decrease (increase) in other assets and liabilities (6,264) 14,248 (21,830)
Other (primarily loan origination costs) 305 (1,407) (238)
Net cash provided by (used for) operating activities 28,100 93,868 (26,152)
Investing Activities
Proceeds from sales of available-for-sale securities 367,151 271,176 263,014
Principal repayments of available-for-sale securities 45,554
Purchases of available-for-sale securities (376,055) (185,675) (101,855)
Proceeds from sales of investment securities 299,266 498,183 419,398
Maturities of investment securities 139,731 17,573 16,835
Principal repayments of investment securities 97,986 226,336 298,835
Purchases of investment securities (513,569) (676,399) (659,796)
Sales of mortgage loans held for sale 1,164,257 1,136,671 265,787
Originations of mortgage loans held for sale (1,266,492) (1,101,627) (350,976)
Purchases of servicing (11,006) (2,055) (9,084)
Proceeds from sale of servicing 10,230 5,503 1,811
Proceeds from sale of home equity loans 178,929
Decrease (increase) in loans 206,975 318,267 (56,923)
Purchases of premises and equipment (3,838) (1,317) (2,872)
Other 171 458 399
Net cash provided by investing activities $ 160,361 $ 686,023 $ 84,573
Financing Activities
Net increase in noninterest-bearing demand deposits $54,961 $ 3,722 $ 14,653
Net (decrease) increase in interest-bearing deposits (349,720) (715,330) 22,070
Net increase (decrease) in securities sold under agreements
to repurchase and other short-term borrowings 47,176 (34,473) (226,607)
Proceeds from sale of deposits 20,304
Retirement of long-term borrowings (1,317) (5,299) (12,888)
Proceeds from sale of common stock 25,464 3,222 6
Cash dividends paid (833) (7,012)
Net cash used for financing activities $ (203,965) $ (748,158) $(209,778)
Increase (decrease) in cash and cash equivalents $ (15,504) $ 31,733 $(151,357)
Cash and cash equivalents at beginning of year 109,976 78,243 229,600
Cash and cash equivalents at end of year $ 94,472 $ 109,976 $ 78,243
Supplemental Information:
Interest paid $ 84,007 $ 136,595 $ 227,621
Net income tax paid (refunded) (3,618) (18,864) 7,507
Noncash Investing and Financing Activities:
Assets acquired in foreclosure $ 16,253 $ 43,702 $ 61,825
Loans to facilitate sale of assets acquired in foreclosure 16,868 7,721
Unrealized gain on available-for-sale securities 686
Reclassifications of investment securities to loans 4,974
Reclassification of investment securities to
available-for-sale securities 390,510 252,590 53,957
Reclassification of available-for-sale securities to
investment securities 136,192
Common stock exchanged for long-term borrowings 1,478
Reclassification of loans to loans held for sale 120,189
Reclassification of loans held for sale to loans 120,189
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
(Thousands of dollars, except per share data)
Note A--Summary of Significant Accounting Policies
The accounting policies followed by Baltimore Bancorp and its
subsidiaries conform with generally accepted accounting
principles and prevailing practices of the banking industry. The
methods of applying those policies and the basis of
significant estimates and valuations which materially affect the
determination of financial condition, results of operations,
changes in stockholders' equity and cash flows are summarized
below.
Principles of Consolidation
The consolidated financial statements include the accounts of
Baltimore Bancorp (the Company) and its subsidiaries, the
most significant of which is The Bank of Baltimore (the Bank).
All significant intercompany transactions and accounts have
been eliminated. The Company conducts commercial and retail
banking business, primarily in Maryland. Significant
subsidiaries of the Bank include Baltimore Bancorp Leasing &
Financial, Inc., an equipment leasing and finance company,
Atlantic Residential Mortgage Corporation, a multi-state mortgage
banking business, and Baltimore Bancorp Investment
Services, Inc., a brokerage and investment services business.
Cash and Cash Equivalents
The Company considers cash and due from banks, federal funds sold
and securities purchased under resale agreements
and other short-term investments as cash and cash equivalents for
purposes of preparing the Consolidated Statements of
Cash Flows. Other short-term investments consist of commercial
paper and money market fund investments whose cost
approximates market value.
Loans Held for Sale
Loans held for sale, which represent loans generated by the
Bank's mortgage banking unit, are recorded at the lower of
aggregate cost or market value. The amount by which cost exceeds
market value is accounted for as a valuation allowance.
Changes in the valuation allowance are included in the
determination of net income of the period in which the change
occurred.
Investments in Securities
At December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS No. 115").
Accordingly, available-for-sale securities at December 31,
1993 are recorded at fair value. Under SFAS No. 115, unrealized
gains and losses for available-for-sale securities are
reported, net of any related income tax effect, as a separate
component of stockholders' equity. Realized gains and losses
on the sale of available-for-sale securities are included in the
determination of net income in the period of disposition using
the specific identification cost method. If the decline in fair
value of an available-for-sale security is considered other than
temporary, the cost basis of that security is written down to
fair value as a new cost basis and the amount of the write-down
is accounted for as a realized loss. The cumulative effect of
adopting SFAS No. 115, represented by the unrealized gain for
available-for-sale securities of $1,055 at December 31, 1993, net
of the related income tax effect of $369, has been
recorded in the separate component of stockholders' equity.
Prior to the adoption of SFAS No. 115, investment securities,
other than marketable equity securities, were recorded at cost
adjusted for amortization of premiums and accretion of discounts
computed on a basis which approximates the interest
method. Marketable equity securities were carried at the lower of
aggregate cost or market. A valuation allowance, when
necessary, representing the excess of cost over market was
established by charges to stockholders' equity. Gains and
losses on sales of investment securities were determined using
the specific identification cost method. If the decline in
market value of an investment security was considered other than
temporary, the cost basis of that security was written
down to market value as a new cost basis, and the amount of the
write-down was accounted for as a realized loss.
Investment securities represented securities in which the Company
had both the ability and intent to hold until maturity. In
making this determination, management considered significant
known liquidity and capital requirements. Securities to be
held for indefinite periods of time, including securities that
management intended to use as part of its asset/liability
strategy, or that may have been sold in response to changes in
interest rates, changes in repayment risk, the need to increase
regulatory capital or other similar factors, were classified as
available-for-sale and carried at the lower of cost or market
value. The amount, if any, by which the aggregate cost of the
portfolio exceeded market value was accounted for as a
valuation allowance. When securities were sold, the adjusted cost
of the specific security sold was used to compute the
realized gain or loss on the sale.
Trading account assets held by the Company during 1992 and 1991
were recorded at market value. Gains or losses
resulting from changes in market value were recorded as other
operating income. The Company had no trading account
assets during 1993.
Interest and Fees on Loans
Interest on loans and amortization of unearned income is computed
by methods which approximate the interest method and
result in a level rate of return on the principal amounts
outstanding. Accrual of interest is discontinued when management
believes that circumstances indicate collectibility of interest
or principal is doubtful, or generally when a default of interest
or principal has existed for 90 days or more, unless such loan is
fully collateralized and in the process of collection. Cash
collections received on nonaccrual loans are generally applied to
principal. Restructured loans are accounted for in
accordance with Statement of Financial Accounting Standards No.
15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings.
Loan origination and commitment fees and certain loan origination
costs are deferred and amortized to interest income using
the interest method. These amounts are amortized over the
contractual life of the related loans and adjusted for
anticipated prepayments using current and past payment trends.
Commitment fees and fees related to standby letters of credit are
recognized over the commitment period.
Lease Financing
Investments in lease contracts are recorded at their amounts
receivable (gross receivables plus guaranteed and estimated
unguaranteed residuals). Income is recognized, for financial
reporting purposes, using the interest method. For income tax
purposes, certain lease income is recognized using the operating
method. Deferred income taxes are provided for differences in the
amount of income recognized for financial reporting and tax
purposes.
Interest Rate Contracts
Interest rate swaps and caps are used to manage the risk of
fluctuations in interest rates, and therefore, risk to the
Company's earnings. Net interest income or expense associated
with interest rate swap and cap transactions is accrued on
a monthly basis over the lives of the agreements and is included
in net interest income in the Consolidated Statements of
Income.
Allowance for Possible Loan Losses
The allowance for possible loan losses is based upon management's
evaluation of the risk characteristics of the loan
portfolio, including the impact of current economic conditions on
borrowers' ability to repay, past collection experience and
other factors, which in management's judgment, warrant current
recognition. The allowance is maintained at a level believed
adequate by management to absorb estimated potential credit
losses. In assessing the adequacy of the allowance for loan
losses, management is required to make certain judgments based on
estimates of information or assumptions, some of
which are obtained from outside professionals, such as appraisals
of real estate. These estimates are subject to change
and, due to the significant nature of the loan portfolio in a
financial institution, changes in estimates may directly affect
current earnings and the financial condition of the Company.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Gains and losses upon
dispositions are included in other operating income. Depreciation
on premises and equipment is charged to operations over
the respective estimated useful lives using the straight-line
method. Leasehold improvements are amortized using the
straight-line method over the terms of the respective leases or
the useful lives of the improvements, whichever is shorter.
Maintenance and repairs are expensed as incurred.
The range for estimated useful lives for each component of
premises and equipment is as follows: buildings, 20 to 40 years;
furniture and equipment, 3 to 12 years; and leasehold
improvements, 5 to 30 years.
Assets Acquired in Foreclosure
Real estate acquired through foreclosure, loans which are
considered in-substance foreclosures and other repossessed
property are carried at the lower of the recorded investment in
the loan or the current fair market value of the property.
Losses necessary to write the recorded investment in the loan to
fair value, at the time of foreclosure, are charged to the
allowance for possible loan losses. Subsequent gains or losses on
the sales of these assets and losses resulting from any
subsequent decrease in the fair values of the assets are credited
or charged to other operating expense, as are the costs of
operating the properties.
Intangible Assets
The Company identifies and measures the impairment of intangible
assets by comparing the carrying value of intangible
assets to the undiscounted value of forecasted related income and
any excess of carrying value over the undiscounted
forecasted related income is written off as a charge against
income.
Income Taxes
In 1992, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS
No. 109"). Under this pronouncement, income taxes are accounted
for using the liability method and deferred taxes are
recorded based on the differences, termed "temporary
differences," between the basis of assets and liabilities for
financial statement purposes versus tax purposes at current tax
rates. SFAS No. 109 provides for the establishment of a reserve
which discounts the Company's deferred tax assets based on the
probability of future realization. Tax expense (benefit) in
the Consolidated Statements of Income is equal to the sum of
taxes currently payable (receivable), including the effect of the
alternative minimum tax, if any, plus an amount necessary to
adjust deferred tax assets and liabilities to an amount equal to
period-end temporary differences at currently prevailing marginal
tax rates. There was no cumulative effect of adopting
SFAS No. 109 as of January 1, 1992.
The Company and its subsidiaries file a consolidated federal tax
return.
Mortgage Banking Activities
The Company's mortgage banking subsidiary originates, sells and
services residential first mortgage loans. Gains and
losses on loan sales are computed based on retaining a normal
servicing fee. Capitalized excess servicing, resulting from
loan sales, and purchased mortgage servicing rights are being
amortized using the interest method over the life of the
related loans, adjusted for estimated prepayments. Actual
prepayment experience is reviewed periodically and the carrying
values of excess servicing and purchased mortgage servicing
rights are appropriately adjusted.
Reclassifications
Certain reclassifications of information previously reported have
been made to conform with the 1993 presentation.
New Accounting Pronouncements
In November 1992, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards
No. 112, Employers' Accounting for Post-employment Benefits
("SFAS No. 112"). This pronouncement requires the
Company to accrue, beginning in 1994, expenses for benefits
provided to former or inactive employees after employment
but before retirement if the obligation is attributable to
employee services already rendered, if employees' rights to those
benefits accumulate or vest, if payment of the benefits is
probable, and if the amount of benefits can be reasonably
estimated. The Company does not believe that the adoption of SFAS
No. 112 will have a material impact on its financial
position or results of operations.
The FASB, in May 1993, issued Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS No. 114"), which the Company will be
required to adopt effective January 1, 1995. Under
SFAS No. 114, an impaired loan must be measured based on the
present value of expected future cash flows discounted at
the loan's effective interest rate. Alternatively, impairment can
be measured by reference to an observable market price, if
one exists, or the fair value of the collateral for a
collateral-dependent loan. The Company has evaluated this new
accounting standard and has determined that it will not have a
material impact on its financial position or results of
operations.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial
instruments:
Cash and cash equivalents
The carrying amounts reported in the Consolidated Statements of
Financial Condition for cash and short-term instruments
approximate their fair values.
Investments
Fair values for available-for-sale securities, including
mortgage-backed securities, are based on quoted market prices,
where available. Where quoted market prices are not available,
fair values are based on quoted market prices of
comparable instruments.
Loans receivable
Variable-rate loans that reprice frequently at market rates and
with normal levels of credit risk are presented at carrying
values or market values where appropriate. The fair value of
credit card loans is based on a current valuation of this
portfolio by a national investment banking firm. The fair values
for other loans are estimated primarily using discounted cash
flow analyses, applying interest rates currently being offered
for loans with similar terms to borrowers of similar credit
quality. The fair value of nonaccrual loans is based upon an
individual loan valuation using a discounted cash flow analysis
of the underlying loan and a rate estimated to be commensurate
with the risk involved. This valuation is measured in part by
assessing the fair value of the underlying collateral. These
assessments are calculated using techniques that include recent
comparable sales, replacement costs and discounted cash flows.
The carrying amount of accrued interest approximates its
fair value.
Financial instruments with off-balance-sheet risk
Fair values for the Bank's financial instruments with
off-balance-sheet risk (forwards, options, guarantees, lending
commitments, and interest rate contracts) are based on fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the
counterparties' credit standing (guarantees and loan
commitments). The Company deems the fair value of these financial
instruments to be immaterial at December 31, 1993.
Deposit liabilities
The fair values disclosed for demand deposits (interest and
noninterest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). The carrying amounts for variable-rate, fixed-term
money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a
discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of
aggregated expected maturities on time deposits.
Long-term borrowings
Fair values for long-term borrowings are estimated utilizing
quoted market values, recent transactions of similar debt or
discounted cash flow analyses that apply current interest rates
for similar types of debt.
Note B--Restrictions on Cash and Due from Banks
In accordance with Federal Reserve Board Regulation D, the Bank
maintains reserve balances with the Federal Reserve
Bank based on the overall levels of transaction account deposit
balances. The average amount of those reserve balances,
net of vault cash, for the years ended December 31, 1993 and 1992
was $6,442 and $4,167 respectively.
<PAGE>
Note C--Available-for-Sale and Investment Securities
Available-for-sale securities at December 31, 1993 are summarized
as follows:
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,994 $ 1,994
Federal agency obligations 75,071 $ 53 $ 267 74,857
Foreign government debt 1,000 1,000
Mortgage-backed securities 452,564 1,593 328 453,829
Other asset-backed securities 10,512 5 1 10,516
Total available-for-sale securities $541,141 $1,651 $ 596 $542,196
</TABLE>
Available-for-sale securities with a fair value of $175,218 at
December 31, 1993 were pledged to collateralize securities sold
under agreements to repurchase, other short-term borrowing
arrangements, and various other arrangements as required.
The amortized cost and fair value of available-for-sale
securities by contractual maturity at December 31, 1993 are shown
below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
December 31, 1993
Amortized Fair
Cost Value
Due after one year through five years $ 63,001 $ 62,945
Due after five years through ten years 15,064 14,906
Mortgage-backed securities 452,564 453,829
Other asset-backed securities 10,512 10,516
Total investment securities $ 541,141 $ 542,196
Available-for-sale securities at December 31, 1992 had a carrying
amount of $178,294 and a fair value of $179,827,
including mortgage-backed securities with a carrying amount of
$167,749 and a fair value of $169,269. Gross unrealized
gains on the total portfolio were $2,227 and gross unrealized
losses were $694 at December 31, 1992.
Proceeds from the sale of available-for-sale securities were
$367,151 in 1993, $271,176 in 1992 and $263,014 in 1991.
Gross gains of $9,737, $10 and $1,782 and gross losses of $188,
$1,423 and $0 were realized on those sales in 1993, 1992
and 1991 respectively.
Securities classified as investment securities at December 31,
1992 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1992
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $184,680 $ 29 $ 1 $184,708
Federal agency obligations 30,199 1 263 29,937
Obligations of states and
municipalities 1,125 1,125
Corporate debt 4,983 1,174 3,809
Mortgage-backed securities 199,679 1,247 1,127 199,799
Total investment securities $420,666 $1,277 $2,565 $419,378
</TABLE>
Proceeds from sales of investment securities during 1993, 1992
and 1991 were $299,266, $498,183, and $419,398,
respectively. Gross gains of $1,386, $7,521 and $3,464 and gross
losses of $355, $3,644 and $6,167 were realized on
those sales in 1993, 1992 and 1991, respectively.
<PAGE>
Note D--Loans Receivable
The carrying amounts and fair values of loans receivable are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Real estate-construction --residential $ 78,084 $ 75,422 $ 57,217 $ 50,199
--commercial 15,657 15,515 95,093 73,383
Real estate-first mortgage --residential 52,403 53,147 68,438 69,551
--commercial 419,335 397,494 441,839 419,885
Real estate-second mortgage and home equity 303,547 311,714 357,562 369,824
Consumer installment 162,389 162,645 225,282 230,136
Credit card 145,204 168,087 133,623 156,520
Commercial 64,052 61,576 65,107 62,960
Lease financing 67,774 67,786 77,289 73,351
Less allowance for loan losses (38,684) (65,899)
Net loans receivable $1,269,761 $1,313,386 $1,455,551 $1,505,809
</TABLE>
Mortgage loans held for sale at December 31, 1993 had a carrying
value of $167,336 and a fair value of $170,303.
Included in other assets at December 31, 1993 and 1992 are ground
rent receivables in the amount of $15,755 and
$15,927, respectively, with a fair value of $12,110 at December
31, 1993.
Note E--Lease Financing
Lease financing receivables are summarized as follows:
December 31
1993 1992
Minimum lease payment receivable $70,785 $75,171
Residual values 2,888 4,376
Total lease receivables $73,673 $79,547
At December 31, 1993, future minimum lease payments receivable
for the lease financing receivables are as follows:
1994 $29,495
1995 15,084
1996 8,412
1997 5,319
1998 3,456
Thereafter 9,019
Total $70,785
Note F--Allowance for Possible Loan Losses
Transactions in the allowance for possible loan losses are
summarized as follows:
Year ended December 31
1993 1992 1991
Balance at January 1 $65,899 $77,368 $35,502
Provision charged to
operating expense 22,000 29,881 125,368
Recoveries on loans and leases
previously charged off 5,298 5,244 2,904
Loans and leases charged
off during the year (54,513) (46,594) (86,406)
Balance at December 31 $38,684 $65,899 $77,368
Nonaccruing and restructured loans and leases are summarized as
follows:
December 31
1993 1992 1991
Nonaccruing loans and leases $24,899 $113,276 $109,016
Restructured loans and leases 9,000 9,000 59,218
Total nonperforming loans
and leases $33,899 $122,276 $168,234
Performing restructured loans $39,220 $ 56,250
Interest income that would
have been recognized on
such loans and leases under
contractual terms $ 2,517 $ 9,069 $ 17,959
Interest income actually
recognized $ 764 $ 4,522 $ 12,361
At December 31, 1993, the Company had commitments to advance
additional funds for nonaccruing and restructured loans
and leases totaling $330.
<PAGE>
Note G--Premises and Equipment
The major classes of premises and equipment are summarized as
follows:
December 31
1993 1992
Land and improvements $ 1,529 $ 1,529
Buildings 15,699 15,784
Furniture and equipment 24,349 25,170
Leasehold improvements 15,364 15,448
Total premises and equipment 56,941 57,931
Less accumulated depreciation 25,928 25,651
Net premises and equipment $31,013 $32,280
Depreciation expense for the years ended December 31, 1993, 1992
and 1991 was $4,573, $3,960 and $4,090, respectively.
Note H--Intangible Assets
At December 31, 1993 and 1992, the unamortized cost of purchased
mortgage servicing rights included in other assets in
the Consolidated Statements of Financial Condition amounted to
$12,893 and $13,114, respectively. The cost of purchased
mortgage servicing rights is being amortized in proportion to the
estimated net income derived from servicing the related
mortgage loans. These loans had an outstanding principal balance
at December 31, 1993 and 1992 of $1,085,841 and
$834,065, respectively. The aggregate outstanding principal
balance of all loans serviced by the Company's mortgage
banking unit at December 31, 1993 and 1992 was $2,464,616 and
$1,832,641, respectively. Amortization of purchased
mortgage servicing rights for the years ended December 31, 1993,
1992 and 1991 was $8,629, $2,569 and $1,470, respectively.
Also included in other assets is the unamortized cost of excess
mortgage servicing rights of $3,240 and $4,449 at December
31, 1993 and 1992, respectively. Amortization of excess mortgage
servicing rights amounted to $1,290 in 1993, $398 in
1992 and $58 in 1991.
At the end of 1991, the Company wrote off the remaining balance
of acquisition related intangible assets which consisted
principally of goodwill. The amount of the write-off was $35,798.
The write-off resulted from the substantial decline of the
banking market in the acquired company's market area,
particularly with respect to commercial real estate lending.
Note I--Deposits
The carrying amounts and fair values of deposits are summarized
as follows:
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Noninterest-bearing deposits $ 169,714 $ 169,714 $ 113,603 $ 113,603
Interest-bearing deposits:
Checking accounts 125,461 125,461 115,710 115,710
Money market 497,665 497,665 542,384 542,384
Savings 263,914 263,914 243,546 243,546
Other time 887,983 894,731 973,709 982,497
Brokered 12,418 13,467 241,781 245,291
Jumbo certificates of
deposit 4,362 4,365 5,637 5,641
Total deposits $1,961,517 $1,969,317 $2,236,370 $2,248,672
</TABLE>
Statement of Financial Accounting Standards No. 107, Disclosures
About Fair Values of Financial Instruments, defines the
fair value of demand deposits as the amount payable on demand,
and prohibits adjusting fair value for any value derived
from retaining those deposits for an expected future period of
time. That component, commonly referred to as a deposit
base intangible, is neither considered in the above fair value
amounts nor is it recorded as an intangible asset in the balance
sheet.
Certificates of deposit and other time deposits in denominations
of $100 or more at December 31, 1993 aggregated $67,807.
Note J--Borrowings
The Company enters into sales of securities under agreements to
repurchase which are treated as financings. The
obligation to repurchase securities sold is reflected as a
liability in the Consolidated Statements of Financial Condition.
The securities underlying the agreements remain in the respective
investment accounts. At December 31, 1993, the Company
had outstanding various repurchase agreements with maturities of
one day to one month amounting to $60,980 and bearing
interest rates of 2.75% to 3.45%. The investments collateralizing
these financing arrangements were mortgage-backed
securities with a carrying value of $95,182 and a market value of
$95,704. The Company enters into repurchase agreements
with only selected primary dealers.
The carrying amounts and fair values for long-term borrowings are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
Maturity Interest Carrying Fair Carrying Fair
Date Rate Amount Value Amount Value
<S> <C> <C> <C> <C> <C> <C>
Subordinated Capital Notes 1999 10.875% $ 867 $ 872 $ 867 $ 806
Convertible Subordinated Debentures 2011 6.75 5,229 3,922 5,229 3,745
Advances from Federal Home Loan Bank 1994-1995 9.50 1,500 1,559 2,500 2,675
Financing arrangement under sale-
leaseback 2008 9.23 10,650 11,906 10,967 11,998
Total long-term borrowings $ 18,246 $18,259 $19,563 $19,224
</TABLE>
During 1992 and 1991, the Company purchased in open market
transactions or converted and retired various amounts of its
10.875% Subordinated Capital Notes and its 6.75% Convertible
Subordinated Debentures. The debt issues were purchased
or converted at discounts which resulted in gross extinguishment
gains of $91 in 1992 and $347 in 1991. These gains, net of
the related income tax effect of $35 in 1992 and $134 in 1991,
are reported as extraordinary items in the Consolidated
Statements of Income.
The Subordinated Capital Notes will be exchanged at maturity for
other eligible primary capital securities of the Company
having a market value equal to the principal amount of the Notes,
except to the extent that the Company, at its option, elects
to pay in cash the principal amount of the Notes from amounts
representing proceeds of other issuances of capital
securities designated for such purpose. There are certain other
circumstances in which the Company may pay all or part of
the Notes in cash at maturity. Under certain limited
circumstances, these Notes may be redeemed prior to maturity. In
1992, the Company swapped $1,500 of this long-term debt for an
approximately equal amount of its common stock.
The Convertible Subordinated Debentures are convertible into
common stock at the option of the holder at any time prior to
maturity at a price of $26.125 per share. The debentures are
redeemable at the option of the Company at declining
premiums to April 1996 and thereafter at par.
The Federal Home Loan Bank requires the Bank to maintain
qualified collateral levels equal to the amount of outstanding
advances. These borrowings are collateralized by mortgage-backed
securities with a carrying value of $2,060 and a fair
value of $2,045 at December 31, 1993. These advances mature in
May 1994 ($1,000) and May 1995 ($500).
In 1988, the Company entered into sale-leaseback transactions
involving two of its properties with an aggregate carrying
value of $7,225 at December 31, 1988. The Company has an option
to repurchase these properties at fair market value at
the expiration of the lease. The sale-leaseback of the two
properties was accounted for as a financing transaction since it
did not meet the criteria for profit recognition. The two properties
are carried at historical cost less depreciation in Premises and
Equipment in the Consolidated Statements of Financial Condition.
The proceeds of the sale were recorded as long-term
borrowings. Lease payments are $1,186 per year for years one
through ten and $1,449 per year for years eleven through
twenty. The lease contains two renewal options for five years
each.
Note K--Stockholders' Equity
The Company registered 2,000,000 shares of common stock in
September 1992 and 1,675,000 additional shares in May
1993 under a dividend reinvestment and stock purchase plan. In
1992, 516,179 shares were sold under the plan for $3,208
and, in 1993, the remaining 3,158,821 shares were sold for
$25,385. The plan offered stockholders the ability to make
optional cash deposits for the direct purchase of additional
shares at a 5% discount to an average market price.
In December 1992, the Company issued 224,352 shares of common
stock in exchange for $1,500 of its 10.875% Subordinated
Capital Notes.
The Company has granted stock options to key employees at the
Company and its subsidiaries under three stock option
plans, including one approved by the Company's stockholders in
1993 authorizing 635,000 shares of common stock to be
reserved for the grant of options. Under all three plans,
qualified stock options are granted at 100% of the fair market
value of the stock at the date of grant. Prior to 1992, under two of
these plans, nonqualified stock options were granted at not less
than 50% of the fair market value of the stock at the date of
grant. Compensation expense is recognized for the difference
between the fair market value of the stock at the grant date and
the option price. Since 1992, all nonqualified stock options
are granted at 100% of fair market value at the date of grant.
Stock appreciation rights have been granted prior to 1992 in
connection with certain options. Compensation expense relating to
these rights is recorded based on the current market
value of the stock.
Information related to activity under the plans is summarized as
follows:
<TABLE>
<CAPTION>
Qualified Options Nonqualified Options
Shares Shares
Under Under
Option Price Range Option Price Range
<S> <C> <C> <C> <C>
Outstanding at January 1, 1991 209,964 $11.13-$19.00 225,453 $3.44-$18.50
Exercised (900) -3.44
Cancelled (28,965) 8.69- 19.00 (14,969) 8.69- 18.50
Granted 83,900 -8.69 116,650 -8.69
Outstanding at December 31, 1991 264,899 8.69- 18.50 326,234 3.44- 18.50
Exercised (1,960) -3.44
Cancelled (84,886) 8.69- 18.50 (98,134) 8.69- 18.50
Granted 403,000 6.25- 7.88
Outstanding at December 31, 1992 180,013 8.69- 18.50 629,140 3.44- 18.50
Exercised (11,200) 3.44- 7.88
Cancelled (89,347) 8.69- 18.50 (126,757) 3.44- 18.50
Granted 487,500 6.63- 12.88
Outstanding at December 31, 1993 90,666 $ 8.69-$13.88 978,683 $3.44-$18.50
</TABLE>
The options outstanding at December 31, 1993 are exercisable as
follows: 873,549 in 1994; 58,600 in 1995; 58,600 in 1996;
58,600 in 1997; and 20,000 in 1998. Options expire at various
dates through 2003. At December 31, 1993 and 1992,
respectively, 391,071 shares and 530 shares were available for
future grants. There were 52 persons and 59 persons,
respectively, participating in the plans at those dates.
During 1989, the Company awarded certain key executive employees
43,776 shares of stock subject to employment-related
restrictions. The deferred compensation which resulted from this
award was amortized to expense over the restriction
periods which ranged from three to five years. Options exercised,
or cancelled due to terminations, have reduced the
restricted stock to 4,000 shares at December 31, 1993.
A prior executive has a dispute with the Company regarding the
cancellation of 90,650 shares under option. The Company
believes that it has the right to cancel the options in question.
The Bank maintains a liquidation account established for the
benefit of account holders as of May 31, 1984 who maintained
their accounts in the Bank after the Company's 1984
reorganization from a mutual savings bank to a commercial bank.
The liquidation account provides these account holders with an
interest in the assets of the Bank prior to the distribution of
any assets to stockholders in the sole event of a complete
liquidation. The account holders' interest in the liquidation
account decreases as the related deposit account decreases (measured at
May 31 of each year) and terminates entirely when the
account is closed. The account holders' interest in the
liquidation account will never increase. The liquidation account
does not restrict the use or application of stockholder's equity of
the Bank except that the Bank may not declare or pay a cash
dividend on, or repurchase any of its capital stock if, as the
result of such dividend or repurchase, the Bank's stockholder's
equity would be less than the amount required for the liquidation
account. At December 31, 1993, the balance of the
liquidation account was approximately $9,000.
At December 31, 1993, the Company has a total of 1,796,982 shares
of common stock reserved for future issuance. These
shares are reserved pursuant to the Company's stock option plans
(1,460,420 shares), its 401(k) plan (75,394 shares), the
6.75% Convertible Subordinated Debentures (200,153 shares), and
for possible issuance in accordance with the terms of
the 10.875% Subordinated Capital Notes (61,053 shares).
<PAGE>
Note L--Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are summarized as
follows:
December 31
1993 1992
Deferred tax assets:
Allowance for possible loan losses $13,892 $23,132
Capitalized leases 3,519 3,279
Capital loss carryforward 1,400 1,847
Net operating loss carryforward 6,605 14,680
Gross deferred tax assets 25,416 42,938
Valuation allowance for
deferred tax assets (6,121) (13,143)
Total deferred tax assets 19,295 29,795
Deferred tax liabilities:
Tax over book depreciation 3,246 2,997
Leasing activities 5,505 9,575
Deferred income 1,289 2,073
Other-net 485 4,878
Total deferred tax liabilities 10,525 19,523
Net deferred tax assets $ 8,770 $10,272
The valuation allowance for deferred tax assets decreased by
$7,022 in 1993 due to the Company's ability to realize more
tax benefits as a result of higher taxable income than previously
anticipated for 1993 and future years. The increased level
of projected future taxable income reflects the Company's
improved earnings capacity associated with its reduction in
nonperforming assets during 1993. The net deferred tax assets at
December 31, 1993 is expected to be realized through
available carrybacks of $601 and expected future taxable income
for 1994 of $8,169.
A reconciliation of income tax expense (benefit) at the federal
statutory income tax rate of 34% to income tax expense
(benefit) in the Consolidated Statements of Income follows:
Year ended December 31
1993 1992 1991
Income (loss) before income
taxes and extraordinary item $ 7,835 $14,854 $(162,229)
Income tax (benefit) at
statutory rate $ 2,664 $ 5,050 $ (55,158)
Dividends received deduction (30) (79) (277)
Tax-exempt income (92) (199) (372)
State taxes (net of federal
tax benefit) (11) 279 1,521
Benefit from use of
capital loss carryforward (447) (2,989)
Net operating loss carryback (855)
Operating loss carryforward (707) (1,736) 7,140
Reduction in valuation
allowance (3,857)
Capital loss relating to
investment securities losses 331
Amortization and write-off
of intangibles 12,949
Settlement of tax audit issue (1,663)
Other items, net 45 74 857
Income taxes (benefit) $(2,435) $ 400 $ (35,527)
The components of income tax expense (benefit) are summarized as follows:
Year ended December 31
1993 1992 1991
Current taxes (benefit):
Federal $(4,167) $ 1,082 $(23,276)
State 230 426 315
Total current taxes (benefit) (3,937) 1,508 (22,961)
Deferred taxes (benefit):
Federal 1,749 (1,104) (14,466)
State (247) (4) 1,900
Total deferred taxes
(benefit) 1,502 (1,108) (12,566)
Income taxes (benefit) $(2,435) $ 400 $(35,527)
Income taxes (benefits) on securities gains (losses) were $4,086
in 1993, $380 in 1992 and $(1,525) in 1991.
At December 31, 1993, the Bank had net operating loss
carryforwards of $110,423 for state income tax purposes that
expire in years 1996 through 2008. In addition, the Company has a
capital loss carryforward of $4,119 which expires in 1994 and
1996.
<PAGE>
Note M--Pension Plan
The Company has a noncontributory defined benefit pension plan
covering substantially all of its employees. Retirement
benefits under the plan are based on years of service and the
employee's compensation during the last five years of
employment. The Company's funding policy is to contribute
annually the minimum amount which is required under the
Employee Retirement Income Security Act. The plan's assets are
generally invested in U.S. Government securities, listed
common and preferred stocks, investment grade corporate bonds,
interest-bearing cash accounts and other cash equivalent
investments.
The following table sets forth the funded status of the defined
benefit pension plan and amounts recognized in the
Company's Consolidated Statements of Financial Condition at
December 31, 1993 and 1992.
December 31
1993 1992
Actuarial present value of
periodic benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$7,943 in 1993 and $5,958
in 1992 $ (9,022) $ (6,858)
Projected benefit obligation
for service rendered to date $(12,767) $ (11,202)
Plan assets at fair value 10,672 10,497
Plan assets less than
projected benefit obligation (2,095) (705)
Unrecognized net asset at
January 1, 1986, being recognized
over 16 years (686) (763)
Unrecognized prior service cost 120 136
Unrecognized net loss from
past experience different from
that assumed and effects of changes
in assumption 1,391 204
Accrued pension cost included in
other liabilities $ (1,270) $ (1,128)
The components of net periodic cost for the defined benefit
pension plan are summarized as follows:
Year ended December 31
1993 1992 1991
Service cost $1,259 $1,143 $1,010
Interest cost 821 834 1,017
Return on plan assets (396) (1,107) (1,530)
Net amortization and
deferral of asset gains
and losses (758) 105 404
Net periodic pension cost $ 926 $ 975 $ 901
Assumptions used in the accounting for the plans were as follows:
December 31
1993 1992 1991
Discount rate 7.75% 8.25% 8.25%
Rate of increase in
compensation level 5.00 5.00 5.00
Expected long-term rate
of return on assets 10.00 10.00 10.00
In 1993, the Company adopted a retirement plan pursuant to
Section 401(k) of the Internal Revenue Code covering
substantially all of its employees. The plan permits eligible
employees to defer a portion of their income into trusteed
investments in mutual funds. Matching contributions are made by
the Company in the form of Company common stock
based on a percentage of each participant's annual compensation.
During 1993, a total of 24,606 common shares were
issued under the plan, representing a charge to expense of $293.
<PAGE>
Note N--Leases
The Company leases a major portion of its banking, executive
offices and operations facilities. Additionally, the Company
leases certain equipment. All such arrangements are treated as
operating leases with rental expenses being charged
currently to operations. Total rent expense for 1993, 1992, and
1991 was $5,748, $5,505, and $5,143 respectively. These
noncancellable leases which relate to premises include one or
more renewal options ranging from five to ten years and
together with equipment leases provide for future minimum rental
commitments as follows:
1994 $ 4,958
1995 4,633
1996 4,075
1997 3,530
1998 2,920
1999 and subsequent years 11,541
Total $31,657
Note O--Financial Instruments with Off-Balance Sheet Risk
The Company is a party to various financial agreements in the
normal course of business which are not recorded in its
financial statements but which carry varying degrees of credit
and interest rate risk. These financial agreements include
commitments to extend credit, standby letters of credit, recourse
provisions related to loans sold, interest rate contracts,
forward loan and securities sale contracts, and options on
mortgage-backed securities.
The contract or notional amounts of these financial instruments
at December 31, 1993 and 1992, are summarized as follows:
December 31
1993 1992
Commitments to extend credit:
Home equity line of credit $126,011 $119,409
Credit card line of credit 473,213 549,302
All other commitments 244,747 154,147
Standby letters of credit 17,013 7,813
Recourse provisions on loans sold 61,106 51,771
Interest rate swaps 100,000
Interest rate caps 100,000
Forward loan and securities
sale contracts 222,081 155,846
Options on mortgage-backed securities 14,000 4,000
The contract amount of commitments to extend credit, standby
letters of credit and recourse provisions of loans sold
quantify the Company's maximum exposure to credit loss resulting
from these agreements. The Company uses the same
credit policies in making these commitments and conditional
obligations as it does for agreements which are recorded in the
financial statements. Interest rate contracts, forward loan and
securities sale contracts, and options on mortgage-backed
securities result in exposure to credit loss which is less than
the notional amount of these agreements. The Company
controls the credit risk of these contracts through credit
approvals, establishment of exposure limits, and monitoring
procedures.
Commitments to extend credit are legally binding agreements. The
most common commitment relates to available levels of
credit under consumer loan arrangements such as home equity lines
and credit cards. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since some portion of the commitments are
expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit assessment of
the customer. Collateral held varies, but may include accounts
receivable, inventory, real and personal property, equipment
and income-producing commercial properties. The Company's access
to such collateral is generally unrestricted.
Standby letters of credit are conditional commitments issued by
the Company supporting performance guarantees to a third
party. Those guarantees are primarily issued to support a
customer's borrowing arrangement with the Company. The credit
risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
In addition to the collateral underlying the borrowing arrangement,
the Company may require the borrower to deposit some
portion of the cash flows from the project as collateral for the
letter of credit. Management conducts regular reviews of these
instruments on an individual customer basis and does not
anticipate any loss as a result of these transactions.
The Company has at various times pooled residential mortgage
loans into mortgage-backed securities which were ultimately
sold. The Company in the past has retained some recourse with
respect to potential losses incurred in the event of customer
default and subsequent foreclosure of the underlying properties.
Most of the loans collateralizing the securities sold with
recourse are seasoned loans. Management believes that the
underlying properties have generally experienced price
appreciation since the loans were sold. Management monitors
payment activity on these loans, and considers the risk of
loss resulting from recourse provisions to be minimal.
Interest rate swap transactions involve the exchange of fixed and
floating rate interest payment obligations on a nominal
contract amount without exchange of the underlying principal
amounts and generally do not represent exposure to credit
loss. Interest rate caps provide that payments be made only if
interest rates move above a predetermined rate. The
Company has entered into interest rate swap and cap agreements
solely as part of its asset and liability management
program. The Company transacted all of its interest rate swaps
and caps with major investment banking firms thereby
limiting the risk of default by the co-party.
Forward loan and securities sale contracts as well as options on
GNMA, FHLMC, and FNMA mortgage-backed securities
are used in the Company's mortgage banking subsidiary as hedging
instruments to mitigate price movements of its
warehouse and pipeline loans. Using forward contracts, the
subsidiary fixes a sale price on whole loans or on securities in
which a portion of its loan originations are pooled. Coverage is
adjusted as necessary through the use of options on
mortgage-backed securities. In this manner, the subsidiary
attempts to minimize the effect of any adverse interest rate
movements between the time that loans are committed and sold
which would ultimately affect profit or loss on the sale
transaction.
Note P--Litigation
Various claims and lawsuits are pending against the Company and
its subsidiaries. It is generally anticipated that final
disposition may not occur for several years. Management, after
reviewing developments with legal counsel, establishes loss
contingency reserves as considered necessary. No such reserves
have been established as of December 31, 1993. Although the
amount of any ultimate liability with respect to legal matters
cannot be determined, management is of the opinion that losses,
if any, resulting from the settlement of current legal actions
will not have a material adverse effect on the financial
condition of the Company.
During 1993, the Company settled a lawsuit originally filed in
1990 by a class of stockholders against the Company and
certain previous executive officers and former directors. While
no specific amount in damages had been claimed, the suit
alleged that the financial condition of the Company was not
adequately disclosed prior to the rejection of a conditional
proposal to acquire the Company made by Allied Irish Bank. Allied
Irish subsequently withdrew its proposal. The total
settlement paid by the Company amounted to $1,750 and was charged
to other expense in 1993.
Note Q--Earnings Per Share Information
Net income per share for the years ended December 31, 1993, 1992
and 1991 was determined based on the weighted
average number of common shares outstanding for the year and the
assumed exercise of stock options using the treasury
method to the extent that the effect is dilutive. The weighted
average number of shares outstanding was 15,529 in 1993,
12,796 in 1992 and 12,750 in 1991. The dilutive effect of stock
options was not material.
Note R--Related Party Transactions
At December 31, 1993 and 1992, excluding nominal consumer and
credit card receivables, loans outstanding to executive
officers, directors and their associates amounted to $1,000 and
$66, respectively.
Note S--Regulatory Matters
Effective July 31, 1992, Baltimore Bancorp entered into a written
agreement ("Agreement") with the Federal Reserve Bank
of Richmond ("FRB") and the Maryland Bank Commissioner
("Commissioner"), and The Bank of Baltimore agreed to a
Cease and Desist Order ("Order") issued by the Federal Deposit
Insurance Corporation ("FDIC") and the Commissioner.
The Agreement and Order relate to problems which were created
prior to September 11, 1991, the date that a majority of
the current Board of Directors took office. The principal
components of both the Agreement and Order are consistent with
the Company's financial and strategic plans as approved by the
current Board of Directors.
The Agreement prohibits the payment of cash dividends by the
parent company and certain transactions between the parent
company or its affiliates with the Bank without prior regulatory
approval. The Agreement also requires the parent company to
provide the FRB and the Commissioner with plans and reports
pertaining to capital adequacy and liquidity, and to develop
written policies regarding intercorporate fees and payments. The
Agreement also limits certain parent company borrowings
and payments without prior regulatory approval.
The Order requires that the Bank obtain prior regulatory approval
to pay cash dividends to the parent, prohibits the
acceptance or renewal of brokered deposits, sets leverage capital
ratios and the dates by which the ratios must be
achieved, and specifies reductions in the levels of classified
assets. The Order also calls for the submission of various
reports and the development and implementation of plans relating
to management, asset quality, loan administration,
earnings and liquidity.
Specifically, the Order requires the Bank to have an adjusted leverage
capital ratio of at least 4.50% by December 31, 1992, 6.00% by June 30,
1993 and 6.50% by June 30, 1994 and thereafter as long as the Order is
in effect. With an adjusted leverage capital ratio of 7.08% at December
31, 1993, the Company was in full compliance with the minimum
regulatory requirement. The comparable ratio at December 31,
1992 was 5.10%. Additionally, at December 31, 1993, the Bank's
Tier 1 risk-based capital ratio of 9.72% and total risk-based
capital ratio of 10.99% were also in full compliance with the
currently applicable minimum regulatory requirements of 4.00% and
8.00%, respectively.
Pursuant to the Order, assets classified "Doubtful" and
"Substandard" at October 31, 1991 by the FDIC and the
Commissioner are not to exceed 100% of total capital plus
ineligible reserves after July 26, 1993, and may not exceed 75%
of such capital and reserves at January 26, 1994. At December 31,
1993, assets classified "Doubtful" and "Substandard" at
October 31, 1991 by the FDIC and the Commissioner amounted to
$94,553, or 47% of the Bank's capital plus ineligible
reserves, which totaled $199,974. The comparable ratio at
December 31, 1992 was 135%.
Loans classified "Substandard" are inadequately protected by the
current sound worth and paying capacity of the obligor or
the collateral pledged, if any. Loans so classified must have a
well-defined weakness, or weaknesses which jeopardize the
orderly liquidation of the debt. Well-defined weaknesses include
a project's lack of marketability, inadequate cash flow from
operations or collateral support, failure to complete
construction on time, the project's failure to fulfill economic
expectations, the borrower's financial condition indicates an inability
to repay and prospects for improvement are unlikely, the primary
repayment source appears to be shifting from cash flow to
liquidation of collateral, or the borrower has declared
bankruptcy. Such loans are characterized by the distinct possibility
that the Company will sustain some loss if the deficiencies are not
corrected.
Loans classified "Doubtful" have all of the weaknesses inherent
in "Substandard" loans with the added characteristic that the
weaknesses make collection or liquidation in full on the basis of
currently known facts, conditions, and values highly
questionable and improbable. A "Doubtful" classification may be
appropriate in cases where significant risk exposures
are perceived, but loss cannot be determined because of
specific, reasonable and pending factors which may strengthen
and work to the advantage of the credit in the near term.
At December 31, 1993, classified assets of $94,553 were composed of
doubtful assets of $1,038 and substandard assets of $93,515 which
included $2,299 of in-substance foreclosures and $40,651 of real
estate owned. Of total classified assets, $82,948 (88%) are
commercial real estate loans, $11,093 are residential construction loans,
$120 are lease financings, and $392 are second mortgages.
Also at December 31, 1993, total classified assets carried as
nonperforming assets amounted to $81,751, $24,899 of which
is included in nonaccruing loans, $9,000 in restructured loans,
and $47,852 in assets acquired in foreclosure.
There are no material concentrations of classified assets to any
one borrower.
Failure to comply with the terms of the Agreement or the Order
could, among other things, subject the Company or the Bank
to a broad range of regulatory sanctions, including civil
monetary penalties. The Company and the Bank at December 31,
1993 are in compliance with all terms established by the
regulatory authorities.
<PAGE>
Note T--Baltimore Bancorp Financial Information
(Parent Company Only)
Condensed Statements of Financial Condition
December 31
(Thousands of dollars) 1993 1992
Assets
Interest-bearing deposits with subsidiaries $ 2,527 $ 102
Investment in banking subsidiaries 163,329 128,847
Investment in nonbanking subsidiaries 2,725 3,376
Other assets 63 1,066
Total assets $168,644 $133,391
Liabilities and Stockholders' Equity
Liabilities
Long-term borrowings $ 6,096 $ 6,096
Other liabilities 263 890
Total liabilities 6,359 6,986
Stockholders' equity
Common stock 83,360 67,397
Capital surplus 27,839 18,045
Retained earnings 50,400 40,963
Unrealized gain on available-for-sale
securities held by banking subsidiary 686
Total stockholders' equity 162,285 126,405
Total liabilities and stockholders' equity $168,644 $133,391
<TABLE>
<CAPTION>
Condensed Statements of Income
Year ended December 31
(Thousands of dollars) 1993 1992 1991
<S> <C> <C> <C>
Income
Interest income from deposits in and
loans to subsidiaries $ 101 $ 36 $ 323
Dividend income from subsidiaries 108 9,925
Other income, principally management fees 1,386 1,341 4,164
Total income 1,487 1,485 14,412
Expenses
Interest on borrowings 452 622 285
Operating expenses 2,628 2,341 41,210
Total expenses 3,080 2,963 41,495
Income (loss) before income taxes and equity in
undistributed Income of subsidiaries (1,593) (1,478) (27,083)
Income tax benefit 687 181 247
Income (loss) before equity in undistributed
income of subsidiaries (906) (1,297) (26,836)
Equity in undistributed income (loss) of
subsidiaries 11,176 15,751 (99,866)
Income (loss) before extraordinary item 10,270 14,454 (126,702)
Extraordinary item, net of taxes 56 213
Net income (loss) $10,270 $14,510 $(126,489)
Condensed Statements of Cash Flows
Year ended December 31
(Thousands of dollars) 1993 1992 1991
Operating Activities
Net income (loss) $10,270 $14,510 $(126,489)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Equity in undistributed loss (income) of subsidiaries (11,176) (15,751) 99,866
Amortization and write-off of goodwill 36,324
Provision (benefit) for deferred income taxes (88) 532 113
Decrease (increase) in other assets and liabilities 364 407 (3,852)
Gain on early extinguishment of debt (91) (347)
Net cash provided by (used for) operating activities (630) (393) 5,615
Investing Activities
Decrease in loans to subsidiaries 731
Capital contributed to banking subsidiary (22,600) (2,830)
Net cash provided by (used for) investing activities (21,869) (2,830)
Financing Activities
Retirement of long-term borrowings (3,123)
Proceeds from issuance of common stock 25,757 3,222 6
Cash dividends paid (833) (7,012)
Net cash provided by (used for) financing activities 24,924 3,222 (10,129)
Decrease in cash and cash equivalents 2,425 (1) (4,514)
Cash and cash equivalents at beginning of year 102 103 4,617
Cash and cash equivalents at end of year $ 2,527 $ 102 $ 103
Noncash transactions:
Common stock exchanged for long-term borrowings $ 1,478
Unrealized gain on available-for-sale securities held by
banking subsidiary $ 686
</TABLE>
<PAGE>
Note U--Mortgage Banking Operations
The Company conducts consumer and commercial banking activities,
of which its mortgage banking operations are an
integral part. The Company's mortgage banking operations are
conducted through a wholly owned subsidiary of the Bank,
Atlantic Residential Mortgage Corporation (ARMCO), which
originates, packages, sells and services residential mortgage
loans for the secondary market.
Financial information related to the Company's mortgage
operations for the years ended December 31, 1993, 1992 and
1991 is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1993
Other Adjustments
Mortgage Banking and
Banking Operations Eliminations Consolidated
<S> <C> <C> <C> <C>
Interest and fee income:
Unaffiliated customers $ 8,652 $ 162,590 $ 171,242
Intercompany 121 4,367 $ (4,488)
Total interest and fee income $ 8,773 $ 166,957 $ (4,488) $ 171,242
Other operating income:
Unaffiliated customers $ 16,064 $ 24,255 $ 40,319
Intercompany 113 $ (113)
Total other operating income $ 16,177 $ 24,255 $ (113) $ 40,319
Operating profit $ 263 $ 10,198 $ 10,461
General corporate expenses (2,626)
Income before income taxes and extraordinary
item $ 7,835
Identifiable assets at December 31, 1993 $200,369 $2,196,782 $ (164,960) $2,232,191
Capital expenditures $ 737 $ 3,101 $ 3,838
Depreciation and amortization $ 201 $ 4,372 $ 4,573
Other amortization (primarily securities
and purchased servicing) $ 9,981 $ 4,131 $ 14,112
<CAPTION>
Year ended December 31, 1992
Other Adjustments
Mortgage Banking and
Banking Operations Eliminations Consolidated
<S> <C> <C> <C> <C>
Interest and fee income:
Unaffiliated customers $ 8,598 $ 208,410 $ 217,008
Intercompany 617 4,295 $ (4,912)
Total interest and fee income $ 9,215 $ 212,705 $ (4,912) $ 217,008
Other operating income:
Unaffiliated customers $ 15,851 $ 35,598 $ 51,449
Intercompany 5 $ (5)
Total other operating income $ 15,856 $ 35,598 $ (5) $ 51,449
Operating profit $ 5,079 $ 10,520 $ 15,599
General corporate expenses (745)
Income before income taxes and extraordinary
item $ 14,854
Identifiable assets at December 31, 1992 $ 96,809 $2,426,323 $ (93,803) $2,429,329
Capital expenditures $ 198 $ 1,119 $ 1,317
Depreciation and amortization $ 151 $ 3,809 $ 3,960
Other amortization (primarily securities
and purchased servicing) $ 3,035 $ 5,017 $ 8,052
<CAPTION>
Year ended December 31, 1991
Other Adjustments
Mortgage Banking and
Banking Operations Eliminations Consolidated
<S> <C> <C> <C> <C>
Interest and fee income:
Unaffiliated customers $ 4,804 $ 287,934 $ 292,738
Intercompany 1,131 1,785 $ (2,916)
Total interest and fee income $ 5,935 $ 289,719 $ (2,916) $ 292,738
Other operating income:
Unaffiliated customers $ 5,676 $ 14,200 $ 19,876
Intercompany 12 $ (12)
Total other operating income $ 5,688 $ 14,200 $ (12) $ 19,876
Operating profit (loss) $ 2,518 $ (160,164) $ (157,646)
General corporate expenses (4,583)
Income (loss) before income taxes and
extraordinary item $ (162,229)
Identifiable assets at December 31, 1991 $ 123,315 $3,183,717 $ (120,739) $3,186,293
Capital expenditures $ 188 $ 2,684 $ 2,872
Depreciation and amortization $ 123 $ 3,967 $ 4,090
Amortization and write-off of goodwill $ 38,150 $ 38,150
Other amortization (primarily securities
and purchased servicing) $ 1,634 $ 1,653 $ 3,287
<PAGE>
Note U--Mortgage Banking Operations (Continued)
With respect to intercompany revenues, ARMCO is charged interest
by the Bank on borrowings to fund new mortgage loans
and the purchase of servicing rights, after giving effect to
custodial cash balances maintained with the Bank. The terms of
the borrowing arrangement require that interest be charged at a
rate indexed to the 90-day Treasury rate for new loan
funding and at a rate indexed to prime for the purchase of
servicing rights.
Under the terms of an overnight investment arrangement with the
Bank, ARMCO receives interest income on available
operating cash balances at the current overnight rate paid for
similar deposits of unaffiliated customers. In addition, ARMCO
sells mortgage loans to the Bank in accordance with a commitment
to purchase between the two parties.
Consolidated Average Balances, Interest Rates and Interest
Spreads (Unaudited)
Baltimore Bancorp and Subsidiaries
</TABLE>
<TABLE>
<CAPTION>
1993 1992
Average Average Average Average
(Thousands of dollars) Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 50,712 $ 45,536
Federal funds sold and securities
purchased under resale agreements 68,264 $ 2,127 3.12% 55,125 $ 1,946 3.53%
Other short-term investments 8,722 276 3.16 17,021 750 4.41
Trading account assets 119,957
Loans held for sale 103,549 8,179 7.90 168,764 21,205 12.56
Available-for-sale securities(1) 190,780 11,135 5.84 73,061 4,464 6.11
Investment securities:(1)
Taxable 352,507 20,792 5.90 535,562 39,241 7.33
Floating rate notes 22,592 1,323 5.86
Corporate stocks(2) 6,098 374 6.13
Tax-exempt(2) 339 42 12.39 1,752 212 12.10
Total investment securities 352,846 20,834 5.90 566,004 41,150 7.27
Loans, net of unearned income:(3)
Real estate:
Construction(2) 89,032 5,806 6.52 256,196 15,178 5.92
First mortgage:
Residential 61,138 5,534 9.05 74,323 8,518 11.46
Commercial(2) 474,278 36,114 7.61 448,651 35,152 7.84
Second mortgage 327,978 26,435 8.06 439,757 37,265 8.47
Consumer installment 184,332 19,682 10.68 278,452 29,711 10.67
Credit card(4) 136,088 23,395 17.19 40,956 7,056 17.23
Commercial 73,531 5,282 7.18 84,372 6,382 7.56
Lease financing 70,927 5,622 7.93 90,413 7,603 8.41
Total loans 1,417,304 127,870 9.02 1,713,120 146,865 8.57
Less: Allowance for possible
loan losses 58,045 84,243
Net loans 1,359,259 1,628,877
Ground rents 15,837 958 6.05 16,027 975 6.08
Premises and equipment, net 31,726 33,678
Assets acquired in foreclosure 78,373 60,763
Other assets 58,242 81,082
Total assets/interest income $2,318,310 $171,379 $2,865,895 $217,355
Liabilities and Stockholders' Equity
Noninterest-bearing deposits $ 146,469 $ 107,664
Interest-bearing deposits:
Demand (NOW and Super NOW) 114,113 $ 2,901 2.54% 110,219 $ 3,769 3.42%
Regular savings 257,854 7,803 3.03 229,744 8,850 3.85
Brokered 108,205 500,311
Jumbo certificates of deposit 5,436 8,316 7.32 20,175 41,157 7.91
Other time (including money market
deposits) 1,459,953 54,593 3.74 1,666,312 73,808 4.43
Total interest-bearing deposits 1,945,561 73,613 3.78 2,526,761 127,584 5.05
Total deposits 2,092,030 2,634,425
Securities sold under agreements to
repurchase and other short-term
borrowings 27,999 727 2.60 43,414 1,753 4.04
Long-term borrowings 18,819 1,653 8.78 22,998 2,054 8.93
Accrued taxes, interest and other
liabilities 30,407 48,922
Stockholders' equity 149,055 116,136
Total liabilities and
stockholders' equity $2,318,310 $ 75,993 $2,865,895 $131,391
Interest income/earning assets $2,157,302 $171,379 7.94% $2,729,079 $217,355 7.96%
Interest expense/interest-bearing
liabilities 1,992,379 75,993 3.81 2,593,173 131,391 5.07
Interest expense/earning assets 2,157,302 75,993 3.52 2,729,079 131,391 4.81
Net interest spread(5) 4.13 2.89
Net yield on earning assets(6) 4.42 3.15
<FN>
(1) Investment securities in the amount of $390,510 were transferred to available-for-sale
securities in the fourth quarter of 1993.
(2) Certain loan and securities income is not subject to federal income taxes. In order to
compute taxable equivalent earnings, an adjustment was made to income based on a
federal income tax rate of 35% in 1993 and 34% in all preceding years.
(3) Fees on loans which are not material, and nonaccrual loans are included under the appropriate
loan category.
</TABLE>
Consolidated Average Balances, Interest Rates and Interest Spreads (Unaudited)
Baltimore Bancorp and Subsidiaries
<TABLE>
<CAPTION>
1991 1990 1989
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 47,561 $ 57,048 $ 70,069
27,675 $ 1,603 5.79% 36,268 $ 2,881 7.94% 33,699 $ 3,803 11.29%
66,210 4,334 6.55 42,090 3,218 7.65 28,120 2,329 8.28
44,675
33,862 3,017 8.91 14,072 1,483 10.54 5,892 444 7.54
3,604 163 4.52
675,576 56,554 8.37 837,239 71,288 8.51 807,607 68,475 8.48
36,434 2,604 7.15 36,752 3,173 8.63 61,098 5,426 8.88
17,282 1,469 8.50 23,433 2,318 9.89 28,475 2,966 10.42
7,814 544 6.96 11,309 870 7.69 20,561 1,776 8.64
737,106 61,171 8.30 908,733 77,649 8.54 917,741 78,643 8.57
342,287 27,014 7.89 351,278 38,916 11.08 261,701 33,260 12.71
185,929 21,257 11.43 208,145 24,560 11.80 246,076 28,108 11.42
485,022 43,944 9.06 479,007 49,962 10.43 466,954 49,119 10.52
518,764 50,040 9.65 343,796 36,735 10.69 332,581 35,345 10.63
394,262 42,139 10.69 503,482 53,263 10.58 543,188 54,966 10.12
101,512 17,252 17.00 71,732 12,460 17.37 43,527 7,894 18.14
120,370 10,732 8.92 160,094 16,827 10.51 156,101 17,932 11.49
114,829 9,976 8.69 140,952 13,965 9.91 141,386 14,843 10.50
2,262,975 222,354 9.83 2,258,486 246,688 10.92 2,191,514 241,467 11.02
45,114 18,690 16,314
2,217,861 2,239,796 2,175,200
16,276 1,006 6.18 16,568 1,006 6.07 16,966 1,026 6.05
35,940 36,707 36,708
8,400 16,999 6,479
120,093 94,926 107,087
$3,359,263 $293,648 $3,463,207 $332,925 $3,397,961 $327,712
$ 100,002 $ 85,257 $ 75,124
98,235 $ 4,885 4.97% 95,183 $ 5,067 5.32% 96,654 $ 5,131 5.31%
202,558 9,398 4.64 210,155 10,632 5.06 224,940 11,532 5.13
667,388 652,242 736,516
25,178 60,231 8.70 40,369 61,933 8.94 70,749 76,905 9.53
1,782,097 126,922 7.12 1,680,171 136,199 8.11 1,558,664 122,556 7.86
2,775,456 201,436 7.26 2,678,120 213,831 7.98 2,687,523 216,124 8.04
2,875,458 2,763,377 2,762,647
173,024 11,263 6.51 323,480 27,349 8.45 227,181 20,100 8.85
35,749 3,048 8.53 71,891 6,858 9.54 97,953 9,256 9.45
53,767 62,649 76,894
221,265 241,810 233,286
$3,359,263 $215,747 $3,463,207 $248,038 $3,397,961 $245,480
$3,192,383 $293,648 9.20% $3,276,217 $332,925 10.16% $3,193,932 $327,712 10.26%
2,984,229 215,747 7.23 3,073,491 248,038 8.07 3,012,657 245,480 8.15
3,192,383 215,747 6.76 3,276,217 248,038 7.57 3,193,932 245,480 7.69
1.97 2.09 2.11
2.44 2.59 2.57
<FN>
(4) Credit cards were transferred to loans from loans held for sale in September 1992, and averaged
$120,183 for the full year.
(5) Net interest spread is the difference between the ratios (expressed as percentages) of interest
income adjusted to a fully tax equivalent basis to earning assets and of interest expense to
interest-bearing liabilities.
(6) Net yield on earning assets is the difference between the ratios (expressed as percentages) of
interest income adjusted to a fully tax equivalent basis to earning assets and of interest expense
to earning assets.
</TABLE>
<PAGE>
Consolidated Quarterly Results of Operations, Market Prices and Dividends
Baltimore Bancorp and Subsidiaries (Unaudited)
<TABLE>
<CAPTION>
1993 Quarters Ended
(Thousands of dollars, except per
share data) December 31 September 30 June 30 March 31
<S> <C> <C> <C> <C>
Interest income $42,214 $42,524 $43,302 $43,202
Interest expense 17,622 18,260 19,699 20,412
Net interest income 24,592 24,264 23,603 22,790
Provision for possible loan losses 4,000 6,000 6,000 6,000
Mortgage banking income 3,962 3,024 6,631 2,561
Gains on available-for-sale securities 3,448 6,101
Gains on investment securities 670 306 55
Other operating income 2,806 3,776 3,710 3,269
Other operating expenses 30,219 26,280 25,364 23,870
Income taxes (benefits) (561) (2,138) 238 26
Net income $ 1,150 $ 1,592 $ 2,648 $ 4,880
Per Share
Net income $ .07 $ .10 $ .18 $ .35
Dividends paid .05
Stock prices: high 14.25 12.625 9.75 9.125
low 12.25 8.75 7.25 6.875
close 14.25 12.50 9.00 8.875
<CAPTION>
1992 Quarters Ended
December 31 September 30 June 30 March 31
<S> <C> <C> <C> <C>
Interest income $45,217 $51,949 $56,624 $63,218
Interest expense 24,711 30,072 34,585 42,023
Net interest income 20,506 21,877 22,039 21,195
Provision for possible loan losses 6,000 6,000 13,000 4,881
Mortgage banking income 4,230 4,062 5,218 2,978
Gains (losses) on available-for-sale
securities (5) 800 (3,689)
Gains (losses) on investment securities 1,564 (442) 339 2,416
Other operating income 3,781 8,730 13,628 7,839
Other operating expenses 23,808 25,702 22,148 20,673
Income taxes 12 24 281 83
Income before extraordinary item 256 3,301 5,795 5,102
Extraordinary item, net of taxes(1) 56
Net income $ 312 $ 3,301 $ 5,795 $ 5,102
Per Share
Net income $ .02 $ .26 $ .45 $ .40
Stock prices: high $ 7.375 $ 9.00 $ 8.50 $ 8.375
low 6.00 6.125 5.00 5.25
close 6.875 6.50 7.875 6.00
<FN>
(1) In 1992, the Company converted portions of its long-term debt. The debt was converted
at discounts which resulted in extinguishment gains reflected net of taxes as an
extraordinary item.
</TABLE>
<PAGE>
Selected Financial Data
Baltimore Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31
(Thousands of dollars, except per share data) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Results of Operations
Interest income $ 171,242 $ 217,008 $ 292,738 $ 331,734 $ 326,001
Interest expense 75,993 131,391 215,747 248,038 245,480
Net interest income 95,249 85,617 76,991 83,696 80,521
Provision for possible loan losses 22,000 29,881 125,368 25,120 7,341
Gains (losses) on available-for-sale securities 9,549 (2,894) 1,782 - -
Gains (losses) on investment securities 1,031 3,877 (5,731) 1,747 3,650
Other operating income 29,739 50,466 23,825 17,167 11,792
Other operating expenses 105,733 92,331 133,728 72,785 63,702
Income taxes (benefit) (2,435) 400 (35,527) 826 7,598
Extraordinary item(1) - 56 213 5,131 308
Net income (loss) 10,270 14,510 (126,489) 9,010 17,630
Per Share (primary)
Income (loss) before extraordinary item $ .66 $ 1.13 $ (9.94) $ .31 $ 1.36
Extraordinary item(1) - - .02 .40 .02
Net income (loss) .66 1.13 (9.92) .71 1.38
Per Share (fully diluted)
Income (loss) before extraordinary item $ .66 $ 1.13 $ (9.94) $ .31 $ 1.34
Extraordinary item(1) - - .02 .40 .02
Net income (loss) .66 1.13 (9.92) .71 1.36
Cash dividends declared .05 - .40 .60 .5375
At December 31
Available-for-sale securities $ 542,196 $ 178,294 $155,800 $ 261,232 $ -
Investment securities - 420,666 597,756 646,598 925,655
Loans (net of unearned income) 1,308,445 1,521,450 1,949,233 2,226,043 2,218,151
Earning assets 2,086,299 2,239,398 3,002,264 3,342,001 3,242,308
Total assets 2,232,191 2,429,329 3,186,293 3,523,429 3,461,722
Core deposits(2) 1,944,737 1,988,952 2,249,689 2,145,865 2,021,265
Total deposits 1,961,517 2,236,370 2,947,978 2,911,255 2,710,283
Borrowings 79,226 33,367 74,725 314,560 446,679
Stockholders' equity 162,285 126,405 107,195 235,288 237,299
Earnings Ratios
Return on average total assets .44% .51% (3.77)% .26% .52%
Return on average stockholders' equity 6.89 12.49 (57.17) 3.73 7.56
Dividend payout ratio 7.58 - N/M 84.51 38.95
Net yield on average earning assets 4.42 3.15 2.44 2.59 2.57
Credit Ratios
Nonperforming loans to total loans 2.59% 8.04% 8.63% 2.00% .89%
Nonperforming assets to total assets 3.66 8.57 7.45 2.01 .85
Allowance to total loans 2.96 4.33 3.97 1.59 .76
Allowance to nonperforming loans 114.12 53.89 45.99 79.54 85.79
Net loan losses to average loans 3.47 2.41 3.69 .29 .30
Capital Ratios
Average stockholders' equity to average assets 6.43% 4.05% 6.59% 6.98% 6.87%
Tier 1 risk-based capital 9.67 6.81 3.98 7.20 N/R
Total risk-based capital 11.28 8.39 5.51 8.41 N/R
Bank only:
Adjusted Tier 1 leverage capital 7.08 5.10 3.34 5.92 N/R
Tier 1 risk-based capital 9.72 7.12 4.16 7.47 N/R
Total risk-based capital 10.99 8.39 5.42 8.28 N/R
Nonfinancial Data
Employees (full time equivalent basis) 1,163 1,114 1,225 1,101 1,088
Branch offices 42 47 51 51 51
Electronic banking facilities (ATMs) 50 53 57 57 51
<FN>
(1) Gain, net of taxes, from early extinguishment of debt.
(2) Total deposits excluding brokered deposits and jumbo certificates of deposit.
N/M = Not meaningful.
N/R = Not required by banking regulations.
</TABLE>
<PAGE>
Board of Directors
Baltimore Bancorp and Subsidiaries
Edwin F. Hale, Sr. 2,3,7
Chairman of the Board &
Chief Executive Officer
Baltimore Bancorp
Chairman of the Board
The Bank of Baltimore
Alan M. Leberknight 3,4
President
Baltimore Bancorp
Chief Executive Officer &
President
The Bank of Baltimore
Joseph A. Cicero
Executive Vice President &
Chief Financial Officer
The Bank of Baltimore
& Baltimore Bancorp
William A. Beasman, Jr.
Chairman Emeritus
Barry B. Bondroff, CPA 1,3,5,6
President & Managing Director
Grabush, Newman &Co., P.A.
Conrad H.C. Everhard 8
Chairman
Cho Yang Line (U.S.A.)Inc.
Bruce H. Hoffman 1
Executive Director
Maryland Stadium Authority
Melvin S. Kabik 2,5,8
Retired
R. Andrew (Drew) Larkin, Jr. 3,4,6,9
President
Maryland Realty Investment
Corporation
James P. O'Conor 2,8
Chairman
O'Conor, Piper & Flynn
Robert A. Pascal 3,5,6,7
Chairman of the Board
United Propane, Inc.
Dennis F. Rasmussen 3,4,6,7
Private Consultant
G. Gregory Russell, CPA1,4,6,9
Director of Finance
Maryland Port Administration
Member of:
1 Audit Committee
2 Community irs Committee
3 Executive Committee
4 Loan Portfolio Review Committee
5 Compensation Committee
6 Compliance Committee
7 Nominating Committee
8 Retirement Committee
9 Shareholders' Liaison Committee
Exectutive Officers
Baltimore Bancorp and Subsidiaries
Edwin F. Hale, Sr.
Chairman of the Board &
Chief Executive Officer
Alan M. Leberknight
President
Joseph A. Cicero
Executive Vice President &
Chief Financial Officer
E. Wayne Edwards
Executive Vice President
Asset Quality Group
Thomas M. Scott, III
Executive Vice President
Real Estate Group
Larry D. Unger
Executive Vice President
Retail Banking Group
John P. Hollerbach
Senior Vice President & Controller
Keith W. Stackhouse
Senior Vice President
David L. Spilman
Treasurer
James A. Gast
Secretary
The Bank of Baltimore
Senior Vice Presidents
Robert C. Brennan
John P. Hollerbach
William R. Jones
Stewart P. McEntee
Carol L. Rigg
Francis E. Rugemer
Virginia W. Smith
David L. Spilman
Joel C. Sweren
Frances M. Teller
William F. Thompson
Robert W. Warr
Elizabeth M. Wright
Principal Subsidiaries
The Bank of Baltimore
120 East Baltimore Street
Baltimore,Maryland 21202
(410) 244-3360
Alan M. Leberknight
Chief Executive Officer & President
Baltimore Bancorp Investment
Services, Inc.
7-9 East Baltimore Street
Baltimore, Maryland 21202
(410) 244-3541
Steven C. Donald
President
Baltimore Bancorp Leasing &
Financial, Inc.
120 East Baltimore Street
Baltimore, Maryland 21202
(410) 539-0108
Alan M. Leberknight
President
Atlantic Residential Mortgage Corporation
120 East Baltimore Street
Baltimore, Maryland 21202
(410) 244-3350
Keith W. Stackhouse
President
Stockholder Information
Baltimore Bancorp and Subsidiaries
Corporate Headquarters
120 East Baltimore Street
Baltimore, Maryland 21202
Phone: (410) 244-3360
Stock Transfer Agent
and Registrar
For services such as change of address, change in certificate
registration, replacement of lost certificate or inquiries as to
account status, write to:
Chemical Bank
Securityholder Relations Department
J.A.F. Building
P.O. Box 3068
New York, NY 10116-3068
Please include your name, address and telephone number with all
correspondence. Telephone inquiries may be made to
Chemical Bank Shareholder Services, (800) 242-3967.
Independent Auditors
Coopers & Lybrand
217 E. Redwood Street
Baltimore, Maryland 21202
Stock Listing
The common stock of Baltimore Bancorp is traded on the New York
Stock Exchange. The symbol is BBB.
Research Reports
Alex. Brown & Sons, Inc.
Ferris, Baker Watts, Inc.
CS First Boston Corp.
Johnston, Lemon & Co.
Keefe, Bruyette & Woods, Inc.
Legg Mason Wood Walker, Inc.
Mabon Securites Corp.
McConnell, Budd & Downes, Inc.
Wheat, First Securities, Inc.
Annual Meeting
The annual meeting of stockholders will be held on Wednesday,
April 27,1994 at 9:00 a.m. at the Omni Inner Harbor Hotel,
101 West Fayette Street, Baltimore, Maryland.
Stockholders' Advisory Committee
(The Stockholders' Advisory Committee was established under Bylaw
Section 1.10 as voted by stockholders in June 1991.
The Committee meets quarterly with, and advises, the Board of
Directors on matters of interest to stockholders generally.
Stockholders are invited to express their interests by writing or
calling any member identified below.)
John E. Brandau
909 Greenleigh Road
Baltimore, Maryland 21212
(410) 296-4426
Joel D. Fedder, Esq.
514 North Crain Highway
Glen Burnie, Maryland 21061
(410) 768-4100
J. R. Hershey, Jr.
Chairperson
Ferris, Baker Watts, Incorporated
17 East Washington Street
Hagerstown, Maryland 21740
(301) 733-7111
Ina M. McGuinness
for T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
(410) 989-3200
William A. Seiler, III
2405 York Road
Timonium, Maryland 21093
(410) 561-9500
Melvin C. Vernon, Jr.
105 River Oak Drive
Danville, Virginia 24541
(804) 799-1000
Number of Stockholders
At December 31, 1993, there were 4,133 registered holders and
approximately 11,000 beneficial holders of Baltimore
Bancorp Common Stock.
Additional Information
The Company files an annual report with the Securities and
Exchange Commission on Form 10-K. Any stockholder may
obtain a copy, without charge, upon written request to the
address below.
Analysts, investors and others seeking financial
information regarding Baltimore Bancorp are invited to contact:
David L. Spilman
Treasurer and
Director of Investor Relations
Baltimore Bancorp
120 East Baltimore Street
Baltimore, Maryland 21202
(410) 576-4490
(800) 722-8823
