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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended December 31, 1996
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Commission file number: 0-23090
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Carrollton Bancorp
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(Name of Small Business Issuer in Its Charter)
Maryland 52-1660951
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
15 Charles Plaza, Suite 200
Baltimore, Maryland 21201-3936
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(Address of Principal Executive Offices) (Zip Code)
(410) 536-4600
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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None None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. /X/
Issuer's revenues for its most recent fiscal year. $22,339,046.
Aggregate market value of the voting stock held by non-affiliates:
$24,465,281.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 1,394,758 shares as of
March 14, 1997.
Transitional Small Business Disclosure Format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
Generally. Carrollton Bancorp (the "Company") is a bank holding company
registered as such under the Bank Holding Company Act of 1956, as amended,
and was organized on January 11, 1990. Carrollton Bank (the "Bank") is a
commercial bank and the principal subsidiary of the Company. The Bank was
incorporated under the laws of the State of Maryland in 1903 and is engaged
in a general commercial and retail banking business.
Service Area. The service area for the Bank is defined both in terms of
geographic area and by the specific types of customers the Bank seeks to
attract by implementing its banking services and programs. Geographically,
the Bank's twelve bank branches are located in Baltimore City, Baltimore
County, Anne Arundel County, and Carroll County, Maryland. The Bank attracts
deposits and generates loan activity throughout this area primarily through
its branch network. In addition, the Bank has made loans in Harford County,
Howard County and Prince George's County, Maryland, and has deposit customers
who live in Harford County and Howard County, Maryland. Bank management
believes that the Bank is able to attract customers from outside of its
geographic branch location by strategically locating branches in certain
commercial areas of central Maryland, thereby appealing to customers who bank
where they work.
Description of Services. The Bank provides a broad range of consumer and
commercial banking products and services to individuals, businesses,
professionals and governments. The services and products have been designed
in such a manner as to appeal to consumers and business principals.
The loan portfolio of the Bank consists primarily of loans for which the
cash flow of the borrower serves as the principal source of debt service and
loan retirement, with secondary emphasis on asset-collateral and other forms
of secondary support. In this regard, many small businesses require
short-term inventory financing which can be supported by cash flow and
individual assets. The Bank also engages in asset-based lending, traditional
real estate loans and general consumer loans to individuals. The loan
portfolio is approximately 35% adjustable rate loans and 65% fixed rate in
terms of its repricing mix.
The Bank has established and implemented lending policies and
procedures, underwriting guidelines and internal control systems in order to
conduct its business in a sound and prudent manner. Potential loan customers
are carefully evaluated in order to assess risk and to expedite any later
loan approval process. The Bank monitors and assesses the performance of the
smaller businesses to which it provides funding.
The following is a partial listing of the types of services and products
which the Bank offers:
. Commercial loans for businesses, including those for working capital
purposes, equipment purchases and accounts receivable and inventory
financing.
. Commercial and residential real estate loans for acquisition,
refinancing and construction.
. Selected consumer loans including automobile loans, residential
mortgages, home equity loans and lines of credit.
. Loans guaranteed by the United States Small Business Administration.
. Money market deposits, demand deposits and NOW accounts and
certificates of deposit.
. Letters of credit and remittance services.
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. Credit and charge card services.
. Merchant credit card deposit processing.
. Brokerage services for stocks, bonds, mutual funds and annuities.
. A 24-hour ATM and affiliation with the MOST ATM Network.
. Credit life insurance.
. After-hours depository services.
. Safe deposit boxes.
. Other services, such as direct deposit services, travelers checks
and IRA accounts.
Customer service hours for the Bank are fully competitive with other
institutions in the market area. The Bank also acts as a reseller of
services purchased from other financial institutions for customers requiring
services not offered directly by the Bank.
Lending Activities. The Bank makes various types of loans to borrowers based
on, among other things, an evaluation of the borrowers' net asset value, cash
flow, security and indicated ability to repay. Loans to consumers include
residential mortgages, home equity loans, home improvement loans, overdraft
loans, credit card loans, and installment loans for automobiles, boats and
recreational vehicles. The Bank also makes loans secured by deposit accounts
and common stocks. The Bank's commercial loan product line includes first
mortgage loans, time and demand loans, lines and letters of credit, and asset
based financing. The Notes to the Consolidated Financial Statements
contained in Part II, Item 7 show the classification by type of loan for the
whole portfolio.
First mortgage residential loans are loans made to enable customers to
purchase or refinance primary residences. These loans are secured by a first
mortgage lien on the property. The Bank typically finances 80% of the
purchase price or appraised value, whichever is less, and requires the
borrower to meet minimum income and debt criteria consistent with the
underwriting standards of the Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation. The Bank also reviews the credit
history of each mortgage applicant. The Bank does have a first time home
buyer program for qualifying purchasers whose family incomes are under
$49,000, with the loan amount not to exceed $80,750, and with a purchase
price not to exceed $85,000. The Bank will finance 95% of the purchase price
or appraised value. First mortgage residential loans are considered low risk
based on the type of collateral obtained (residential property) and the
underwriting standards used (financing only 80% of the value). The Bank
experienced net losses on residential mortgage loans during 1996 of $34,000
and 1994 of $11,000. There were no losses during 1995. There were no
residential mortgage loans delinquent more than 90 days at December 31, 1996.
There are no discernible delinquency or loss trends relating to residential
mortgage loans known to management.
Home equity lines of credit are typically second mortgage loans
(sometimes first mortgages) secured by the borrower's primary residence
structured as a revolving borrowing line with a maximum loan amount.
Customers write checks to access the line. Generally, the Bank has a second
lien on the property behind the first mortgage lien holder. The Bank has a
number of different equity loan products that it offers. Borrowers can
choose between fixed rate loans or loans tied to the prime rate with margins
ranging from 0% to 3.0%. The Bank will finance up to 90% of the value of the
home in combination with the first mortgage loan balance and depending on the
rate and program. As with first mortgage residential loans, borrowers are
required to meet certain income and debt ratios. Home equity loans carry a
higher level of risk than first mortgage residential loans because of the
second lien position on the property behind the first mortgage, and because a
higher loan to value ratio is used in the underwriting of the loan. However,
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the overall risk of loss on home equity loans is also considered low due to
the underlying values of the collateral. The Bank experienced net losses on
home equity loans during 1996 of $19,000 and 1994 of $29,000, and net
recoveries on home equity loans during 1995 of $10,000. There were no home
equity loans delinquent more than 90 days at December 31, 1996. There are no
discernible delinquency or loss trends relating to home equity loans known to
management.
Commercial and investment mortgage loans are first mortgage loans made
to individuals or to businesses to finance acquisitions of plant or earning
assets, such as rental property. These loans are secured by a first mortgage
lien on the commercial property, and may be further secured by other property
or other assets depending on the variability of the value of the mortgaged
property. In most instances, these loans are guaranteed personally by the
principals. The Bank typically looks for cash flow from the business at
least equal to 100% coverage of the business debt service, and to the
income-producing property to be self-supporting generally with a minimum debt
service coverage ratio of 120% to 125%. Commercial mortgage loans carry more
risk than residential real estate loans. First, commercial mortgage loans
tend to be larger in size, and the properties tend to exhibit more
fluctuation in value. Second, the repayment of the loan is primarily
dependent on the success of the business itself, or the tenants in the case
of income producing property. Economic cycles can affect the success of a
business depending on the type of business. Therefore, business risk to the
Bank's customer is involved. The Bank did not experience any losses on
commercial mortgage loans during 1996, 1995 or 1994. There were no
commercial mortgage loans past due more than 90 days at December 31, 1996.
There are no known discernible delinquency or loss trends relating to
commercial mortgage loans.
Construction and land development loans are loans to finance the
acquisition and development of parcels of land and to construct residential
housing or commercial property. The Bank's financing of these types of
transactions principally relates to projects for residential housing
development and construction. The Bank typically will finance 70% to 75% of
the discounted future value of these projects, or 80% of value or 90% of
cost, whichever is less, on a single-family detached home. The loan is
collateralized by the project or real estate itself, and other assets or
guarantees of the principals in most cases. Repayment to the Bank is
anticipated from the proceeds of sale of the final units, or permanent
mortgage financing on a residential construction loan for a single borrower.
These types of loans carry a higher degree of risk than a commercial mortgage
loan because often the end result is an anticipated future event, the timing
of which is not always controllable. Interest rates, buyer preferences, and
desired locations are all subject to change during the period from the time
of the loan commitment to final delivery of the final unit, all of which can
change the economics of the project. In addition, real estate developers to
whom these loans are typically made are subject to the business risk of
operating a business in a competitive environment. The Bank did not
experience any losses on construction and land development loans during 1996,
1995 or 1994. There were no construction and land development loans past due
more than 90 days at December 31, 1996. There are no discernible delinquency
or loss trends relating to construction and land development loans known to
management.
Time and demand loans and lines of credit are loans to businesses for
relatively short periods of time, usually not more than one year. These
loans are made for any valid business purpose. These loans may be secured by
assets of the borrower or guarantor, but also may be unsecured based on the
personal guarantee of the principal. If secured, loans may be made for up to
100% of the value of the collateral. Time and demand loans and lines of
credit are more risky than secured commercial real estate lending
transactions. The businesses to which these loans are made are subject to
normal business risk, and cash flows of the business may be subject to
economic cycles. In addition, the value of the collateral may fluctuate, or
the collateral may be used for other purposes if not subject to Uniform
Commercial Code filings. If guaranteed by the principal, the net worth and
assets of the principal may be dissipated by demands of the business, or due
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to other factors. The Bank had net recoveries of $6,000 in 1996 and did not
experience any time and demand loan or line of credit losses in 1995 or 1994.
Approximately $31,000, or .11%, of the time and demand and line of credit
loan portfolios were delinquent more than 90 days at December 31, 1996.
There are no discernible delinquency or loss trends relating to time and
demand loans or lines of credit known to management.
Home improvement loans are loans made to borrowers to complete
improvements to their homes including such projects as room additions,
swimming pool installations or new roofs. Home improvement loans include
those made directly to customers and those made indirectly or originated
through an approved home improvement dealer. The Bank makes unsecured home
improvement loans to a maximum amount of $12,500, and any loan above that
limit is secured by a deed of trust. Borrowers are required to own their
home, and to meet certain income and debt ratio requirements. The Bank also
reviews the credit history of all applicants. Because they are unsecured or
secured by a deed of trust, these loans are more risky than first mortgage
residential lending. This risk is mitigated somewhat based on the fact that
the loans are used to improve the borrower's home, typically a borrower's
most significant asset. In addition, the income-and-debt-ratio requirement
helps determine the borrower's current ability to repay the loan. In 1995,
the Bank had net recoveries of home improvement loans of approximately
$350,000. This was the result of a recovery on an insurance claim of
$414,000 for fraudulent loans written off by the Bank in 1990. In 1996 and
1994, the Bank had net charge-offs of home improvement loans of approximately
$34,000 and $68,000, respectively. Approximately $3,000, or .12%, of the
home improvement portfolio was delinquent more than 90 days at December 31,
1996. There are no discernible loss or delinquency trends relating to home
improvement loans known to management.
The remainder of the consumer loan portfolio is composed of installment
loans for automobiles, boats and recreational vehicles, credit card lines,
overdraft protection lines, and loans secured by deposit accounts or stocks.
The largest portion of this group is installment loans for automobiles and
other vehicles. The Bank will finance 85% of the cost of a new car purchase,
or the maximum loan amount as determined by the National Automobile Dealers
Association (NADA) publication for used cars. The Bank will finance 85% of
the cost of a new boat or RV, or the maximum loan amount determined by the
NADA Boat/RV Guide for used Boats and RVs. These loans are secured by the
vehicle purchased. Borrowers must meet certain income and debt ratio
requirements, and a credit review is performed on each applicant. These
types of loans are subject to the risk that the value of the vehicle will
decline faster than the amount due on the loan. However, the income-to-debt
ratio requirement helps determine the borrower's current ability to repay.
The Bank had net losses on automobile loans in 1996 of $11,000 and in 1995 of
$5,000. The Bank did not experience any losses on automobile or other
vehicle loans during 1994. There were no automobile or other vehicle loans
past due more than 90 days at December 31, 1996. There are no discernible
delinquency or loss trends relating to automobile or other vehicle loans
known to management.
Credit card, overdraft lines and other personal loans are unsecured
lending arrangements. These loans or lines of credit are made to allow
customers to easily make purchases of consumer goods. The line amounts are
subject to fairly low limits based on an assessment of the customer's credit
history and income and debt ratios. If the lines are handled as agreed, they
will typically be automatically renewed each year. Because they are
unsecured, these loans carry a higher level of risk than secured lending
transactions. The Bank works to mitigate this risk by establishing fairly
low credit limits. Net charge-offs in 1996, 1995 and 1994 were approximately
$98,000, $30,000, and $7,000, respectively. There were approximately $26,000
of credit card, overdraft loans and other personal loans past due more than
90 days at December 31, 1996. There are no discernible delinquency or loss
trends relating to credit card or overdraft lines known to management,
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however, the increased losses for 1996 relate primarily to a higher level of
personal bankruptcy filings.
Loans secured by savings accounts in the Bank and stock and bond
certificates are very secure forms of lending. The Bank will advance funds
for up to 100% of balances in savings or certificates of deposit accounts in
the Bank. The Bank will advance funds up to 70% of the market value of
actively traded stock certificates and bonds or 60% of the market value of
listed but not actively traded stocks and bonds. Loans secured by stocks and
bonds are subject to margin calls to maintain the loan to value ratio.
Collateral is not released until the loan is repaid, and the borrower is
generally required to pay interest monthly. There were no losses on loans
secured by savings accounts or stock and bond certificates during 1996, 1995
or 1994. There were no loans secured by savings accounts or stock and bond
certificates past due more than 90 days at December 31, 1996. There are no
discernible delinquency or loss trends relating to loans secured by savings
accounts or stock and bond certificates known to management.
Reference is also made to Note 4 of the Notes to Consolidated Financial
Statements included on page F-9 in this Report for the composition of the
loan portfolio by type of loan. This Note will indicate the relative size of
the various types of loans to the portfolio in total. Reference is made to
the Statistical Disclosures on page 16 of this Report for an allocation of
the allowance for loan losses by type of loan which also indicates
management's assessment of the degree of risk that each type of loan carries.
The Bank is the principal originator of all of the loans it makes,
although it increasingly purchases loans and loan participations from brokers
and other institutions. The Bank currently does not sell loans into the
secondary market. Since the Company does not currently sell loans in the
secondary market, it does not service loans for others to derive noninterest
income from loans. Noninterest income related to loans is derived from
commissions on credit life insurance sold to borrowers and letter of credit
fees. These income amounts are not significant to the amounts of noninterest
income derived from other sources.
Reference is made to Note 4 of the Notes to Consolidated Financial
Statements which contains the amounts of nonaccrual and delinquent loans at
December 31, 1996.
Investment Activities. The Bank maintains a portfolio of investment
securities to provide liquidity and income. The current portfolio amounts to
about 32% of total assets, and is invested primarily in U.S. Treasury, U.S.
Government Agency, state and municipal, and mortgage backed securities with
maturities varying from 1997 to 2023. Reference is made to Note 3 of the
Notes to Consolidated Financial Statements included on page F-7 of this
Report and to the Statistical Disclosures on page 16 for additional
information concerning the investment portfolio.
Deposit Services. The Bank offers a wide range of both personal and
commercial types of deposit accounts and services as a means of gathering
funds. Types of deposit accounts available include noninterest bearing
demand checking, interest bearing checking (NOW accounts), savings, money
market, certificates of deposit, individual retirement accounts, and
Christmas Club accounts. These accounts carry varying fee structures
depending on the level of services desired by the customer and varying
interest rates depending on the balance in the account maintained by the
customer. Commercial deposit customers may also choose an overnight
investment account which automatically invests excess balances available in
demand accounts on a daily basis in repurchase agreements. The Bank's
customer base for deposits is primarily retail in nature. The Bank does
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offer certificates of deposit over $100,000 to its retail and commercial
customers. The Bank does not actively solicit these types of deposits
through deposit brokers or otherwise and does not currently consider these
types of deposits as necessary sources of funds given its liquidity position.
Accordingly, the balance of accounts over $100,000 is not significant, and
these accounts are offered principally as accommodations to existing
customers.
Reference is also made to Note 8 of the Notes to Consolidated Financial
Statements included on page F-11 of this Report for additional information
concerning deposits on the Bank.
Brokerage Activities. Carrollton Financial Services, Inc., a subsidiary of
the Bank, provides full service brokerage services for stocks, bonds, mutual
funds and annuities. For 1995, commission and other income totalled $843,069
and income after taxes was $194,925.
Sources of Business. The major focus of the Bank's marketing efforts is both
on individual consumers and on small to medium-sized businesses and
professionals in the Bank's service area. The Bank's ability to generate
deposits, loans and service income is dependent upon the growth of its market
and the development and execution of a marketing strategy. Marketing
primarily involves the print, television and radio media. Direct mail is
used on a sporadic basis, and direct calling on business customers is
performed by branch and commercial lending personnel. The Bank's customers
also promote the bank through word of mouth referral. In its marketing
efforts, the Bank emphasizes the advantages of dealing with a locally-owned
institution which provides personalized service and is sensitive to the
particular needs of consumers and businesses.
Competition. The Bank faces strong competition in all areas of its
operations. This competition comes from entities operating in Baltimore
City, Baltimore County and Anne Arundel County and includes branches of some
of the largest banks in Maryland. Its most direct competition for deposits
historically has come from other commercial banks, savings banks, savings and
loan associations and credit unions operating in Baltimore City, Baltimore
County and Anne Arundel County. The Bank also competes for deposits with
money market funds, mutual funds and corporate and government securities.
The Bank competes with the same banking entities for loans, as well as
mortgage banking companies and other institutional lenders. The competition
for loans varies from time to time depending on certain factors, including,
among others, the general availability of lendable funds and credit, general
and local economic conditions, current interest rate levels, conditions in
the mortgage market and other factors which are not readily predictable.
Some of the Bank's competitors have greater assets and operating capacity
than the Bank.
Asset Management. The Bank makes available several types of loan services to
its customers as described above, depending on customer needs. Recent
emphasis has been made on originating short-term (one year or less), variable
rate commercial loans and variable rate home equity lines of credit, with the
balance of its funds invested in consumer/installment loans and real estate
loans. In addition, a portion of the Bank's assets is invested in high grade
securities and other investments in order to provide income, liquidity and
safety. Such investments include U.S. government and U.S. government agency
securities, mortgage backed securities and collateralized mortgage
obligations, as well as advances of federal funds to other member banks of
the Federal Reserve System. Subject to the effects of taxes, the Bank also
invests in tax-exempt state and municipal securities with a minimum rating of
"A" by a recognized ratings agency. The Bank's primary source of funds is
customer deposits.
The risk of non-repayment (or deferred payment) of loans is inherent in
the business of commercial banking, regardless of the type of loan or
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borrower. The Bank's efforts to expand its loan portfolio to small and
medium-sized businesses may result in the Bank undertaking certain lending
risks which are somewhat different from those involved in loans made to
larger businesses. The Bank's management evaluates all loan applications and
seeks to minimize the exposure to credit risks through the use of thorough
loan application, approval and monitoring procedures. However, there can be
no assurance that such procedures significantly reduce all risks.
Employees. As of December 31, 1996, the Bank and its subsidiaries had 144
full time equivalent employees, 27 of whom were officers. Each officer
generally has responsibility for one or more loan, banking or operation
functions. Non-officer employees are employed in a variety of administrative
capacities. Management does not anticipate any inordinate difficulty in
recruiting and training such additional officers and employees as it may need
in the future. Management believes that relations with its employees are
good.
SUPERVISION AND REGULATION
Supervision and Regulation of the Company. As a bank holding company, the
Company is subject to the Bank Holding Company Act of 1956, as amended (the
"BHCA"). The BHCA is administered by the Board of Governors of the Federal
Reserve System (the "Board of Governors"), and the Company is required to
file with the Board of Governors such reports and information as may be
required pursuant to the BHCA. The Board of Governors also may examine the
Corporation and any of its nonbank subsidiaries. The BHCA requires every
bank holding company to obtain the prior approval of the Board of Governors
before: (i) it or any of its subsidiaries (other than a bank) acquires
substantially all of the assets of any bank; (ii) it acquires ownership or
control of any voting shares of any bank if after such acquisition it would
own or control, directly or indirectly, more than five percent of the voting
shares of such bank; or (iii) it merges or consolidates with any other bank
holding company.
Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than five
percent of the voting shares of any company engaged in, non-banking
activities. A major exception to this prohibition is for activities the
Board of Governors finds, by order or regulation, to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the activities that the Board of Governors has determined by
regulation to be properly incident to the business of a bank holding company
are: making or servicing loans and certain types of leases; engaging in
certain investment advisory and discount brokerage activities; performing
certain data processing services; acting in certain circumstances as a
fiduciary or as an investment or financial advisor; ownership of certain
types of savings associations; engaging in certain insurance activities; and
making investments in certain corporations or projects designed primarily to
promote community welfare. The Board of Governors has added ownership of
certain types of savings associations to the list of permissible activities
of a bank holding company.
Certain provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991 ("FDICIA") also may impact the operations of the
Company. FDICIA requires that the Board of Governors adopt regulations
establishing safety and soundness standards for bank holding companies
relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate exposure; (v) asset growth; and (vi) compensation and benefit standards
for officers, directors, employees and principal shareholders. The Board of
Governors proposed regulations to implement this requirement in April 1993.
Final regulations were to become effective by December 1,1993. FDICIA also
requires any bank holding company which controls an undercapitalized insured
bank to act as a "source of strength" to such bank. See "Holding Company
Guaranty" below. Finally, FDICIA permits the appropriate federal bank
regulatory agency to require a bank holding company to divest itself of a
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bank subsidiary in certain circumstances. See "Prompt Corrective Action"
below.
The Company is an "affiliate" of the Bank under the Federal Reserve Act,
which imposes certain restrictions on: (i) loans by the Bank to the Company;
(ii) investments in the stock or securities of the Company; and (iii) the
Bank taking stock or securities of the Company as collateral for loans by it
to a borrower. See "Transactions with Affiliates" below.
The Company also is an affiliate of the Bank under the Maryland
Financial Institutions Article of the Annotated Code of Maryland (the
"Financial Institutions Article"). As such, the Commissioner of Financial
Regulation for the State of Maryland (the "Commissioner") has the same
authority to examine the business of the Company that it has to examine the
business of the Bank.
Federal law generally prohibits the current acquisition of banks or bank
holding companies in Maryland by out-of-state banks or bank holding
companies, although the Financial Institutions Article allows regional
interstate banking by permitting banking organizations in certain states to
acquire Maryland banking organizations if Maryland banking associations are
allowed to acquire banking organizations in their states. As a result of
this provision, banking organizations in other states, most significantly
North Carolina, Pennsylvania and Virginia, have entered the Maryland market
through acquisitions of Maryland institutions. Those acquisitions are
subject to federal and Maryland approval. The so-called "Douglas Amendment"
to the Bank Holding Company Act was amended effective September 29, 1995 to
allow an "adequately capitalized and adequately managed" bank holding company
to acquire a bank or substantially all of its assets located in any other
state regardless of whether the acquisition is expressly authorized under
state law.
President Clinton also signed into law a bill which, among other things,
allows interstate branching by banking organizations as early as June 1,
1997, subject to each states' separate decision to allow interstate branch
banking within the state. The effects of such legislation cannot yet be
determined, but it is anticipated that competition by financial institutions
within Maryland may increase due to entrance into the market place by
branches of out-of-state banks. Such legislation could also spur increased
acquisition activity of Maryland institutions by out-of-state organizations.
During the 1995 legislative session, the State of Maryland passed legislation
to allow interstate branch banking within Maryland.
Supervision and Regulation of the Bank. The Bank is the only direct
subsidiary of the Company. The Bank operates as a banking institution
incorporated under the laws of the State of Maryland and is subject to
examination by the Commissioner. The Bank is not a member of the Federal
Reserve System (an "insured nonmember bank") and as such, its primary federal
regulator is the Federal Deposit Insurance Corporation (the "FDIC").
Deposits in the Bank are insured by the FDIC. The Commissioner and the FDIC
regulate or monitor all areas of the Bank's operations, including reserves,
loans, loans to directors, officers or principal shareholders, loans to one
borrower, capital, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits,
interest rates or fees chargeable on loans, establishment of branches,
corporate reorganizations and maintenance of books and records.
Examinations. Pursuant to FDICIA, examinations of insured nonmember
banks having assets of $100,000,000 or more must be conducted no less
frequently than every 18 months until December 31, 1993 and no less
frequently than every 12 months thereafter. The Bank is subject to
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assessments by the FDIC to cover the costs of such examinations. As a result
of such examinations, the FDIC may revalue assets of the Bank and require
establishment of specific reserves in amounts equal to the difference between
such revaluation and the book value of the assets.
Safety and Soundness. The FDIC is authorized to promulgate regulations
to ensure the safe and sound operations of insured nonmember banks and may
impose various requirements and restrictions on the activities of insured
nonmember banks. Additionally, under FDICIA, the FDIC was required to
prescribe safety and soundness regulations no later than December 1, 1993
relating to: (i) internal controls, information systems, and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate exposure; (v) asset growth; and (vi) compensation and benefit standards
for officers, directors, employees and principal shareholders.
Loans and Deposit Products. Interest and certain other charges
collected or contracted for by the Bank are subject to state usury and
consumer protection laws and certain federal laws concerning interest rates.
The Bank's loan operations are also subject to certain federal laws
applicable to credit transactions, such as the Truth-in-Lending Act
(governing disclosures of credit terms to consumer borrowers), the Equal
Credit Opportunity Act (prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit), the Fair Credit
Reporting Act (governing the use of information from and provision of
information to credit reporting agencies and others), the Fair Debt
Collection Practices Act (governing the manner in which consumer debts may be
collected), and the rules and regulations of the various federal agencies
charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Electronic Funds
Transfer Act (governing automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking services), the
Truth-in-Savings Act (governing disclosures of terms applicable to deposit
accounts), the Expedited Funds Availability Act (governing the availability
of certain funds deposited into transaction accounts), and the rules and
regulations of the Board of Governors implementing such acts.
Pursuant to FDICIA, the FDIC has adopted regulations prescribing
standards for extensions of credit by insured nonmember banks secured by
liens on or interests in real estate and made for the purpose of financing
the construction of a building or other improvements to real estate. The
FDIC regulations require insured nonmember banks to establish and maintain
written internal real estate lending policies consistent with safe and sound
banking practices and appropriate to the size of the bank. These policies
must include loan portfolio diversification standards, prudent underwriting
standards (including clear and measurable loan-to-value limits), loan
administration procedures, and documentation, approval and reporting
requirements to monitor compliance with the policies. Finally, the
regulations require insured nonmember banks to monitor conditions in its real
estate market to ensure that its lending policies continue to be
appropriately based on current market conditions.
Capital Requirements. Under regulations promulgated by the FDIC,
insured nonmember banks currently are required to maintain "core" or "tier 1"
capital of at least 3% of total assets (the "Leverage Ratio"). For all but
the most highly rated banks, the minimum Leverage Ratio requirement will be
4% to 5% of total assets. Tier 1 capital consists of: (i) common
shareholders' equity, noncumulative perpetual preferred stock and minority
interests in consolidated subsidiaries; (ii) minus intangible assets (other
than certain purchased mortgage and credit card servicing rights); (iii)
minus certain losses, and minus investments in certain securities
subsidiaries.
In addition, each insured nonmember bank also must maintain a "tier 1
risk-based capital ratio" of 4%. The "tier 1 risk-based capital ratio" is
defined in FDIC regulations as the ratio of tier 1 capital to "risk-weighted
assets." A bank's total risk-weighted assets are determined by: (i)
converting each of its off-balance sheet items to an on-balance sheet credit
equivalent amount; (ii) assigning each on-balance sheet asset and the credit
equivalent amount of each off-balance sheet item to one of the five risk
categories established in the FDIC's regulations; and (iii) multiplying the
amounts in each category by the risk factor assigned to that category. The
sum of the resulting amounts constitutes total risk-weighted assets.
-9-
<PAGE>
Finally, each insured nonmember bank is required to maintain a "total
risk-based capital ratio" of at least 8%. The "total risk-based capital
ratio" is defined in FDIC regulations as the ratio of total qualifying
capital to risk-weighted assets (as defined above). Total capital, for
purposes of the risk-based capital requirement, consists of the sum of tier 1
capital (as defined for purposes of the Leverage Ratio) and supplementary
capital. Supplementary capital includes such items as cumulative perpetual
preferred stock, long-term and intermediate-term preferred stock, term
subordinated debt and general valuation loan and lease loss allowances (but
only in an amount of up to 1.25% of total risk-weighted assets). The maximum
amount of supplementary capital that may be counted towards satisfaction of
the total capital requirement is limited to 100% of core capital.
Additionally, term subordinated debt and intermediate-term preferred stock
only may be included in supplementary capital up to 50% of tier 1 capital.
Capital requirements higher than the generally applicable minimum
requirements may be established for a particular insured nonmember bank if
the FDIC determines that the bank's capital is or may become inadequate in
view of its particular circumstances. Individual minimum capital
requirements may be imposed where a bank is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses
other safety or soundness concerns. Deficient capital may result in the
suspension of an institution's deposit insurance.
Under FDICIA, the FDIC was required to revise its risk-based capital
standard no later than June 19, 1993 to ensure that such standard takes
adequate account of: (i) interest rate risk; (ii) concentration of credit
risk; and (iii) the risk of nontraditional activities and to adequately
reflect the actual performance and expected risk of loss on multifamily
mortgages. Although the FDIC, together with the Office of the Comptroller of
the Currency and the Board of Governors published a joint notice of proposed
rulemaking addressing the interest rate risk issue, no final action has
occurred with respect thereto nor has the FDIC taken any action to date with
respect to concentration of credit risk, the risk of nontraditional
activities or the expected risk on multifamily mortgages.
Prompt Corrective Action. Under FDIC regulations, any insured nonmember
bank that receives notice from the FDIC that it is undercapitalized,
significantly undercapitalized or critically undercapitalized must file a
capital restoration plan with the FDIC addressing, among other things, the
manner in which the bank will increase its capital to comply with all
applicable capital standards. Under the prompt corrective action regulation
adopted by the FDIC, an institution will be considered: (i) "well
capitalized" if the institution has a total risk-based capital ratio of 10%
or greater, a tier 1 risk-based capital ratio of 6% or greater, and a
Leverage Ratio of 5% or greater (provided the institution is not subject to
an order, written agreement, capital directive or prompt corrective action to
meet and maintain a specified capital level for any capital measure); (ii)
"adequately capitalized" if the institution has a total risk-based capital
ratio of 8% or greater, a tier 1 risk-based capital ratio of 4% or greater,
and a Leverage Ratio of 4% or greater (3% or greater if the institution is
rated composite 1 in its most recent report of examination); (iii)
"undercapitalized" if the institution has a total risk-based capital ratio of
less than 8%, or a tier 1 risk-based capital ratio of less than 4%, or a
Leverage Ratio of less than 4% (3% if the institution is rated composite 1 in
its most recent report of examination); (iv) "significantly undercapitalized"
if the institution has a total risk-based capital ratio of less than 6%, or a
tier 1 risk-based capital ratio of less than 3%, or a Leverage Ratio that is
less than 3%; and (v) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets that is less than 2%. The
regulation also permits the FDIC to determine that an institution should be
placed in a lower category based on the existence of an unsafe and unsound
condition or on other information, such as the institution's examination
report, after written notice.
The degree of regulatory intervention mandated by FDICIA and the prompt
corrective action regulation is tied to an insured nonmember bank's capital
category, with increasing scrutiny and more stringent restrictions being
imposed as a bank's capital declines. The prompt corrective actions
specified by FDICIA for undercapitalized banks include increased monitoring
-10-
<PAGE>
and periodic review of capital compliance efforts, a requirement to submit a
capital restoration plan, restrictions on dividends and total asset growth,
and limitations on certain new activities (such as opening new branches and
engaging in acquisitions and new lines of business) without FDIC approval.
Banks that are significantly undercapitalized or critically undercapitalized
may be required to raise additional capital so that the bank will be
adequately capitalized or be acquired by, or combined with, another bank if
grounds exist for appointing a receiver. Further, the FDIC may restrict such
banks from (i) entering into any material transaction without the prior
approval of the FDIC; (ii) making payments on subordinated debt; (iii)
extending credit for any highly leveraged transaction; (iv) making any
material change in accounting methods; (v) engaging in certain affiliate
transactions; (vi) paying interest on deposits in excess of the prevailing
rates of interest in the region where the institution is located; (vii)
paying excess compensation or bonuses; and (viii) accepting deposits from
correspondent depository institutions. In addition, the FDIC may require
that such banks: (a) hold a new election for directors, dismiss any director
or senior executive officer who held office for more than 180 days
immediately before the institution became undercapitalized, or employ
qualified senior executive officers; and (b) divest or liquidate any
subsidiary which the FDIC determines poses a significant risk to the
institution.
Any company which controls a significantly undercapitalized insured
nonmember bank may be required to: (i) divest or liquidate any affiliate
other than an insured depository institution; or (ii) divest the bank if the
FDIC determines that divestiture would improve the bank's financial condition
and future prospects. Generally a conservator or receiver must be appointed
for a critically undercapitalized bank no later than 90 days after the bank
becomes critically undercapitalized, subject to a limited exception for banks
which are in compliance with an approved capital restoration plan and which
the FDIC certifies as not likely to fail. Additionally, the FDIC may impose
such other restrictions on a capital-deficient bank as the FDIC deems
necessary or appropriate for the safety and soundness of the bank, its
depositors and investors, including limitations on investments and lending
activities. The failure by a bank to materially comply with an approved
capital plan constitutes an unsafe or unsound practice.
Holding Company Guaranty. FDICIA and the regulations promulgated by the
FDIC pursuant thereto also require any company that has control of an
"undercapitalized" insured nonmember bank, in conjunction with the submission
of a capital restoration plan by the bank, to guarantee that the bank will
comply with the plan and provide appropriate assurances of performance. The
aggregate liability of any such controlling company under such guaranty is
limited to the lesser of: (i) 5% of the bank's assets at the time it became
undercapitalized; or (ii) the amount necessary to bring the bank into capital
compliance at the time the bank fails to comply with the terms of its capital
plan.
Brokered and Other Deposits. Under applicable FDIC regulations, only
well-capitalized depository institutions may solicit, accept, renew or roll
over any brokered deposit. Adequately-capitalized depository institutions
may accept, renew or roll over brokered deposits only after obtaining a
waiver from the FDIC. Adequately-capitalized institutions are subject to
limits on rates of interest they may pay on brokered deposits.
Undercapitalized institutions are subject to limits on rates of interest they
may pay on deposits in general.
Limitation on Bank Activities. The scope of activities in which an
insured nonmember bank may engage and the permissible investments which an
insured nonmember bank may make are subject to federal and Maryland law.
Further, pursuant to FDICIA and the regulations of the FDIC promulgated
pursuant thereto, an insured nonmember bank may engage only in those
activities, and make only those investments, as are permissible for national
banks. National banks generally are permitted to engage in certain
enumerated banking functions and all such activities as are incidental
thereto. Further, national banks, and as a result of FDICIA, insured
nonmember banks are severely limited as to the types of debt and equity
securities in which such banks may invest.
Transactions with Affiliates. Transactions engaged in by an insured
nonmember bank or one of its subsidiaries with affiliates of such bank are
subject to the affiliate transactions restrictions contained in Section 23A
-11-
<PAGE>
and 23B of the Federal Reserve Act in the same manner and to the same extent
as such restrictions apply to transactions engaged in by a Federal Reserve
System member bank or one of its subsidiaries with affiliates of that member
bank. Section 23A of the Federal Reserve Act imposes both quantitative and
qualitative restrictions on transactions engaged in by a member bank or one
of its subsidiaries with an affiliate, while Section 23B of the Federal
Reserve Act requires, among other things, that all transactions with
affiliates be on terms substantially the same, or at least as favorable to
the member bank or the subsidiary, as the terms that would apply, or would be
offered in, a comparable transaction with an unaffiliated party.
Loans made by an insured nonmember bank to its directors, executive
officers and principal shareholders, to the directors, executive officers and
principal shareholders of its affiliates, or to the related interests of any
of the foregoing (collectively, "insiders") must comply with Maryland law and
the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and
certain of the regulations of the Board of Governors promulgated pursuant
thereto, except to the extent more stringent requirements are established by
the FDIC. Among other things, Sections 22(g) and 22(h) of the Federal
Reserve Act require that all loans to insiders be made on substantially the
same terms as those prevailing at the time for comparable transactions with
unaffiliated borrowers and not involve more than the normal risk of repayment
or present other unfavorable features. Maryland law further requires that
such loans with limited exceptions be approved by the board of directors or
executive committee and be reviewed every six months by the board.
Additionally, the aggregate amount of loans or extensions of credit
outstanding to any insider may not exceed the loans to one borrower
limitation applicable to national banks. Further, FDICIA limits the
aggregate amount of loans or extension of credit outstanding to all insiders
to 100% of the amount of unimpaired capital and unimpaired surplus of the
institution.
Regulatory Restrictions on the Payment of Dividends by the Bank to the
Company. FDICIA restricts the ability of federally-insured banks to pay any
dividend (other than a dividend in the form of additional shares, or options
to purchase additional shares, of the bank) if, after paying the dividend,
the bank would be undercapitalized.
Community Reinvestment. The Community Reinvestment Act (the "CRA") and
the regulations of the FDIC promulgated pursuant thereto require each insured
nonmember bank to delineate its local community, adopt a CRA statement
listing the local community and the types of credit the bank is prepared to
extend in that community and to make its CRA statement available for public
inspection. The FDIC periodically evaluates performance and compliance with
the CRA statement. The failure to adequately perform community reinvestment
activities could result in the denial of applications to acquire banking and
non-banking institutions, establish branches, obtain deposit insurance for
newly-chartered banks, or to relocate the main office or a branch office of a
bank.
Insurance of Deposits. The Bank's deposits are insured by the FDIC
through the Bank Insurance Fund (the "BIF") up to a maximum of $100,000 for
each insured depositor. The insurance premium payable by each BIF member is
based on the institution's assessment base (generally total deposit accounts
subject to certain adjustments). The premiums are paid in quarterly
assessments. The FDIC promulgated regulations establishing a risk-based
assessment system commencing in 1993.
Under the risk-based assessment system, each institution is assigned to
one of three capital groups and to one of three supervisory subgroups for
purposes of determining an assessment rate. The capital group is determined
by the institution's regulatory capital position. The supervisory subgroup
assignments are based on a determination by the FDIC's Director of the
Division of Supervision. Institutions can request a review of the
supervisory subgroup assignment. Under this formula, well-capitalized
institutions classified as Subgroup "A" (financially sound institutions with
only a few minor weaknesses) will pay the most favorable assessment rate of
0%, subject to a minimum assessment, while undercapitalized institutions
classified as Subgroup "C" (institutions which pose a substantial probability
of loss to the BIF unless corrective action is taken) will pay the least
favorable assessment rate of 0.27%. In addition, as a result of federal
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<PAGE>
legislation during 1996, BIF insured financial institutions are assessed for
repayment of the Financing Corporation (FICO) bonds. For the second quarter
of 1997, the assessed annual FICO BIF rate is .013%. The Company's
subsidiary bank total insurance premium (FDIC and FICO combined) is currently
the minimum required by the FDIC and amounts to approximately $30,000
annually based on the Bank's current deposit level.
Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon a finding by the FDIC that an insured nonmember bank has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, rule, regulation,
order or condition imposed by, or written agreement with, the FDIC.
Additionally, the FDIC may temporarily suspend insurance on new deposits
received by an insured nonmember bank that has no tangible capital and no
goodwill includible in core capital.
Income Taxes. The Company and its subsidiaries are required to file annual
income tax returns with both the Internal Revenue Service (the "IRS") and the
taxing authorities in any state in which they are qualified to do business,
or franchise tax returns in Maryland in the case of the Bank. Because the
Bank is under $500 million in asset size, it is permitted to use the reserve
method of tax accounting for determining bad debt deductions for income tax
purposes. At December 31, 1996, the Bank had a tax bad debt reserve of
$731,000 and a book bad debt reserve of $2.2 million. The Bank has provided
a deferred tax asset on its books for the difference between its tax and book
bad debt reserves. If the Bank were to grow to a size of $500 million or
greater, it would be required to recapture its tax bad debt reserve over a
four year period and pay taxes on that amount. For financial accounting
purposes, the payment of these taxes would be offset by an increase in the
deferred tax asset related to the difference between tax and book bad debt
reserves, potentially subject to a total deferred tax asset limitation based
on reasonable recovery under current accounting literature.
Although the Company currently pays income taxes based on current
marginal rates, the Bank has a portfolio of state and municipal securities
which earn interest which is not taxed for federal income tax purposes. For
that reason, the Bank may be subject to the Alternative Minimum Tax ("AMT")
provisions of the Internal Revenue Code. The AMT provisions in general limit
the benefit available from investing in tax free obligations, and require
companies to pay the higher of taxes computed at 34% of income less the tax
free income, or 20% of total income. Any amounts paid under the AMT are
carried over and are available as a credit in future years.
Beginning in 1996, the State of Maryland began assessing an income tax
and personal property tax on financial institutions in lieu of a franchise
tax. Such changes are being phased in over a three year period and will be
fully effective in 1998. These changes are not expected to have an adverse
effect on Carrollton Bank or the Company.
Securities Laws. The Company and certain of its directors, officers and
shareholders are subject to the Securities Act of 1934 and a broad range of
both federal and state securities laws including, by way of example, the
obligation to file annual, quarterly and other periodic reports with the
appropriate authorities, soliciting proxies and conducting shareholders'
meetings in accordance with the 1934 Act's proxy rules, and complying with
the reporting and "short-swing" profit recovery provisions imposed by 1934
Act Section 16.
Monetary Policies. Banking is a business which depends on interest rate
differentials. In general, the differences between the interest paid by a
bank on its deposits and other borrowings and the interest received by the
bank on loans extended to its customers and securities held in its investment
portfolio constitute the major portion of a bank's earnings. Consequently,
the earnings growth of the Bank is influenced by economic conditions
generally, both domestic and foreign, and also on the monetary and fiscal
policies of the United States and its agencies, particularly the Federal
Reserve Board, which regulates the supply of money through various means,
including open market transactions in United States government securities.
The nature and timing of changes in such policies and their impact on the
Bank cannot be predicted, although this instrument of monetary policy may
-13-
<PAGE>
cause volatile fluctuations in short term interest rates, and it can have a
direct, adverse effect on the operating results of financial institutions
generally. Consequently, Federal Reserve monetary policies have had a
significant effect on the operating results of commercial banks in the past
and are expected to continue to do so in the future.
During the last several years, federal legislation and actions by
various federal regulatory authorities have significantly increased the
competition among commercial banks, savings and loan associations, savings
bank, and other financial institutions through, among other things, the
elimination of virtually all rate ceilings on interest-bearing deposits.
ITEM 2: DESCRIPTION OF PROPERTY
Both the Bank's main branch and the Company's principal executive and
administrative offices are located in downtown Baltimore, in leased space.
The Bank also leases space for eight of its remaining eleven branches, and
for its operations center which primarily houses back-office functions.
Current lease terms expire in 1998 through 2014 and contain renewal options
ranging from 5 to 20 years. The Bank owns three of its branch office
buildings.
The Bank has purchased the furniture and fixtures required for its
headquarters, operations center and branch network. The Bank has purchased
the computer/teller equipment in its branch network and the equipment used
for administrative functions. The Bank leases the computer equipment used in
the data processing department which supports its operations.
ITEM 3: LEGAL PROCEEDINGS
There are no pending legal proceedings in which the Company or any of
its subsidiaries is a defendant for claims or damages which exceed $50,000.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
STATISTICAL DISCLOSURES
The following statistical information should be read in conjunction with
the Audited Consolidated Financial Statements contained in Section F of this
document and Management's Discussion and Analysis of Financial Condition and
Results of Operations beginning on page 27 of this document. The following
statistical information contained herein is presented to help the reader gain
additional insight to information and discussion presented in the Audited
Consolidated Financial Statements and in Management's Discussion and
Analysis.
Item 1: Distribution of Assets, Liabilities, and Shareholders' Equity;
Interest Rates and Interest Differential
Average Balances, Interest and Yields
The following chart contains average balance sheet information for 1996,
1995 and 1994, and indicates the related interest income or expense and
calculated yield. Non-accruing loans are included in the average balance
amounts of the applicable portfolio, but only the amount of interest actually
recorded as income on non-accrual loans is included in the interest income
column.
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<PAGE>
Average Balances, Interest, and Yields
1996
-------------------------------------
Average
balance Interest Yield
------------ ----------- ------
Assets
Federal funds sold $ 2,000,000 $ 107,404 5.37%
Interest-bearing deposits 80,328 4,781 5.95
Investment securities
U.S. Treasury 6,287,274 406,733 6.47
U.S. Government agency 40,287,442 2,568,964 6.38
State and municipal 17,076,309 1,221,347 7.15
Mortgage-backed securities 23,609,276 1,563,854 6.62
Other 2,829,995 148,756 5.26
------------ ----------- -----
90,090,296 5,909,654 6.56
------------ ----------- -----
Loans
Demand and time 26,141,357 2,708,450 10.36
Mortgage and construction 104,423,480 8,860,566 8.49
Installment and credit card 15,730,078 1,349,889 8.58
------------ ----------- -----
146,294,915 12,918,905 8.83
------------ ----------- -----
Total interest-earning assets 238,465,539 18,940,744 7.94
Non-interest-bearing cash 15,289,149
Bank premises and equipment 4,324,119
Other assets 5,054,500
Allowance for loan losses (2,256,400)
Unrealized gains (losses) on
available for sale securities 26,752
------------ -----------
$260,903,659 $18,940,744
------------ -----------
------------ -----------
Liabilities and Shareholders' Equity
Interest-bearing deposits
Savings and NOW $ 70,472,716 $ 1,740,092 2.47%
Money market 61,690,578 2,669,164 4.33
Other time 63,379,561 3,698,671 5.84
------------ ----------- -----
195,542,855 8,107,927 4.15
Borrowed funds 8,512,282 440,815 5.18
------------ ----------- -----
204,055,137 8,548,742 4.19
Non-interest-bearing deposits 28,169,827
Other liabilities 1,510,893
Shareholders' equity 27,167,802
------------ -----------
Total liabilities and equity $260,903,659 $ 8,548,742
------------ -----------
------------ ------------
Net yield on interest-earning assets $238,465,539 $10,392,002 4.36%
------------ ----------- -----
------------ ----------- -----
Interest on investments is presented on a fully taxable equivalent basis,
using regular income tax rates.
-15-
<PAGE>
Average Balances, Interest, and Yields
(Continued)
1995
-------------------------------------
Average
balance Interest Yield
------------ ----------- ------
Assets
Federal funds sold $ 5,594,131 $ 331,642 5.93%
Interest-bearing deposits 95,210 6,615 6.95
Investment securities
U.S. Treasury 8,828,105 553,776 6.27
U.S. Government agency 41,828,062 2,455,983 5.87
State and municipal 11,902,569 904,594 7.60
Mortgage-backed securities 15,813,197 1,082,165 6.84
Other 2,134,974 157,606 7.28
---------- --------- -----
80,536,907 5,154,124 6.40
---------- --------- -----
Loans
Demand and time 20,675,685 2,215,907 10.72
Mortgage and construction 93,358,237 8,260,579 8.85
Installment and credit card 17,571,425 1,465,906 8.34
----------- ---------- -----
131,605,347 11,942,392 9.07
----------- ---------- -----
Total interest-earning assets 217,831,595 17,434,773 8.00
Non-interest-bearing cash 12,044,235
Bank premises and equipment 3,796,228
Other assets 4,328,016
Allowance for loan losses (2,242,169)
Unrealized gains (losses) on
available for sale securities (845,595)
----------- ----------
$234,912,310 $17,434,818
----------- ----------
----------- ----------
Liabilities and Shareholders' Equity
Interest-bearing deposits
Savings and NOW $ 64,530,682 $ 1,715,235 2.66%
Money market 47,418,472 2,022,416 4.27
Other time 57,729,997 3,409,167 5.91
------------ ----------- ----
169,679,151 7,146,818 4.21
Borrowed funds 11,274,640 720,570 6.39
------------ ----------- ----
180,953,791 7,867,388 4.35
Non-interest-bearing deposits 27,258,698
Other liabilities 1,471,765
Shareholders' equity 25,228,056
------------ -----------
Total liabilities and equity $234,912,310 $ 7,867,388
------------ -----------
------------ -----------
Net yield on interest-earning
assets $217,831,595 $ 9,567,385 4.39%
------------ ----------- ----
------------ ----------- ----
Interest on investments is presented on a fully taxable equivalent basis,
using regular income tax rates.
-16-
<PAGE>
Average Balances, Interest, and Yields
(Continued)
<TABLE>
<CAPTION>
1994
-----------------------------------------
Average balance Interest Yield
--------------- -------- -----
<S> <C> <C> <C>
Assets
Federal funds sold $ 1,582,192 $ 62,258 3.93%
Interest-bearing deposits 4,466,250 188,130 4.21
Investment securities
U.S. Treasury 13,275,631 782,092 5.89
U.S. Government agency 38,516,949 2,035,793 5.29
State and municipal 10,661,316 877,412 8.23
Mortgage-backed securities 4,196,667 270,644 6.45
Other 1,376,251 107,171 7.79
------------ ----------- -----
68,026,814 4,073,112 5.99
------------ ----------- -----
Loans
Demand and time 14,613,807 1,356,410 9.28
Mortgage and construction 88,151,061 7,322,430 8.31
Installment and credit card 17,805,104 1,565,048 8.79
------------ ----------- -----
120,569,972 10,243,888 8.50
------------ ----------- -----
Total interest-earning assets 194,645,228 14,567,388 7.48
Non-interest-bearing cash 8,344,064
Bank premises and equipment 2,947,579
Other assets 3,323,975
Allowance for loan losses (1,905,091)
Unrealized gains (losses) on available for sale securities (1,031,705)
------------ -----------
$206,324,050 $14,567,388
------------ -----------
------------ -----------
Liabilities and Shareholders' Equity
Interest-bearing deposits
Savings and NOW $ 61,541,421 $ 1,625,674 2.64%
Money market 34,401,236 924,101 2.69
Other time 49,790,762 2,481,648 4.98
------------ ----------- -----
145,733,419 5,031,423 3.45
Borrowed funds 9,082,550 416,192 4.58
------------ ----------- -----
154,815,969 5,447,615 3.52
Non-interest-bearing deposits 25,801,883
Other liabilities 1,534,896
Shareholders' equity 24,171,302
------------ -----------
Total liabilities and equity $206,324,050 $ 5,447,615
------------ -----------
------------ -----------
Net yield on interest-earning assets $194,645,228 $ 9,119,773 4.69%
------------ ----------- -----
------------ ----------- -----
</TABLE>
Interest on investments is presented on a fully taxable equivalent basis,
using regular income tax rates.
-17-
<PAGE>
Rate and Volume Variance
The following chart shows the changes in interest income and interest
expense for the last two years resulting from changes in volume and changes
in rates.
Rate and Volume Variance Analysis
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
----------------------------------- --------------------------------------
Change Due to Variance In Change Due to Variance In
Rates Volumes Total Rates Volumes Total
-------- ---------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on
Federal funds sold $ (11,164) $ (213,074) $(224,238) $ 111,517 $157,867 $ 269,384
Interest-bearing deposits (800) (1,034) (1,834) 2,605 (184,120) (181,515)
Investment securities
U.S. Treasury 12,340 (159,383) (147,043) 33,696 (262,012) (228,316)
U.S. Government agency 203,440 (90,459) 112,981 245,183 175,007 420,190
State and municipal (76,451) 393,204 316,753 (74,971) 102,153 27,182
Mortgage backed securities (51,831) 533,520 481,689 62,369 749,153 811,522
Other (57,262) 48,412 (8,850) (10,984) 61,419 50,435
------------ ----------- ---------- ------------ ------------- -----------
30,236 725,294 755,530 255,293 825,720 1,081,013
------------ ----------- ---------- ------------ ------------- ------------
Loans
Demand and time (93,238) 585,781 492,543 296,851 562,645 859,496
Mortgage and construction (373,890) 973,877 599,984 489,494 448,655 938,149
Installment and credit card 37,598 (153,615) (116,017) (78,602) (20,540) (99,142)
------------ ----------- ---------- ------------ ------------- ------------
(429,530) 1,406,043 976,513 707,743 990,760 1,698,503
------------ ----------- ---------- ------------ ------------- ------------
Total interest earned (411,258) 1,917,229 1,505,971 1,077,158 1,790,227 2,867,385
------------ ----------- ---------- ------------ ------------- ------------
Interest expense on
Deposits
Savings and NOW (133,083) 157,940 24,857 10,597 78,964 89,561
Money market 38,037 608,711 646,748 748,640 349,675 1,098,315
Other time (44,123) 333,627 289,504 531,815 395,704 927,519
Borrowed funds (103,211) (176,544) (279,755) 203,929 100,449 304,378
------------ ----------- ---------- ------------ ------------- ------------
Total interest expense (242,380) 923,734 681,354 1,494,981 924,792 2,419,773
------------ ----------- ---------- ------------ ------------- ------------
Net interest income $(168,878) $993,495 $824,617 $(417,823) $865,435 $ 447,612
------------ ----------- ---------- ------------ ------------- ------------
------------ ----------- ---------- ------------ ------------- ------------
</TABLE>
Interest on investments is presented on a fully taxable equivalent basis.
The change in rate/volume has been allocated wholly to the change in rates
for both years presented.
-18-
<PAGE>
Item 2: Investment Portfolio
Amortized Cost of Investments
Reference is made to Note 3 of Notes to Consolidated Financial
Statements on page F-7 for the amortized cost of investments at the end of
1996 and 1995. The amortized cost of investments at the end of 1994 was as
follows:
<TABLE>
<CAPTION>
Book Value
----------
Available for Sale
- - ------------------
<S> <C>
U.S. Treasury $ 2,484,132
U.S. Government Agency 28,094,481
Mortgage backed securities 6,096,107
State and municipal 5,589,462
Federal Home Loan Bank Stock 1,234,800
Equity securities 951,355
-----------
$44,450,337
-----------
-----------
Available for Sale
- - ------------------
U.S. Treasury $ 7,887,342
U.S. Government agency 5,324,026
Mortgage backed securities 990,160
State and municipal 4,699,790
Foreign bonds 50,000
-----------
$19,117,073
-----------
-----------
</TABLE>
Note: Investments classified as available for sale are carried at market
value whereas investments classified as held to maturity are carried at
amortized cost.
Maturity and Weighted Average Yields
The following charts show the maturity distribution for amortized cost
and weighted average yields of debt securities in the Company's investment
portfolio at December 31, 1996. Separate charts are presented for securities
classified as available for sale and held to maturity. Because the amortized
cost is shown and not market value, the totals of the available for sale
securities will not agree with the amount shown on the Consolidated Balance
Sheet for 1996 in Part II, Item 7.
-19-
<PAGE>
MATURITY DISTRIBUTION - AMORTIZED COST
<TABLE>
<CAPTION>
Available for Sale
-----------------------------------------------------
Description < 1 year 1 to 5 years 5 to 10 years > 10 years
- - ----------- -------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $ - $ - $ - $ -
U.S. Government agency 500,000 14,644,398 16,758,541 500,060
Mortgage backed
securities (1) - 7,650,502 3,743,339 10,930,071
State and municipal - 1,198,086 3,458,532 6,979,312
-------- ------------ ------------- -----------
$500,000 $23,492,986 $23,960,412 $18,409,443
-------- ------------ ------------- -----------
-------- ------------ ------------- -----------
Held to Maturity
-------------------------------------------------------
Description < 1 year 1 to 5 years 5 to 10 years > 10 years
- - ----------- ---------- ------------ ------------- -----------
U.S. Treasury $1,499,312 $2,796,553 $ - $ -
U.S. Government Agency 1,300,026 1,499,832 993,753 -
Mortgage backed
securities (1) 832,114 - - -
State and municipal 280,316 1,325,505 3,623,977 2,114,428
Foreign - - - 50,000
---------- ------------ ------------- -----------
$3,911,768 $5,621,890 $4,617,730 $2,164,428
---------- ------------ ------------- -----------
---------- ------------ ------------- -----------
</TABLE>
(1) Mortgage backed securities are included in the maturity
distribution table based on the average life of the security
using anticipated prepayment rates.
-20-
<PAGE>
WEIGHTED AVERAGE YIELD
Available for Sale
----------------------------------------------------
Description < 1 year 1 to 5 years 5 to 10 years > 10 years
- - ----------- -------- ------------ ------------- ----------
U.S. Treasury - - - -
U.S. Government agency 4.98% 5.71% 7.31% 6.64%
Mortgage backed securities - 6.56% 6.49% 6.80%
State and municipal (1) - 6.42% 6.97% 7.90%
----- ----- ----- -----
4.98% 6.02% 7.13% 7.21%
----- ----- ----- -----
----- ----- ----- -----
Held to Maturity
----------------------------------------------------
Description < 1 year 1 to 5 years 5 to 10 years > 10 years
- - ----------- -------- ------------ ------------- ----------
U.S. Treasury 6.20% 7.07% - -
U.S. Government Agency 5.02% 5.08% 7.35% -
Mortgage backed securities 7.71% - - -
State and municipal (1) 6.81% 7.66% 7.63% 8.11%
Foreign - - - 5.50%
----- ----- ----- -----
6.17% 6.68% 7.57% 8.05%
----- ----- ----- -----
----- ----- ----- -----
(1) Yields on state and municipal obligations are computed on a tax equivalent
basis using a 34% federal income tax rate.
There are no securities of any issuer in the investment portfolio which exceeds
ten percent of shareholders' equity.
Item 3: Loan Portfolio
Classification of Loans
Reference is made to Note 4 of Notes to Consolidated Financial
Statements on page F-9 for the classification of loans at the end of 1996 and
1995. In addition to that information, the following information concerning
loans is presented.
1994 1993 1992
------------ ------------ -----------
Real Estate:
Residential $ 69,158,861 $ 64,227,030 $ 61,174,602
Commercial 26,751,432 21,995,974 24,377,230
Construction & land development 780,254 1,204,388 -
Demand and time 14,911,369 13,175,668 11,182,897
Installment & credit card 16,317,472 12,362,361 15,349,041
------------ ------------ -----------
127,919,388 112,965,421 112,083,770
Allowance for loan losses 1,931,345 1,902,507 1,881,787
------------ ------------ -----------
Loans, net $125,988,043 $111,062,914 $110,201,983
------------ ------------ ------------
------------ ------------ ------------
-21-
<PAGE>
Maturities and Interest Rate Sensitivities
The maturities and sensitivities to changes in interest rates for
commercial demand and time loans and real estate - construction loans at
December 31, 1996 is presented below:
Contractually Due
------------------------------------------------------
One year or After one year through
less five years After five years
----------- ---------------------- ----------------
Variable Fixed Variable Fixed
-------- ----- -------- -----
Construction and
land development - - - $291,000 -
Commercial demand
and time $18,344,338 - - - -
Risk Elements
Reference is made to Note 4 of Notes to Consolidated Financial
Statements on page F-9 for nonaccrual, past due and restructured loans at the
end of 1996, 1995 and 1994. In addition to that information, the following
information concerning risk elements is presented.
1993 1992
---- ----
Nonaccrual $352,607 $ 5,891
Restructured - -
-------- --------
$352,607 $ 5,891
-------- --------
-------- --------
Accruing loans past due more than 90 days $ 76,247 $228,555
-------- --------
-------- --------
As of December 31, 1996, there are no loans known to management other than
those previously disclosed about which management has any information about
possible credit problems of borrowers which causes management to have serious
doubts as to the borrower's ability to comply with present loan repayment
terms. There are no other interest-bearing assets that would be required to
be reported under this section if such assets were loans.
Item 4: Summary of Loan Loss Experience
The following charts show the level of loan losses recorded by the
Company for the past five years, management's allocation of the allowance for
loan losses by type of loan as of the end of each year, and other statistical
information. The allocation of the allowance reflects management's analysis
of economic risk potential by type of loan, and is not intended as a forecast
of loan losses.
-22-
<PAGE>
Analysis of the Allowance for Loan Losses
Years Ended December 31
------------------------------------------------------
Description 1996 1995 1994 1993 1992
- - ----------- ------- ------- ------- ------- -------
Balance at
beginning
of year $2,243,472 $1,931,345 $1,902,507 $1,881,787 $1,244,174
Charge-offs:
Commercial - - 4,318 - 5,407
Real Estate:
Residential 52,613 - 69,452 - -
Commercial - - - - -
Construction - - - - -
Installment 218,950 172,375 151,108 129,193 177,442
------- ------- ------- ------- -------
271,563 172,375 224,878 129,193 182,849
------- ------- ------- ------- -------
Recoveries:
Commercial - - 23,466 - -
Real Estate:
Residential 2,000 10,134 29,155 3,655 1,534
Commercial 6,406 - - - -
Construction - - - - -
Installment 73,333 474,368 75,095 81,258 93,928
------- ------- ------ ------ ------
81,739 484,502 127,716 84,913 95,462
------ ------- ------- ------ ------
Net charge-offs 189,824 (312,127) 97,162 44,280 87,387
------- -------- ------ ------ ------
Provision charged
to operations 187,500 - 126,000 65,000 725,000
------- -------- ------- ------ -------
Balance at end of
the year $2,241,148 $2,243,472 $1,931,345 $1,902,507 $1,881,787
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of net charge-offs
to average loans
outstanding .13% .00% .08% .04% .08%
The provision charged to operations for 1994, 1995 and 1996 is discussed in
the section on Management's Discussion and Analysis of Financial Condition
and Results of Operations beginning on page 27 of this document. The
Company's provision in 1993 related to the level of losses incurred during
the year. The Company's provision in 1992 reflected management's concern
about worsening economic conditions in the Bank's market area and the
potential impact that could have on loan losses. Additionally, the Company
had experienced substantial loan portfolio growth in prior years.
-23-
<PAGE>
Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
--------------------- -------------------- --------------------- -------------------
Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in
each each each each
Category Category Category Category
Allocated to Total Allocated to Total Allocated to Total Allocated to Total
Portfolio Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- - --------- --------- ---------- --------- ---------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 563,820 15.3% $289,203 17.8% $ 388,420 11.7% $ 629,942 11.6%
Real Estate:
Residential 433,873 54.4% 531,480 49.1% 436,614 54.1% 339,641 56.9%
Commercial 386,825 20.2% 357,384 18.6% 278,181 20.9% 413,526 19.4%
Construction 7,610 1.3% 15,805 2.3% 15,605 .6% 24,087 1.1%
Installment 269,147 8.8% 219,159 12.2% 181,315 12.7% 196,959 11.0%
Unallocated 579,873 - 830,441 - 631,210 - 298,352 -
---------- ------ ---------- ------ ---------- ------ ---------- ------
$2,241,148 100.0% $2,243,472 100.0% $1,931,345 100.0% $1,902,507 100.0%
--------- ------- ---------- ------ ---------- ------ ---------- ------
--------- ------- ---------- ------ ---------- ------ ---------- ------
</TABLE>
The Company did not prepare internal allocations by portfolio of the
allowance for loan losses for any year prior to December 31, 1993.
Item 5: Deposits
Reference is made to the tables for Average Balances, Interest and
Yields under Item 1 of this section on page 16. Reference is made to Note 8
of Notes to Consolidated Financial Statements on page F-11 for additional
information concerning deposits.
Item 6: Return on Equity and Assets
<TABLE>
<CAPTION>
Description 1996 1995 1994
- - ----------- ----------- ------------- -----------
<S> <C> <C> <C>
Return on average assets .78% .81% .92%
Return on average equity 7.47% 7.50% 7.83%
Dividend payout ratio 28.99% 28.67% 27.98%
Average equity to average assets 10.41% 10.74% 11.72%
</TABLE>
Item 7: Short-term Borrowings
Reference is made to Note 10 of Notes to Consolidated Financial
Statements on page F-12 for description of the general terms of short-term
borrowings, and for information related to repurchase agreements.
-24-
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------- -----------
<S> <C> <C> <C>
Other short-term borrowings:
Total outstanding at period-end $6,646,478 $1,387,611 $1,247,591
Average amount outstanding during
period 3,780,494 7,974,469 1,009,928
Maximum amount outstanding
at any period-end 8,702,977 14,005,097 1,974,776
Weighted average interest
rate at period-end 6.16% 5.15% 5.20%
Weighted average interest
rate for the period 5.42% 6.63% 3.43%
</TABLE>
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Trading and Dividends
As of December 31, 1996, there were approximately 557 shareholders of
record of the Company. Since May 1994, the Company's Common Stock has traded
on the Nasdaq National Market Tier of The Nasdaq Stock Market under the
symbol "CRRB". Currently, there are three broker-dealers who make a market
in the Common Stock.
The table below sets forth the high and low sales price for each quarter
in the last two years, and cash dividends paid per share, adjusted to reflect
the effect of the 5% stock dividend declared by the Company in January 1997.
Cash Dividends
--------------
Period Price per Share Paid per Share
- - -------- -------------------------------- --------------
1995 1996 1995 1996
------ ------ ------ ------
High Low High Low
---- ----- ------ -----
1st Quarter $26.85 $21.01 $24.77 $23.10 $.10 $.10
2nd Quarter 22.64 20.08 24.53 23.10 .10 .10
3rd Quarter 22.64 20.55 24.77 20.96 .10 .10
4th Quarter 24.05 21.48 22.86 20.48 .10 .11
The ability of the Company to pay dividends in the future will be
dependent on the earnings, if any, financial condition and business of the
Company, as well as other relevant factors, such as regulatory requirements.
No assurance can be given either that the Company's future earnings, if any,
will be of sufficient level to enable it to pay dividends, or that if such
earnings are sufficient, that the Company will not decide to retain such
earnings for general working capital and other funding needs. In addition,
the Company is highly dependent on dividends received from the Bank to enable
it to pay dividends to shareholders. No assurance can be given that the Bank
will continue to generate sufficient earnings to enable it to pay dividends
to the Company, or that it will continue to meet regulatory capital
requirements which, if not met, could prohibit payment of dividends to the
Company.
-25-
<PAGE>
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1996 AS COMPARED TO 1995
Earnings
Summary
Carrollton Bancorp reported net income for 1996 of $2,028,000, or $1.45 per
share, representing a 7% increase over 1995 net income of $1,893,000, or
$1.36 per share. The loan portfolio grew 11% to $152,000,000, and net
interest income grew by 8%. During 1996, the Company opened two new
branches. In addition, the Company installed twenty eight off-site ATM
machines, principally in Target Stores in Maryland and Virginia. The branch
growth should enhance the Company's ability to obtain stable, core deposits
and increase the distribution network for making loans. The additional ATMs
will serve to increase fee based income as the volume of those transactions
grows.
Net Interest Income
Net interest income is the principal source of earnings for a banking
company. It represents the difference between the interest income earned on
loans and other investments, and the interest paid on deposits and borrowed
funds. For analysis, net interest income is measured on a fully taxable
equivalent basis. To determine the taxable equivalent basis, an adjustment
is made to income from investments in state and municipal securities which
achieve a federal tax benefit, to dividends from equity stocks which achieve
a dividend exclusion, and to certain loans which are tax exempt.
In 1996, net interest income on a taxable equivalent basis increased by
$825,000 over 1995 to $10.4 million as a result primarily of increased volume
for loans and investment securities. On average, the loan portfolio
increased 11% and the investment portfolio increased 13% for 1996 over 1995.
These volume gains were reduced by the lower interest rate environment in
1996 as compared to 1995. In 1996, the yield on the loan portfolio decreased
to 8.83% from 9.07% in 1995. Decreases in the prime lending rate in
December, 1995 and in January, 1996 combined with strong competition for
loans in the Company's market area caused the aggregate loan yield to fall.
The yield on investment securities increased to 6.56% in 1996 from 6.40% in
1995. The Company was able to reinvest maturities from the securities
portfolio into agency issues with imbedded options (callable agency
securities) to increase the yield on the securities portfolio. In addition,
investments in mortgage backed securities during 1995 and early 1996 to
change the structure of the investment portfolio helped improved the overall
yield in 1996. These factors helped total interest income on a tax
equivalent basis to rise from $17.4 million in 1995 to $18.9 million in 1996.
Interest expense increased $0.6 million to $8.5 million in 1996 from $7.9
million in 1995. Interest expense increased because of increased average
borrowings and increased deposits, and was moderated by falling rates. The
cost of interest-bearing deposits fell to 4.15% in 1996 from 4.21% in 1995.
The cost of borrowed funds also fell to 5.18% in 1996 from 6.39% in 1995.
The table for Rate and Volume Variance Analysis included in the financial
statements shows the majority of the increase in interest expense resulted
from increased volumes. Volume was affected by continued growth from a new
money market product introduced in 1995, and from the two new branches. The
growth in interest-bearing liabilities supported the investment and loan
portfolio growth.
-26-
<PAGE>
Provision for Loan Losses
The provision for loan losses was $187,500 for 1996 compared to no provision
for 1995. A large recovery in 1995 of $414,000 for a loan charged off in a
prior year more than offset charge-offs in 1995. Nonaccrual, restructured,
and delinquent loans over 90 days to total loans decreased to .63% in 1996
from .96% in 1995. Nonaccrual loans fell significantly in 1996 from 1995.
On a monthly basis, management reviews all loan portfolios to determine
trends and monitor asset quality. For consumer loan portfolios, this review
generally consists of reviewing delinquency levels on an aggregate basis with
timely follow-up on accounts that become delinquent. In commercial loan
portfolios, delinquency information is monitored and periodic reviews of
business and property leasing operations are performed on an individual loan
basis to determine potential collection and repayment problems.
Non-Interest Income
For 1996, non-interest income excluding securities gains increased by 48.4%
over 1995. Service charges on deposit accounts increased $96,000 or 8.2% as
a result of greater activity by the Company's commercial deposit account
customers. Brokerage commissions rose $233,000 or 38.4% in 1996 due to the
continued strong stock market and improved sales performance. Other fees and
commissions jumped $899,000 due to increases in ATM fee income generated by
instituting an ATM surcharge fee, by additional machines placed in service
and by an increase in the number of merchants receiving credit card deposit
services.
Net securities gains in 1996 were $57,000 compared to $2,000 in 1995. The
gains in 1996 came primarily from the sale of one equity security. The sale
of $2.6 million of government agency and mortgage-backed securities
classified as available for sale also resulted in net gains. Security sale
transactions were generally undertaken to increase portfolio yield or to
provide liquidity, but were not significant activities for the Company in
1996.
Non-Interest Expenses
In 1996, non-interest expenses increased by $1.8 million or 20%. The
majority of the increases related to the addition of two new branches in 1996
and the installation of twenty eight new off-site ATMs during 1996. This
growth in staff, locations, and electronic network resulted in increases in
salaries, employee benefits, occupancy, furniture and equipment, and other
operating expenses. Increases in other operating expenses included costs of
marketing, printing and stationery, data processing, and servicing related to
both the new branches and the new ATMs. Offsetting the increases in other
operating expenses in 1996 compared to 1995 were decreases in the FDIC
insurance premium and professional fees.
Income Tax Provision
For 1996, the effective tax rate for the Company decreased to 27.2% as
compared to 31.8% for 1995. During 1996, the Company increased the benefit
from tax exempt income by increasing its investment in municipal bonds. In
addition, the Maryland tax laws for banks were revised to provide an
exemption from state tax on the income earned on certain qualifying
investments. The change in the state tax laws is being phased in over a
three year period beginning in 1996.
-27-
<PAGE>
Financial Condition
Summary
Total assets of the Company increased by 7.0% to $267.2 million at December
31, 1996 versus $249.8 million at the end of 1995. Investment securities
declined slightly to $86.3 million at December 31, 1996. Total loans at
December 31, 1996 grew 11.4% to $152.0 million as compared to $136.4 million
at the end of 1995. Interest earning assets increased to $238.6 million and
were 89.3% of total assets.
Short Term Investments
Federal funds sold and interest-bearing deposits with financial institutions
are considered short term investments since maturities are generally less
than one year. Short term investments decreased $3.1 million from the end of
1995 to December 31, 1996. The decrease resulted because short term
investments were used to fund loans.
Investment Securities
Securities were basically level at $86.3 million from December 31, 1995 to
December 31, 1996. The portfolio consists mainly of U.S. Treasury
securities, U.S. Government agency securities, mortgage-backed securities,
and state and municipal obligations. The income from state and municipal
obligations is exempt from federal income tax. The Company uses its
investment portfolio as a source of both earnings and liquidity.
The Company liquidated $2.6 million of available for sale government agency
securities during 1996. These transactions were undertaken to increase yield
or provide liquidity.
Loans
Total loans increased $15.6 million or 11.4% from 1995 to $152.0 million at
December 31, 1996. Approximately 35% of the growth resulted from increased
commercial loan relationships. One of the main objectives for the Company is
to become a major lender to small and medium sized businesses. Commercial
loans increased by $4.6 million to $23.3 million, while commercial mortgage
loans increased by $0.8 million to $32.7 million. Commercial loans equalled
37% of total loans at the end of the year.
The Company's consumer loan portfolio in total also grew in 1996 principally
as a result of an emphasis on home equity lines of credit. At December 31,
1996, residential real estate loans, including home equity loans, increased
to $82.6 million from $70.8 million at the end of 1995. Home equity loans
purchased through broker relationships was the main source for this increase.
Management continues to introduce alternative customer service channels to
increase the consumer loan portfolio. Consumer loans amounted to 63% of
total loans at December 31, 1996 and totalled $96.0 million.
Allowance for Loan Losses
At December 31, 1996, the allowance for loan losses was $2.2 million, and
was basically unchanged from the end of 1995. At December 31, 1996, the
ratio of the allowance to total loans was 1.47% as compared to 1.64% at
December 31, 1995. This ratio fell as a result of
-28-
<PAGE>
portfolio growth. The ratio of net loan losses to average loans outstanding
for 1996 was .13% as compared to below 0% for 1995. The ratio of loan losses
to average loans for 1995 was below 0% because of a large recovery during the
year on a loan charged off in a prior year that was in excess of charge offs
during 1995. The ratio of nonaccrual loans, restructured loans, plus loans
delinquent more than 90 days to total loans decreased to .63% at December 31,
1996 from .96% at the end of 1995. This was primarily due to a reduction in
nonaccrual loans.
Management believes that it has adequately assessed the risk of loss in the
loan portfolios based on a subjective evaluation and has provided an
allowance which is appropriate based on that assessment. Because the
allowance is an estimate based on current conditions, any change in the
economic conditions of the Company's market area or change within a
borrower's business could result in a revised evaluation which could alter
the Company's earnings.
Funding Sources
Total deposits at December 31, 1996 increased by $8.6 million to $225.8
million from the end of 1995. Interest-bearing accounts increased by $8.4
million and non-interest bearing deposits increased by $0.2 million. Deposit
growth is attributed primarily to interest credits retained and two new
branches opened in 1996.
Other borrowings increased significantly in 1996 to fund loan growth.
Advances from the Federal Home Loan Bank increased to $5.0 million at the end
of 1996 compared to no outstanding advances at the end of 1995. Borrowings
for federal funds purchased and securities sold under agreements to
repurchase, which are principally customer accommodation accounts, increased
by $2.1 million at December 31, 1996.
Capital
At December 31, 1996, shareholders' equity was $28.1 million, an increase of
$1.3 million over 1995. The Company paid shareholders dividends totalling
$588,000, and net income for 1996 was $2.0 million. Although stockholders'
equity was not affected in total, the Company declared a 5% stock dividend in
January, 1997. The effects of the dividend were recorded retroactively in
the financial statements as of December 31, 1996. This resulted in the
addition of 66,193 shares for a total of 1,394,758 shares outstanding after
the dividend was distributed on March 14, 1997. Stockholders' equity
amounted to 10.51% of total assets at December 31, 1996 as compared to 10.74%
at the end of 1995. The decrease in this ratio was caused by asset growth in
the balance sheet.
Bank holding companies and banks are required by the Federal Reserve and FDIC
to maintain minimum levels of Tier 1 (or Core) and Tier 2 capital measured as
a percentage of assets on a risk-weighted basis. Capital is primarily
represented by stockholders' equity, adjusted for the allowance for loan
losses and certain issues of preferred stock, convertible securities, and
subordinated debt, depending on the capital level being measured. Assets and
certain off-balance sheet transactions are assigned to one of five different
risk weighting factors for purposes of determining the risk-adjusted asset
base. The minimum levels of Tier 1 and Tier 2 capital to risk-adjusted
assets are 4% and 8%, respectively, under the regulations.
In addition, the Federal Reserve and the FDIC require that bank holding
companies and banks maintain a minimum level of Tier 1 (or Core) capital to
average total assets excluding intangibles for the current quarter. This
measure is known as the leverage ratio. The current regulatory minimum for
the leverage ratio for institutions to be considered adequately capitalized
is 4%, but could be required to be maintained at a higher level based on the
regulator's assessment of an
-29-
<PAGE>
institution's risk profile. The following chart shows the regulatory capital
levels for the Company at December 31, 1996 and 1995. The Company's
subsidiary bank also exceeded the FDIC required minimum capital levels at
those dates by a substantial margin. Based on the levels of capital, the
Company and the bank are well capitalized.
<TABLE>
<CAPTION>
December 31
Ratio Minimum 1996 1995
- - ------ ------- ---- ----
<S> <C> <C> <C>
Leverage Ratio 4% 10.0% 10.0%
Risk-based Capital:
Tier 1 (Core) 4% 16.8% 16.2%
Tier 2 (Total) 8% 18.0% 17.4%
</TABLE>
Liquidity
Liquidity management ensures that funds are available when required to meet
deposit withdrawals, loan commitments, and operating expenses. These funds
are supplied by deposits, loan repayments, security maturities and can be
raised by liquidating assets or through additional borrowings. Available for
sale securities can be liquidated or pledged to secure borrowed funds to
provide necessary liquidity. In addition, the Company has unsecured lines of
credit outstanding under which it could borrow $6 million, and has borrowing
capacity with the Federal Home Loan Bank of approximately $26 million which
is collateralized by a blanket security interest in the Company's residential
first mortgage loans.
At December 31, 1996, the Company had outstanding loan commitments and unused
lines of credit totalling $59.3 million. Of this total, management places a
high probability for funding within 1 year on approximately $13.8 million.
The remaining amount is mainly unused home equity lines of credit and credit
card lines on which management places a low probability for required funding.
Interest Rate Risk
The level of income of a financial institution can be affected by the
repricing characteristics of its assets and liabilities due to changes in
interest rates. This is referred to as interest rate risk. Financial
institutions allocate significant time and resources to managing interest
rate risk because of the impact that interest rate changes can have on the
net interest margin and earnings. Management continues to seek reasonable
ways to reduce its exposure to interest rate shifts. A static gap analysis
is used by the Company as one tool to monitor interest rate risk. A static
gap analysis measures the difference, or the "gap", between the amount of
assets and liabilities repricing within a given time period. The Company
also performs rate shock analyses which estimate changes in the net interest
margin for parallel rising and falling interest rate environments. This
information, together with information about forecasted future interest rate
trends, is used to manage the Company's asset and liability positions.
Management uses this information as a factor in decisions made about
maturities for investment of cash flows, classification of investment
securities purchases as available for sale or held to maturity, emphasis of
variable rate or fixed rate loans and short or longer term deposit products
in marketing campaigns, and deposit account pricing to alter asset and
liability repricing characteristics.
At December 31, 1996, the Company was in a liability sensitive position
amounting to 6% of
-30-
<PAGE>
assets within a one year time horizon. This is within the targets as
established for the Asset/Liability Management Policy approved by the Board
of Directors. In a theoretical environment, a liability sensitive position
is preferable in a falling interest rate climate since more liabilities will
reprice downward as interest rates fall than will assets.
The following chart shows the static gap position for interest sensitive
assets and liabilities of the Company as of December 31, 1996. The chart is
as of a point in time, and reflects only the contractual terms of the loan or
deposit accounts in assigning assets and liabilities to the various repricing
periods except that deposit accounts with no contractual maturity, such as
money market, NOW and savings accounts, have been adjusted based on account
age. All accounts open less than two years are reflected in the one year
time horizon in the gap table. Accounts that were opened between two and
five years are reflected in the 1 to 2 year time horizon in the table.
Accounts opened between five and ten years are reflected in the 2 to 5 year
horizon and accounts opened over 10 years are reflected in the over 5 year
time horizon. Management has taken a conservative approach by using a lower
time horizon in the gap table than the time the account has been opened. In
addition, the maturities of investments shown in the gap table will differ
from contractual maturities due to anticipated calls of certain securities
based on current interest rates. While this chart indicates the opportunity
to reprice assets and liabilities within certain time frames, it does not
reflect the fact that interest rate changes occur in disproportionate
increments for various assets and liabilities.
Period from December 31, 1996 in
which assets and liabilities reprice
----------------------------------------
<TABLE>
<CAPTION>
0 to 90 91 to 365 > 1 to 2 > 2 to 5 > 5
($000) days days years years years
- - --------- --------- ---------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
ASSETS:
Short term
investments $ 700
Securities 13,824 16,506 20,743 16,808 18,397
Loans 61,278 12,332 12,898 26,812 38,674
--------- ---------- --------- --------- ----------
75,802 28,838 33,641 43,620 57,071
--------- ---------- --------- --------- ----------
LIABILITIES:
Deposits 55,484 53,276 27,059 29,547 30,189
Borrowings 10,943 1,000
--------- ---------- --------- --------- ---------
66,427 54,276 27,059 29,547 30,189
--------- ---------- --------- --------- ---------
Gap position:
Period 9,375 (25,438) 6,582 14,073 26,882
% of Assets 3.5% (9.5%) 2.5% 5.3% 10.1%
Cumulative 9,375 (16,063) (9,481) 4,592 31,474
% of Assets 3.5% (6.0%) (3.5%) 1.7% 11.8%
</TABLE>
-31-
<PAGE>
Cumulative risk
sensitive assets to
risk sensitive
liabilities 1.14 .87 .94 1.03 1.15
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued two standards that
become effective for years beginning after December 15, 1996. Statement No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, requires a company to distinguish between and
appropriately account for transfers of financial assets that are sales and
transfers of financial assets that are secured borrowing arrangements. The
Company does not in the normal course of business enter into transactions in
which there may be some question as to which entity has control over the
asset or has incurred a liability, and therefore does not expect that this
Statement will have any significant impact. Statement No. 127, Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125 delays
the effective date for certain provisions of Statement No. 125. Management
does not expect these statements to have any material effect on the Company's
financial position or results of operations
1995 AS COMPARED TO 1994
Earnings
Summary
Carrollton Bancorp reported net income for 1995 was $1,893,000, or $1.36 per
share, compared to 1994 net income of $1,892,000, or $1.33 per share.
Although the year to year earnings for 1995 and 1994 showed little change,
significant growth occurred beginning in late 1994. Carrollton Bank opened
two new branches in the fourth quarter of 1994, and purchased a branch in
June, 1995. In addition, the Bank installed thirty-two off-site ATMs in
Wal-Mart Stores and Sam's Club Stores in Maryland, as well as Valu Food
Stores in the metropolitan area. The branch growth should enhance the
Company's ability to obtain stable, core deposits and increase the
distribution network for making loans. The additional ATMs will serve to
increase fee based income as the volume of those transactions grows.
Net Interest Income
Net interest income is the principal source of earnings for a banking
company. It represents the difference between the interest income earned on
loans and other investments, and the interest paid on deposits and borrowed
funds. For analysis, net interest income is measured on a fully taxable
equivalent basis. In order to determine the taxable equivalent basis, an
adjustment is made to income from investments in state and municipal
securities which achieve a federal tax benefit, and to dividends from equity
stocks which achieve a dividend exclusion.
In 1995, net interest income on a taxable equivalent basis increased by
$448,000 over 1994 to $9.6 million as a result of increased volume for loans
and investment securities. This was offset by the rising interest rate
environment of 1994 and early 1995. The Company's liability sensitive balance
sheet resulted in increased funding costs in excess of rate gains on interest
earning assets. As a result, the net yield on average earning assets
decreased to 4.39% in 1995 from 4.69% in 1994. In 1995, the yield on the
loan portfolio increased to 9.07% from 8.50% in 1994. Aggregate increases in
interest rates and a shift of the mix of the loan portfolio resulting from
commercial loan growth caused the increased yield. The aggregate yield on
investment securities increased to 6.40% in 1995 from 5.99% in 1994. As with
loans, the increase in interest rates in 1995 provided higher yielding
reinvestment opportunities. Additionally, a higher percentage of the
portfolio was invested in mortgage backed securities which improved the
overall yield. These factors helped total interest income on a tax
equivalent basis rise from $14.6 million in 1994 to $17.4 million in 1995.
Interest expense increased $2.4 million to $7.9 million in 1995 from $5.5
million in 1994. Interest expense increased because of rising interest rates,
increased average borrowings, and increased deposits. The rising interest
rate environment combined with new product
-32-
<PAGE>
promotions resulted in the cost of interest-bearing deposits rising to 4.21%
in 1995 from 3.45% in 1994. The cost of borrowed funds also rose to 6.39% in
1995 from 4.58% in 1994. The table for Rate and Volume Variance Analysis
included in the financial statements shows the majority of the increase in
interest expense resulted from rising rates. The remainder of the increase
was volume related. Volume was affected by growth from a new money market
product, the Company's branch acquisition in June 1995, and from increased
borrowing levels. The growth in interest-bearing liabilities supported the
investment and loan portfolio growth.
Provision for Loan Losses
During 1995, no provision for loan losses was made. A large recovery of
$414,000 for a loan charged off in a prior year resulted in a net increase in
the allowance. Nonaccrual, restructured, and delinquent loans over 90 days to
total loans increased to .96% in 1995 from .22% in 1994. One commercial real
estate loan for $831,000 which was restructured during the year was the main
reason for the significant increase.
On a monthly basis, management reviews all loan portfolios to determine
trends and monitor asset quality. For consumer loan portfolios, this review
generally consists of reviewing delinquency levels on an aggregate basis with
timely follow-up on accounts that become delinquent. In commercial loan
portfolios, delinquency information is monitored and periodic reviews of
business and property leasing operations are performed on an individual loan
basis to determine potential collection and repayment problems.
Non-Interest Income
For 1995, non-interest income excluding securities gains increased by 28.7%
over 1994. Service charges on deposit accounts increased $192,000 or 19.7%
primarily due to the Bank's latest branch acquisition. Brokerage commissions
rose $50,000 or 9% in 1995 due to the upswing in the stock market and
expansion of the number of sales personnel. Other fees and commissions
jumped $324,000 due to increases in ATM fee income generated by additional
machines placed in service and an increase in the number of merchants
receiving credit card deposit services.
Net securities gains in 1995 were $2,000 compared to $1,000 in 1994. The
sale of $3.9 million of government agency and mortgage-backed securities
classified as available for sale resulted in net gains of $2,000. Security
sale transactions were undertaken to increase portfolio yield or to provide
liquidity, but were not significant activities for the Company in 1995.
Non-Interest Expenses
In 1995, non-interest expenses increased by $1.1 million or 13.7%. The
majority of the increases related to the addition of two new branches in the
fourth quarter of 1994, a branch acquisition in the second quarter of 1995,
and the installation of thirty-two new off-site ATMs during 1995 and late
1994. This growth in staff, locations, and electronic network resulted in
increases in salaries, employee benefits, occupancy, furniture and equipment,
and other operating expenses. Increases in other operating expenses included
costs of marketing, printing and stationery, data processing, and servicing
related to the new ATMs. Offsetting the increases in other operating
expenses in 1995 compared to 1994 were decreases in the FDIC insurance
premium, legal fees, and insurance expense.
Income Tax Provision
For 1995, the effective tax rate for the Company increased marginally to
31.8% as compared to 31.3% for 1994. During 1995, the Company was able to
maintain the same benefit level from tax exempt income as was achieved in
1994, and this stopped a trend of decreasing benefits from prior years. The
Company did this by increasing its investment in municipal bonds. The
increase in the amount of income before tax between 1995 and 1994 combined
with a marginally higher effective tax rate resulted in a provision increase
of $22,000 in 1995.
-33-
<PAGE>
Financial Condition
Summary
Total assets of the Company increased substantially by 19.7% to $249.8
million at December 31, 1995 versus $208.7 million at the end of 1994.
Investment securities increased by 36% mainly due to the branch acquisition
during the second quarter of 1995. At December 31, 1995, total loans grew to
$136.4 million as compared to $127.9 million at the end of 1994. Interest
earning assets increased to $226.7 million and were 89.9% of total assets.
Short Term Investments
Since maturities are generally less than one year, federal funds sold and
interest-bearing deposits with financial institutions are considered short
term investments. In total, short term investments increased $1.6 million
from the end of 1994 to December 31, 1995. The increase occurred primarily
as a result of issuer call options that were exercised on certain available
for sale securities just prior to year end.
Investment Securities
Securities increased in the aggregate by $22.9 million or 36% to $86.4
million at December 31, 1995. The significant increase was mainly due to the
acquisition of a new branch in June, 1995. The portfolio consists mainly of
U.S. Treasury securities, U.S. Government agency securities, mortgage-backed
securities, and state and municipal obligations. The income from state and
municipal obligations is exempt from federal income tax. The Company uses
its investment portfolio as a source of both earnings and liquidity.
The Company liquidated $3.9 million of available for sale government agencies
and mortgage-backed securities at a net gain of $2,000. These transactions
were undertaken to increase yield or provide liquidity.
Loans
In total, loans increased $8.5 million or 6.7% from 1994 to $136.4 million at
December 31, 1995. Much of the growth resulted from increased commercial
loan relationships. One of the main objectives of the Company is for the Bank
to become a major lender to small and medium sized businesses. Commercial
mortgage loans increased by $4.4 million to $31.9 million, while other
commercial loans increased by $3.8 million to $18.7 million. Commercial
loans equalled 37% of total loans at the end of the year.
The Company's consumer loan portfolio in total did not grow in 1995
principally as a result of increased retail competition from larger financial
institutions, and automobile manufacturers offering attractive financing to
sell cars. At December 31, 1995, residential real estate loans, including
home equity loans, increased to $70.8 million from $69.2 million at the end
of 1994. Home equity loans purchased through broker relationships was the
main reason for this increase. Management continues to introduce customer
service channels to increase the consumer loan portfolio. Consumer loans
amounted to 63% of total loans at December 31, 1995.
Allowance for Loan Losses
At December 31, 1995, the allowance for loan losses increased $312,000 or
16.2% to $2.2 million from $1.9 million at the end of 1994 due to a large
recovery on a loan charged off in a prior year. At December 31, 1994, the
ratio of the allowance to total loans was 1.51% as compared to 1.64% at
December 31, 1995. Because of the large recovery, the ratio of net loan
losses to average loans outstanding for 1995 decreased below 0% as compared
to .08% for 1994. The ratio of nonaccrual loans, restructured loans, plus
loans delinquent more than 90 days to total loans increased to .96% at
December 31, 1995 from .22% at the end of 1994. This was resulting from a
commercial real estate loan for $831,000 which was restructured during the
year.
-34-
<PAGE>
Management believes that it has adequately assessed the risk of loss in the
loan portfolios based on a subjective evaluation and has provided an
allowance which is appropriate based on that assessment. Because the
allowance is an estimate based on current conditions, any change in the
economic conditions of the Company's market area or change within a
borrower's business could result in a revised evaluation which could alter
the Company's earnings.
Funding Sources
Total deposits at December 31, 1995 increased by $49.8 million or 29.7% to
$217.2 million from the end of 1994. Interest-bearing accounts increased by
$47.5 million because of the branch acquisition in June, 1995 and the
introduction of a new higher yielding money market product earlier in the
year. Non-interest bearing deposits increased by $2.3 million.
Other borrowings decreased significantly in 1995 due to the increase in
deposits. Total advances of $12.1 million from the Federal Home Loan Bank
were repaid in 1995. Borrowings for federal funds purchased and securities
sold under agreements to repurchase, which are principally customer
accommodation accounts, increased slightly to $3.2 million at December 31,
1995.
Capital
At December 31, 1995, shareholders' equity increased by $2.9 million. A $2.0
million reduction of unrealized losses, net of tax, on securities classified
as available for sale was the primary reason for the increase. At the end of
1994, the Company had a net unrealized loss of $1.6 million. The Company
paid shareholders dividends totalling $543,000 and net income was $1.9
million. The Company purchased and retired 20,870 shares of stock for
$459,000 in May 1995. Although stockholders' equity was not affected in
total, the Company declared a 2% stock dividend in January, 1996. The
effects of the dividend were recorded retroactively in the financial
statements as of December 31, 1995. This resulted in the addition of 25,820
shares for a total of 1,328,565 shares outstanding after the dividend was
distributed on March 8, 1996. Stockholders' equity amounted to 10.74% of
total assets at December 31, 1995 as compared to 11.44% at the end of 1994.
The decrease in this ratio was caused by asset growth.
Bank holding companies and banks are required by the Federal Reserve and FDIC
to maintain minimum levels of Tier 1 (or Core) and Tier 2 capital measured as
a percentage of assets on a risk-weighted basis. Capital is primarily
represented by stockholders' equity, adjusted for the allowance for loan
losses and certain issues of preferred stock, convertible securities, and
subordinated debt, depending on the capital level being measured. Assets and
certain off-balance sheet transactions are assigned to one of five different
risk weighting factors for purposes of determining the risk-adjusted asset
base. The minimum levels of Tier 1 and Tier 2 capital to risk-adjusted
assets are 4% and 8%, respectively, under the regulations.
In addition, the Federal Reserve and the FDIC require that bank holding
companies and banks maintain a minimum level of Tier 1 (or Core) capital to
average total assets excluding intangibles for the current quarter. This
measure is known as the leverage ratio. The current regulatory minimum for
the leverage ratio for institutions to be considered adequately capitalized
is 4%, but could be required to be maintained at a higher level based on the
regulator's assessment of an institution's risk profile. The following chart
shows the regulatory capital levels for the Company at December 31, 1995 and
1994. The Company's subsidiary bank also exceeded the FDIC required minimum
capital levels at those dates by a substantial margin. Based on the levels
of capital, the Company and the bank are well capitalized.
December 31
<TABLE>
<CAPTION>
Ratio Minimum 1995 1994
- - -------- --------- ------ ------
<S> <C> <C> <C>
Leverage Ratio 4% 10.0% 12.3%
Risk-based Capital:
Tier 1 (Core) 4% 16.2% 19.8%
Tier 2 (Total) 8% 17.4% 21.1%
</TABLE>
-35-
<PAGE>
Liquidity
Liquidity management continues to make certain that monies are available to
meet deposit withdrawals, loan commitments, and operating expenses. These
funds are supplied by deposits, loan repayments, security maturities and can
be raised by liquidating assets or through additional borrowings. Available
for sale securities can be liquidated or pledged to secure borrowed funds to
provide necessary liquidity. In addition, the Company has lines of credit
outstanding under which it could borrow $8 million, and has borrowing
capacity with the Federal Home Loan Bank of approximately $26 million which
is collateralized by a blanket security interest in the Company's residential
first mortgage loans.
At December 31, 1995, the Company had outstanding loan commitments and
unused lines of credit totalling $47.5 million. Of this total, management
places a high probability for funding within 1 year on approximately $11.8
million. The remaining amount is mainly unused home equity lines of credit
and credit card lines on which management places a low probability for
required funding.
Interest Rate Risk
The level of income of a financial institution can be affected by the
repricing characteristics of its assets and liabilities due to changes in
interest rates. This is referred to as interest rate risk. Financial
institutions allocate significant time and resources to managing interest
rate risk because of the impact that interest rate changes can have on the
net interest margin and earnings. Management continues to seek reasonable
ways to reduce its exposure to interest rate shifts. A static gap analysis
is used by the Company as its primary tool to monitor interest rate risk. A
static gap analysis measures the difference, or the "gap", between the amount
of assets and liabilities repricing within a given time period. This
information, together with information about forecasted future interest rate
trends, is used to manage the Company's asset and liability positions.
Management uses this information as a factor in decisions made about
maturities for investment of cash flows, classification of investment
securities purchases as available for sale or held to maturity, emphasis of
variable rate or fixed rate loans and short or longer term deposit products
in marketing campaigns, and deposit account pricing to alter asset and
liability repricing characteristics.
The Company was in a liability sensitive position at December 31, 1995.
Competitive pressures caused the Company to increase deposit rates in early
1995. A portion of the interest-bearing deposit gains during 1995 was
invested in adjustable rate securities and loans to somewhat mitigate
interest rate risk. In a theoretical environment, a liability sensitive
position is preferable in a falling interest rate climate since more
liabilities will reprice downward as interest rates fall than will assets.
The following chart shows the static gap position for interest sensitive
assets and liabilities of the Company as of December 31, 1995. The chart is
as of a point in time, and reflects only the contractual terms of the loan or
deposit accounts in assigning assets and liabilities to the various repricing
periods except that deposit accounts with no contractual maturity, such as
money market, NOW and savings accounts, have been adjusted based on account
age. For accounts that were opened between 2 and 5 years, 50% of the
balances or, $13 million, are reflected in the 2 to 5 year category, with the
remaining $13 million in the 0 to 90 day category. For accounts opened over
5 years, 50% of those balances, or $27 million, are reflected in the 5 year
category. While this chart indicates the opportunity to reprice assets and
liabilities within certain time frames, it does not reflect the fact that
interest rate changes occur in disproportionate increments for various assets
and liabilities.
<TABLE>
<CAPTION>
Contractual period from December 31,1995 in which assets and
liabilities reprice
-------------------------------------------------------------
($000) 0-90 days 91-365 days >1-2 years >2-5 years >5 years
- - --------- ------------ --------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
ASSETS:
Short term investments $ 3,700 $ 100
Securities 18,431 18,247 $ 7,580 $25,602 $16,562
Loans 50,540 11,303 13,020 25,770 35,804
------------ --------------- -------------- ----------- -----------
Subtotal $ 72,671 $29,650 $20,600 $51,372 $52,366
------------ --------------- -------------- ----------- -----------
LIABILITIES:
Deposits $ 99,239 $30,906 $ 8,730 $20,475 $27,832
</TABLE>
-36-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Borrowed funds 4,592
---------- ----------- ---------- ---------- ------------
Subtotal $103,831 $30,906 $ 8,730 $20,475 $27,832
---------- ----------- ---------- ---------- ------------
Gap position:
Period $(31,160) $(1,256) $11,870 $30,897 $24,534
% of Assets (12.5%) (0.5%) 4.8% 12.4% 9.8%
Cumulative $(31,160) $(32,416) $(20,546) $10,351 $34,885
% of Assets (12.5%) (13.0%) (8.2%) 4.1% 14.0%
Cumulative risk sensitive
assets/risk sensitive
liabilities .70 .76 .86 1.06 1.18
</TABLE>
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued three standards
that become effective for years beginning after December 15, 1995. Statement
No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed
of, requires that long-lived assets be reviewed for write-down whenever there
is a change in circumstances that indicate the carrying value of the asset
may not be recoverable. Statement No. 122, Accounting for Mortgage Servicing
Rights, requires a company to recognize the value of rights to service
mortgage loans for others as a separate asset. The Company currently does
not service mortgage loans for others. Statement No. 123, Accounting for
Stock-based Compensation, requires use of a fair value based method of
accounting for certain employee stock compensation plans. The Company
currently has no stock based compensation plans. Management does not expect
these statements to have any material effect on the Company's financial
position or results of operations.
-37-
<PAGE>
ITEM 7: FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Carrollton Bancorp and Subsidiary
Baltimore, Maryland
We have audited the accompanying consolidated balance sheets of Carrollton
Bancorp and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the three years ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Carrollton Bancorp and Subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the three years ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Rowles & Company
Baltimore, Maryland
February 5, 1997
F-1
<PAGE>
Carrollton Bancorp and Subsidiary
Consolidated Balance Sheets
- - --------------------------------------------------------------------------------
December 31
1996 1995
- - --------------------------------------------------------------------------------
Assets
- - ------
Cash and due from banks $20,391,197 $16,203,646
Interest-bearing deposits with financial
institutions - 100,000
Federal funds sold 700,000 3,700,000
Investment securities
Available for sale 69,961,952 62,320,889
Held to maturity (approximate market
value of $16,537,179 and $24,428,685) 16,315,816 24,101,374
Loans less allowance for loan losses of
$2,241,148 and $2,243,472 149,753,004 134,194,025
Bank premises and equipment 4,868,469 4,051,205
Accrued interest receivable 1,956,674 2,045,660
Deferred income taxes 524,439 506,169
Other assets 2,685,609 2,530,956
----------- -----------
$267,157,160 $249,753,924
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity
- - ------------------------------------
Deposits
Non-interest-bearing $30,229,596 $ 30,027,955
Interest-bearing 195,555,484 187,181,343
----------- -----------
Total deposits 225,785,080 217,209,298
Federal funds purchased and securities
sold under agreements to repurchase 5,296,743 3,203,849
Notes payable - U.S. Treasury 1,646,478 1,387,611
Advances from Federal Home Loan Bank 5,000,000 -
Accrued interest payable 207,666 237,101
Other liabilities 1,150,743 898,038
--------- ---------
239,086,710 222,935,897
----------- -----------
Shareholders' equity
Common stock, par value $10.00 per
share; authorized 5,000,000 shares;
issued and outstanding 1,394,758 in 1996
and 1,328,565 in 1995 13,947,580 13,285,650
Surplus 6,973,556 6,079,950
Retained earnings 6,941,366 7,056,446
Net unrealized holding gains (losses) on
available for sale securities 207,948 395,981
----------- -----------
28,070,450 26,818,027
----------- -----------
$267,157,160 $249,753,924
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
Carrollton Bancorp and Subsidiary
Consolidated Statements of Income
- - --------------------------------------------------------------------------------
Years Ended December 31
1996 1995 1994
- - --------------------------------------------------------------------------------
Interest income
Loans, including fees $12,898,277 $11,942,392 $10,243,887
U.S. Treasury securities 406,733 553,776 782,092
U.S. Government agency securities 2,568,964 2,455,983 2,035,793
State and municipal securities 844,158 624,513 616,521
Mortgage backed securities 1,563,854 1,082,165 270,644
Other securities, including dividends 124,734 131,583 89,982
Federal funds sold 107,404 331,642 62,258
Deposits with financial institutions 4,781 6,615 188,130
---------- ---------- ----------
Total interest income 18,518,905 17,128,669 14,289,307
---------- ---------- ----------
Interest expense
Deposits 8,107,927 7,146,818 5,031,423
Other 440,815 720,570 416,192
--------- --------- ---------
Total interest expense 8,548,742 7,867,388 5,447,615
--------- --------- ---------
Net interest income 9,970,163 9,261,281 8,841,692
Provision for loan losses 187,500 - 126,000
--------- --------- ---------
Net interest income after provision
for loan losses 9,782,663 9,261,281 8,715,692
Other operating income
Service charges on deposit accounts 1,263,484 1,167,855 976,029
Brokerage commissions 839,289 606,522 556,426
Other fees and commissions 1,660,464 761,158 437,318
Security gains 56,904 2,278 1,213
--------- --------- ---------
Total other income 3,820,141 2,537,813 1,970,986
--------- --------- ---------
Other expenses
Salaries 4,073,251 3,354,434 3,053,983
Employee benefits 982,507 826,515 810,432
Occupancy 1,321,776 1,216,350 1,005,051
Furniture and equipment 814,559 617,165 517,365
Other operating expenses 3,626,248 3,006,914 2,545,138
--------- --------- ---------
Total other expenses 10,818,341 9,021,378 7,931,969
---------- --------- ---------
Income before income taxes 2,784,463 2,777,716 2,754,709
Income taxes 756,040 884,397 862,780
--------- --------- ---------
Net income $2,028,423 $1,893,319 $1,891,929
--------- --------- ---------
--------- --------- ---------
Earnings per common share $ 1.45 $ 1.36 $ 1.33
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Carrollton Bancorp and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
Net
unrealized
holding
gains
(losses)
on
available
Common Stock for
--------------------- sale Retained
Shares Par Value Surplus securities earnings
---------- --------- -------- ------------ -----------
Balance, December 31,
1993 1,103,013 $11,030,130 $5,917,270 $326,101 $7,220,714
Net income - - - 1,891,929
Stock split in the form of
a 20% stock dividend 220,602 2,206,020 - - (2,206,020)
Cash dividends, $0.37
per share - - - (529,447)
Change in net unrealized
holding gains on available
for sale securities - - (1,970,557) -
---------- --------- -------- ---------- -----------
Balance, December 31,
1994 1,323,615 13,236,150 5,917,270 (1,644,456) 6,377,176
Net income - - - 1,893,319
Shares acquired and
canceled (20,870) (208,700) (250,440) - -
Stock dividend, 2% 25,820 258,200 413,120 - (671,320)
Cash dividends, $0.39 per
share - - - (542,729)
Change in net unrealized
holding gains (losses) on
available for sale
securities - - 2,040,437 -
---------- --------- -------- ---------- -----------
Balance, December 31,
1995 1,328,565 13,285,650 6,079,950 395,981 7,056,446
Net income 2,028,423
Stock dividend, 5% 66,193 661,930 893,606 (1,555,536)
Cash dividends, $.42 per
share (587,967)
Change in net unrealized
holding gains (losses)
on available for sale
securities - - (188,033) -
--------- ----------- ---------- -------- ----------
Balance, December 31,
1996 1,394,758 $13,947,580 $6,973,556 $207,948 $6,941,366
--------- ----------- ---------- -------- ----------
--------- ----------- ---------- -------- ----------
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Carrollton Bancorp and Subsidiary
Consolidated Statements of Cash Flows
- - -------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- - -------------------------------------------------------------------------------
Cash flows from operating activities
Interest received $18,614,576 $16,732,878 $14,164,668
Fees and commissions received 3,730,618 2,481,860 1,961,860
Interest paid (8,578,177) (7,790,876) (5,429,376)
Cash paid to suppliers and
employees (9,912,396) (8,586,439) (7,437,870)
Income taxes paid (725,103) (719,171) (797,688)
------------- ------------ ------------
3,129,518 2,118,252 2,461,594
------------- ------------ ------------
Cash flows from investing activities
Proceeds from maturities of
securities held to maturity 7,900,000 5,925,000 2,781,250
Purchases of securities held to
maturity (298,688) (10,870,504) (4,894,278)
Proceeds from sales of
securities available for sale 2,642,196 3,873,492 3,911,669
Proceeds from maturities of
securities available for sale 15,525,721 11,719,130 14,547,096
Purchases of securities
available for sale (25,880,858) (30,119,456) (15,055,631)
Proceeds from sale of loans -- 2,424,396 433,214
Net decrease in interest-bearing
deposits 100,000 376,977 8,003,133
Loans made, net of principal
collected (7,109,287) (5,219,950) (14,191,167)
Purchases of loans (8,637,192) (5,410,428) (1,293,176)
Purchases of premises and
equipment (1,523,435) (1,617,621) (490,333)
-------------- ------------ ------------
(17,281,543) (28,918,964) (6,248,223)
-------------- ------------ ------------
Cash flows from financing
activities
Net increase (decrease) in
deposits 8,575,782 27,025,520 (7,132,540)
Acquired deposits -- 22,765,077 --
Premium on acquired deposits -- (1,847,663) --
Net increase (decrease) in
other borrowed funds 7,351,761 (11,796,674) 10,231,593
Common stock repurchase and
retirement -- (459,140) --
Dividends paid (587,967) (542,729) (529,447)
------------- ------------ ------------
15,339,576 35,144,391 2,569,606
------------- ------------ ------------
Net increase (decrease) in cash
and cash equivalents 1,187,551 8,343,679 (1,217,023)
Cash and cash equivalents at
beginning of year 19,903,646 11,559,967 12,776,990
------------- ------------ ------------
Cash and cash equivalents at end
of year $21,091,197 $19,903,646 $11,559,967
------------- ------------ ------------
------------- ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Carrollton Bancorp and Subsidiary
Consolidated Statements of Cash Flows
(Continued)
- - -------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- - -------------------------------------------------------------------------------
Reconciliation of net income to
net cash provided by operating
activities
Net income $2,028,423 $1,893,319 $1,891,929
Adjustments to reconcile net
income to net cash provided
by operating activities
Provision for loan losses 187,500 -- 126,000
Depreciation and amortization 710,176 649,352 495,176
Deferred income taxes 100,039 241,328 93,036
Amortization of premiums and
discounts 6,685 (55,966) (22,848)
Gain on disposal of securities (56,904) (2,278) (1,213)
(Increase) decrease in:
Accrued interest receivable 88,986 (339,825) (101,791)
Other assets (214,490) (53,675) 59,280
Increase (decrease) in:
Accrued interest payable (29,435) 76,512 18,239
Income taxes payable (69,102) (76,102) (27,944)
Other liabilities 377,640 (214,413) (68,270)
------------ ------------ -----------
$3,129,518 $2,118,252 $2,461,594
------------ ------------ -----------
------------ ------------ -----------
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accounting and reporting policies reflected in the financial
statements conform to generally accepted accounting principles and to
general practices within the banking industry. Management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosures of commitments and contingent liabilities at the date of
the financial statements and revenues and expenses during the year. Actual
results could differ from those estimates.
Business
The Company provides commercial banking and brokerage services to
businesses and individuals in Baltimore and surrounding areas of central
Maryland.
Principles Of Consolidation
The consolidated financial statements include the accounts of
Carrollton Bancorp (the Company) and its subsidiary Carrollton Bank (the
Bank). Intercompany balances and transactions have been eliminated.
The Parent Only financial statements of the Company account for the
Bank using the equity method of accounting.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
Investment Securities
Investment securities in the portfolio are classified as either
available for sale or held to maturity. The Company does not currently
conduct short term purchase and sale transactions of investment securities
which would be classified as trading securities.
The Company classifies investments as available for sale based
principally on the Company's asset/liability position and potential
liquidity needs. These securities are available for sale in response to
changes in market interest rates or in the event the Company needs funds to
meet loan demand or deposit withdrawals. Securities classified as
available for sale are carried at market value. The unrealized holding
gain or loss, net of taxes, related to securities classified as available
for sale is reflected as a component of shareholders' equity. Gains or
losses on securities sales are determined by the specific-identification
method.
The remaining securities in the investment portfolio are
classified as held to maturity. These securities are carried at amortized
cost. The Company has the ability and the intent to hold these securities
to maturity.
Ground Rents
Ground rents are recorded at cost less an allowance for unrealized
losses of $140,131 at December 31, 1996 and 1995.
Loans and Allowance For Loan Losses
Loans are stated at face value, plus deferred origination costs, less
unearned discount, deferred origination fees, and the allowance for loan
losses. Interest on loans is credited to income based on the principal
amounts outstanding. Origination fees and costs are deferred and amortized
to income over the estimated terms of the loans. Accrual of interest is
discontinued generally when the collection of principal or interest reaches
90 days past due, or earlier if collection becomes uncertain based upon the
financial weakness of the borrower or the realizable value of the
collateral. Nonaccrual loans are returned to accrual status when all past
due principal and interest has been collected, and the remainder of the
loan is judged to be fully collectible.
F-7
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Continued)
1. Summary of Significant Accounting Policies (Continued)
The allowance for loan losses represents an estimate which, in
management's judgment, will be adequate to absorb probable losses on
existing loans and other extensions of credit that may become
uncollectible. Management's judgment in determining the adequacy of the
allowance is based on evaluations of the collectibility of loans. These
evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, current economic conditions that may
affect the borrowers' ability to pay, overall portfolio quality, and review
of specific problem areas. Actual loan performance may differ from
estimates used by management.
Bank Premises and Equipment
Bank premises and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed
over the estimated useful lives using the straight-line method. Leasehold
improvements are amortized over the terms of the leases or the estimated
useful lives of the improvements, whichever is shorter. Accumulated
depreciation includes a provision for a decline in the value of land
recorded in prior years.
Intangible Assets
Intangible assets are predominantly the premium paid for deposits
acquired. The premium is being amortized to expense on the straight line
basis over 15 years.
Income Taxes
The provision for income taxes includes taxes payable for the current
year and deferred income taxes. The Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets may also include
tax credit carryovers that the Company expects to offset against future tax
obligations.
Per Share Data
Earnings per common share and dividends per common share are
determined by dividing net income and dividends by the 1,394,758 shares of
common stock outstanding giving retroactive effect to a 5% stock dividend
declared January 23, 1997. The Consolidated Balance Sheet at December 31,
1996 reflects the additional shares resulting from the dividend as
outstanding at that date.
Reclassification
Certain information related to an estimate of shares outstanding as
a result of the stock dividend declared on January 17, 1996 have been
adjusted in the December 31, 1995 Consolidated Balance Sheet and Statement
of Changes in Stockholders' Equity to reflect the actual number of shares
issued.
2. Restrictions on Cash and Due from Banks
Banks are required to carry cash reserves with the Federal Reserve Bank or
maintain cash on hand of specified percentages of deposit balances. The
Bank's normal amount of cash on hand, which averaged $9,000,000 during 1996,
is sufficient to satisfy the reserve requirements.
In order to cover the costs of services provided by correspondent banks,
the Company maintains compensating balance arrangements at these
correspondent banks, or pays fees in the event the credit earned on balances
is not sufficient to cover activity charges. During 1996 and 1995, the
Company maintained average compensating balances of approximately $1,373,000
and $1,451,000, respectively, of which $1,000,000 in each year was maintained
at the Federal Reserve Bank. In addition, the Company paid $11,649 and
$4,673, respectively, in account charges in 1996 and 1995.
F-8
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
3. Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
December 31, 1996 cost gains losses value
- - ----------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government Agency $32,403,001 $100,478 $193,254 $32,310,225
Mortgage backed
securities 22,323,913 230,338 114,589 22,439,662
State and municipal 11,635,927 145,408 92,385 11,688,950
Federal Home Loan
Bank stock 799,200 - - 799,200
Equity securities 2,461,123 385,104 122,312 2,723,915
----------- -------- -------- -----------
$69,623,164 $861,328 $522,540 $69,961,952
----------- -------- -------- -----------
----------- -------- -------- -----------
Held to Maturity
U.S. Treasury $ 4,295,866 $ 58,841 $ 2,585 $ 4,352,122
U.S. Government agency 3,793,612 2,599 11,445 3,784,766
Mortgage backed
securities 832,114 3,782 - 835,896
State and municipal 7,344,224 177,720 7,549 7,514,395
Foreign bonds 50,000 - - 50,000
----------- -------- -------- -----------
$16,315,816 $242,942 $ 21,579 $16,537,179
----------- -------- -------- -----------
----------- -------- -------- -----------
December 31, 1995
Available for sale
U.S. Government agency $33,714,658 $303,537 $235,537 $33,782,658
Mortgage backed
securities 19,909,547 296,957 27,194 20,179,310
State and municipal 6,009,337 46,337 27,886 6,027,788
Federal Home Loan
Bank stock 743,700 - - 743,700
Equity securities 1,298,516 296,879 7,962 1,587,433
----------- -------- -------- -----------
$61,675,758 $943,710 $298,579 $62,320,889
----------- -------- -------- -----------
----------- -------- -------- -----------
Held to maturity
U.S. Treasury $ 7,892,471 $137,949 $ 10,115 $ 8,020,305
U.S. Government agency 7,803,241 26,124 21,697 7,807,668
Mortgage backed
securities 992,200 16,646 - 1,008,846
State and municipal 7,363,462 187,353 8,949 7,541,866
Foreign bonds 50,000 - - 50,000
----------- -------- -------- -----------
$24,101,374 $368,072 $ 40,761 $24,428,685
----------- -------- -------- -----------
----------- -------- -------- -----------
</TABLE>
F-9
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
3. Investment Securities (Continued)
Contractual maturities of debt securities at December 31, 1996 and 1995 are
shown below. Actual maturities may differ from contractual maturities
because borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1996
Available for sale Held to maturity
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Maturing
Within one year $ 500,000 $ 499,915 $ 3,079,654 $ 3,086,173
Over one to five years 15,842,485 15,752,232 5,621,891 5,670,572
Over five to ten years 20,217,073 20,234,953 4,617,729 4,711,074
Over ten years 7,479,370 7,512,075 2,164,428 2,233,464
Mortgage backed
securities 22,323,913 22,439,662 832,114 835,896
----------- ----------- ----------- -----------
$66,362,841 $66,438,837 $16,315,816 $16,537,179
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Available for sale Held to maturity
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Maturing
Within one year $ 2,099,780 $ 2,086,647 $ 5,898,517 $ 5,915,693
Over one to five years 20,149,193 19,981,226 9,060,705 9,178,803
Over five to ten years 14,886,496 15,133,095 8,149,952 8,325,343
Over ten years 2,588,526 2,609,478 - -
Mortgage backed
securities 19,909,547 20,179,310 992,200 1,008,846
----------- ----------- ----------- -----------
$59,633,542 $59,989,756 $24,101,374 $24,428,685
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
At December 31, 1996 and 1995, securities with a cost basis of
$7,789,478 (market value of $7,836,567), and $8,603,126 were pledged as
collateral for government deposits and for securities sold under repurchase
agreements.
In 1996, 1995, and 1994, the Company realized gains on sales of
securities of $63,467, $40,585, and $25,798, respectively, and losses of
$6,563, $38,307, and $24,585 on securities sales. Income taxes on net
security gains were $21,976, $880, and $468 in 1996, 1995, and 1994,
respectively.
F-10
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
4. Loans
Major classifications of loans are as follows:
1996 1995
------------ ------------
Real estate
Residential $ 82,576,975 $ 70,754,025
Commercial 30,761,597 29,019,857
Construction and land development 1,942,861 2,904,008
Demand and time 23,302,636 18,718,070
Installment and credit card 13,410,083 15,041,537
------------ ------------
151,994,152 136,437,497
Allowance for loan losses 2,241,148 2,243,472
------------ ------------
Loans, net $149,753,004 $134,194,025
------------ ------------
------------ ------------
The Bank makes loans to customers located primarily in the central
Maryland region. Although the loan portfolio is diversified, its performance
will be influenced by the regional economy.
The maturity and rate repricing distribution of the loan portfolio is as
follows:
Repricing or maturing within one year $ 73,611,421 $ 51,012,584
Maturing over one to five years 39,672,657 49,677,221
Maturing over five years 38,710,074 35,747,692
------------ ------------
$151,994,152 $136,437,497
------------ ------------
------------ ------------
Loan balances have been adjusted by the following deferred amounts:
Deferred origination costs and premiums $ 1,020,526 $ 693,642
Deferred origination fees and unearned
discounts (1,009,019) (1,032,715)
------------ ------------
Net deferred (fees) costs $ 11,507 $ (339,073)
------------ ------------
------------ ------------
Transactions in the allowance for loan losses were as follows:
1996 1995 1994
---- ---- ----
Beginning balance $2,243,472 $1,931,345 $1,902,507
Provision charged to operations 187,500 -- 126,000
Recoveries 81,739 484,502 127,716
---------- ---------- ----------
2,512,711 2,415,847 2,156,223
Loans charged off 271,563 172,375 224,878
---------- ---------- ----------
Ending balance $2,241,148 $2,243,472 $1,931,345
---------- ---------- ----------
---------- ---------- ----------
At December 31, 1996, 1995, and 1994, the accrual of interest has been
discontinued on loans of $84,312, $447,073, and $256,858, respectively. The
amount of interest income that would have been recorded in 1996, 1995 and
1994 on non-accrual loans if those loans had been handled in accordance with
their contractual terms totaled $10,339, $34,479 and $41,133. The amount of
interest income actually recorded on non-accrual loans totaled $6,880,
$13,068 and $4,473 for 1996, 1995 and 1994, respectively.
F-11
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
4. Loans (Continued)
At December 31, 1996, the Company had one loan amounting to $812,072
that was classified as impaired because it had been restructured to accept
interest only payments for a period of time. The average balance of the loan
amounted to $828,155 and $842,041 in 1996 and 1995, respectively. The
Company has not provided for a specific allowance for this loan. During
1996, the Company received $121,910 in payments on the loan, of which $20,222
was applied to reduce principal, and $101,688 was recorded as interest
income. During 1995, the Company received $101,768 in payments on the loan,
of which $17,044 was applied to reduce principal, and $84,724 was recorded as
interest income. The loan was current in accordance with its modified terms
at the end of both 1996 and 1995.
Amounts past due 90 days or more, excluding nonaccrual loans are as
follows:
1996 1995 1994
---- ---- ----
Mortgage $ -- $87,767 $ --
Demand and time 30,604 10,944 --
Installment and credit card 32,384 27,182 22,898
------- -------- -------
$62,988 $121,893 $22,898
------- -------- -------
------- -------- -------
5. Credit Commitments
Outstanding loan commitments, unused lines and letters of credit were as
follows:
1996 1995
---- ----
Loan commitments
Mortgage loans $910,400 $4,870,800
Construction and land development 4,636,931 5,280,094
Commercial loans 2,070,000 1,235,403
Installment loans 235,640 386,483
---------- -----------
$7,852,971 $11,772,780
---------- -----------
---------- -----------
Unused lines of credit
Home equity lines $36,027,020 $27,546,269
Commercial lines 11,993,901 5,815,903
Unsecured consumer lines 2,508,658 2,404,671
----------- -----------
$50,529,579 $35,766,843
----------- -----------
----------- -----------
Letters of credit $927,947 $484,427
----------- -----------
----------- -----------
Loan commitments and lines of credit are agreements to lend to a
customer as long as there is no violation of any condition to the contract.
Loan commitments generally have interest rates fixed at current market
amounts, fixed expiration dates, and may require payment of a fee. Lines of
credit generally have variable interest rates. Such lines do not represent
future cash requirements because it is unlikely that all customers will draw
upon their lines in full at any time. Letters of credit are commitments
issued to guarantee the performance of a customer to a third party.
The Company's exposure to credit loss in the event of nonperformance by
the borrower is the contract amount of the commitment. Loan commitments,
lines and letters of credit are made on the same terms, including collateral,
as outstanding loans. The Company is not aware of any accounting loss it
would incur by funding the above commitments.
F-12
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
6. Related Party Transactions
The Company's executive officers and directors, or other entities to
which they are related, enter into loan transactions with the Bank in the
ordinary course of business. The terms of these transactions are similar to
the terms provided to other borrowers entering into similar loan transactions
and do not involve more than normal risk of collectibility. At December 31,
1996, 1995 and 1994, the amounts of such loans outstanding were $6,031,967,
$5,849,790, and $6,711,554, respectively. During 1996, 1995 and 1994
additions to loans outstanding were $1,066,260, $3,492,140, and $4,020,798,
respectively, and repayments of loans were $884,083, $4,353,904, and
$358,781.
7. Bank Premises and Equipment
A summary of bank premises and equipment is as follows:
1996 1995
---- ----
Land and improvements $464,474 $464,474
Bank buildings 1,759,509 1,759,509
Leasehold improvements 2,698,934 2,467,629
Equipment and fixtures 5,764,215 4,593,043
---------- ----------
10,687,132 9,284,655
Accumulated depreciation
and amortization 5,818,663 5,233,450
---------- ----------
$4,868,469 $4,051,205
---------- ----------
---------- ----------
Depreciation and amortization of bank premises and equipment was
$678,786, $557,757, and $467,367 for 1996, 1995, and 1994, respectively.
Amortization of intangible assets, excluding amortization of deposit
premiums, was $31,390, $30,005 and $27,809, for 1996, 1995, and 1994,
respectively.
8. Deposits
Major classifications of interest-bearing deposits are as follows:
1996 1995
---- ----
NOW and SuperNOW $26,323,859 $24,523,735
Money market 58,817,398 58,135,870
Savings 44,714,354 43,267,896
Certificates of deposit of
$100,000 or more 6,882,212 6,060,462
Other time deposits 58,817,661 55,193,380
------------ ------------
$195,555,484 $187,181,343
------------ ------------
------------ ------------
Certificates of deposit of $100,000 or more mature as follows:
Three months or less $2,097,388 $1,787,425
Over three through twelve months 3,740,304 2,925,669
Over one to five years 1,044,520 1,347,368
---------- ----------
$6,882,212 $6,060,462
---------- ----------
---------- ----------
Interest expense associated with certificates of deposit of $100,000 or
more was $388,157, $356,796, and $253,560 for the years ended December 31,
1996, 1995, and 1994, respectively.
F-13
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
8. Deposits (continued)
Other time deposits mature as follows:
1996 1995
---- ----
Maturing within one year $44,114,096 $39,781,956
Maturing over one to five years 14,420,710 14,571,618
Maturing over five years 82,855 839,806
----------- -----------
$58,817,661 $55,193,380
----------- -----------
----------- -----------
9. Branch Acquisition
On June 23, 1995, the Company acquired a branch office from First Union
National Bank of Maryland. This branch had total deposits at the date of
acquisition of $22,765,077. The Company also acquired related real estate
and equipment of $530,000 and loans of $17,303. The deposit premium of
$1,847,663 is being amortized using the straight line method over 15 years.
Amortization expense recorded amounted to $123,180 and $61,590 for 1996 and
1995, respectively. The remaining unamortized balance at December 31, 1996
was $1,662,893.
10. Borrowings
Federal funds purchased and securities sold under agreements to
repurchase represent transactions with customers for correspondent or
commercial account cash management services. These are overnight borrowing
arrangements with interest rates discounted from the federal funds sold rate.
Securities underlying the repurchase agreements are maintained in the
Company's control. Additional information is as follows:
1996 1995 1994
---- ---- ----
Total outstanding at period end $5,296,743 $3,203,849 $3,090,543
Average amount outstanding
during period 4,731,779 3,862,087 4,413,546
Maximum amount outstanding
at any month end 9,254,123 4,019,026 10,504,538
Weighted average interest
rate at period end 4.64% 4.97% 5.79%
Weighted average interest
rate for the period 4.80% 4.63% 3.82%
Notes payable - U.S. Treasury are Federal Treasury Tax and Loan deposits
accepted by the Bank from its customers to be remitted to the Federal Reserve
Bank on a periodic basis. The Company pays interest on these deposits at a
slight discount to the federal funds sold rate.
Advances from the Federal Home Loan Bank (FHLB) of Atlanta amounted to
$5,000,000 at December 31, 1996. There was no balance outstanding at
December 31, 1995. At December 31, 1996, the advances carried a weighted
average interest rate of 5.61% and mature within one year. The Bank has a
total available secured line of $26 million with the FHLB for which the Bank
granted the FHLB a blanket security interest in its residential first
mortgage loans.
The Company also has available unsecured federal funds lines of credit
of $6 million and secured lines of credit of $2 million with other
institutions. These lines were unused at December 31, 1996 and 1995.
F-14
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
11. Other Operating Expenses
Other operating expenses include the following:
1996 1995 1994
---- ---- ----
ATM services $762,617 $374,439 $112,258
Data processing services 488,465 478,453 361,030
Professional services 119,643 173,018 229,345
Marketing 343,535 309,130 216,890
Printing, stationery, and supplies 284,912 252,429 147,274
Credit card 238,268 144,668 126,085
Telephone 120,437 123,881 121,544
Liability insurance 78,064 73,196 120,873
FDIC assessment 2,000 197,272 387,558
Postage and freight 149,200 131,032 108,027
Directors' fees 97,239 90,090 84,550
Deposit premium amortization 123,180 61,590 --
Other 818,688 597,716 529,704
-------- -------- --------
$3,626,248 $3,006,914 $2,545,138
---------- ---------- ----------
---------- ---------- ----------
F-15
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
12. Capital Standards
The Federal Reserve Board and the Federal Deposit Insurance Corporation
(FDIC) have adopted risk-based capital standards for banking organizations.
These standards require ratios of capital to assets for minimum capital
adequacy and to be classified as well capitalized under prompt corrective
action provisions. As of December 31, 1996, the capital ratios and minimum
capital requirements are as follows.
<TABLE>
<CAPTION>
Capital To be well
Actual Adequacy Capitalized
---------------------- --------------------- --------------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
- - -------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Total Capital
(to risk-weighted assets) $28,180,322 18.01% $12,516,560 >=8.0% $15,645,700 >=10.0%
Tier 1 Capital
(to risk-weighted assets) $26,224,609 16.76% $6,258,280 >=4.0% $9,387,420 >=6.0%
Tier 1 Capital
(to average assets) $26,224,609 10.05% $10,436,146 >=4.0% $13,045,183 >=5.0%
</TABLE>
Tier 1 capital consists of capital stock, surplus, and undivided
profits. Total capital includes a limited amount of the allowance for credit
losses. In calculating risk-weighted assets, specified risk percentages are
applied to each category of asset and off-balance sheet items.
Failure to meet the capital requirements could affect the Company's
ability to pay dividends and accept deposits and may significantly affect the
operations of the Company.
13. Pension Plans
The Company has a defined benefit pension plan covering substantially
all of the employees. Benefits are based on years of service and the
employee's highest average rate of earnings for the three consecutive years
during the last five full years before retirement. The Company's funding
policy is to contribute annually the amount recommended by the Plan's
independent actuarial consultants. Assets of the plan are held in a trust
fund managed by an insurance company. Approximately 78% of the trust assets
are invested in an immediate participation guarantee fund, and the balance is
invested in a common stock fund.
F-16
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
13. Pension Plans (Continued)
The following table sets forth the financial status of the plan:
1996 1995 1994
-------- -------- --------
Accumulated benefit obligation
Vested $3,719,484 $ 3,726,634 $3,375,730
Nonvested 60,781 76,432 49,255
---------- ----------- ----------
$3,780,265 $ 3,803,066 $3,424,985
---------- ----------- ----------
---------- ----------- ----------
Plan assets at fair value $4,288,052 $ 3,846,702 $3,488,330
Projected benefit obligation 4,888,812 4,942,444 4,219,295
---------- ----------- ----------
Plan assets (less than) projected
benefit obligation (600,760) (1,095,742) (730,965)
Prior service cost 404,950 456,015 507,080
Unrecognized net loss 388,935 828,070 356,334
Unamortized net asset from
transition (145,941) (192,420) (238,899)
---------- ----------- ----------
(Accrued) prepaid pension expense $ 47,184 $ (4,077) $ (106,450)
---------- ----------- ----------
---------- ----------- ----------
Assumptions used in measuring the projected benefit obligation were as
follows:
Discount rates 7.75% 7.25% 8.00%
Rates of increase in compensation
levels 5.50% 5.50% 5.50%
Long-term rate of return on assets 9.00% 9.00% 9.00%
Net pension expense includes the
following components:
Service cost $ 211,181 $ 153,123 $ 187,774
Interest cost 351,902 328,026 295,204
Actual return on assets (337,765) (306,394) (288,753)
Net amortization and deferral 29,675 4,586 17,465
---------- ----------- ----------
Net pension expense $ 254,993 $ 179,341 $ 211,690
---------- ----------- ----------
---------- ----------- ----------
The Company has a contributory thrift plan qualifying under Section
401(k) of the Internal Revenue Code. Employees with one year of service are
eligible for participation in the plan. The Company's contributions to this
plan, included in expenses, were $63,542, $53,734 and $47,645, for 1996,
1995, and 1994, respectively.
14. Contingencies
The Company is involved in various legal actions arising from normal
business activities. Management believes that the ultimate liability or risk
of loss resulting from these actions will not materially affect the Company's
financial position.
F-17
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
15. Income Taxes
The components of income tax expense are as follows:
1996 1995 1994
---- ---- ----
Current
Federal $ 540,934 $ 476,530 $ 615,478
State 115,067 166,539 154,266
--------- --------- ----------
656,001 643,069 769,744
Deferred 100,039 241,328 93,036
--------- --------- ----------
$ 756,040 $ 884,397 $ 862,780
--------- --------- ----------
--------- --------- ----------
The components of the deferred tax charge (benefits) were as follows:
Provision for loan losses $ (72,412) $ -- $ (11,137)
Deferred origination fees and costs 72,457 167,680 78,460
Deferred compensation plan (12,497) (8,700) (8,606)
Depreciation 73,331 26,054 (23,062)
Discount accretion 2,107 (1,329) 1,809
Retirement benefits 37,053 55,025 58,430
FHLB Stock dividends -- 2,019 (3,360)
Ground rent losses -- 579 502
--------- --------- ----------
$ 100,039 $ 241,328 $ 93,036
--------- --------- ----------
--------- --------- ----------
The components of the net deferred tax assets were as follows:
Deferred tax assets
Allowance for loan losses $ 583,163 $ 510,751 $ 510,751
Deferred origination fees and
costs -- 22,544 190,224
Accrued retirement benefits 15,123 52,176 107,201
Deferred compensation plan 167,631 155,134 146,434
Allowance for ground rent losses 54,119 54,119 54,698
Unrealized losses on available
for sale investment securities -- -- 1,034,685
--------- --------- ----------
820,036 794,724 2,043,993
--------- --------- ----------
Deferred tax liabilities
Deferred origination fees and
costs (49,913) -- --
Unrealized gains on available for
sale investment securities (130,840) (249,149) --
Depreciation (99,385) (26,054) --
Discount accretion (13,440) (11,333) (12,662)
FHLB Stock dividends (2,019) (2,019) --
--------- --------- ----------
(295,597) (288,555) (12,662)
--------- --------- ----------
Net deferred tax asset $ 524,439 $ 506,169 $2,031,331
--------- --------- ----------
--------- --------- ----------
F-18
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
15. Income Taxes (Continued)
The differences between the federal income tax rate of 34 percent and
the effective tax rate for the Company are reconciled as follows:
1996 1995 1994
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt income (10.0) (7.2) (7.2)
State income taxes, net of
federal income tax benefit 3.0 4.6 4.6
Other .2 .4 (.1)
----- ---- ----
27.2% 31.8% 31.3%
----- ---- ----
----- ---- ----
16. Lease Commitments
The Company leases facilities under the following terms:
<TABLE>
<CAPTION>
Current annual rental Expiration date Renewal options
--------------------- --------------- ---------------
<S> <C> <C> <C>
Two and Six Charles Plaza $46,493 November 30, 1998
15 Charles Plaza 164,817 April 30, 1999 2 terms of 5 years
Arbutus Shopping Center 90,600 April 30, 2001 1 term of 5 years
Liberty Plaza 19,500 February 28, 2005
Joppa Road 26,400 September 30, 2002 1 term of 10 years
Northway Shopping Center 44,000 April 30, 1999 3 terms of 5 years
Arbutus Business Center 74,880 February 28, 2009 2 terms of 5 years
Wilkens Plaza 74,500 September 30, 2014 2 terms of 5 years
Ridgeview Plaza 40,000 October 31, 2004 2 terms of 10 years
Towson 51,100 April 30, 2006 1 term of 5 years
Hampstead 21,600 November 30, 2011 2 terms of 5 years
</TABLE>
Some of the leases provide for increases in the rental rates at specified
times during the lease terms, prior to the expiration dates. All renewal
options are exercisable at increased rates.
Lease obligations will require rent payments as follows:
Period Minimum rentals
------ ---------------
1997 $ 653,889
1998 651,377
1999 476,980
2000 428,831
2001 377,793
Remaining years 2,455,483
----------
$5,044,353
----------
----------
The leases generally provide for payment of property taxes, insurance,
and maintenance costs by the Company. The total rental expense for all real
property leases amounted to $634,376, $604,187, and $462,643 for 1996, 1995,
and 1994, respectively.
F-19
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
17. Parent Company Financial Information
The balance sheets for 1996 and 1995 and statements of income and cash
flows for Carrollton Bancorp (Parent Only) for 1996, 1995, and 1994, are
presented below:
Balance Sheets
- - ------------------------------------------------------------------------------
December 31 1996 1995
- - ------------------------------------------------------------------------------
Assets
Cash $ 275 $ 5,000
Interest-bearing deposits in subsidiary 576,635 1,609,753
Investment in subsidiary 24,867,282 23,730,073
Investment securities available for sale 2,723,916 1,587,433
Other assets 483 --
----------- -----------
$28,168,591 $26,932,259
----------- -----------
----------- -----------
Liabilities and Shareholders' Equity
Liabilities $98,141 $114,232
----------- -----------
Shareholders' Equity
Common Stock 13,947,580 13,287,990
Surplus 6,973,556 6,083,694
Retained earnings 6,941,366 7,050,362
Net unrealized holding gains (losses)
on available for sale securities 207,948 395,981
----------- -----------
28,070,450 26,818,027
----------- -----------
$28,168,591 $26,932,259
----------- -----------
----------- -----------
Statements of Income
- - ------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- - ------------------------------------------------------------------------------
Income
Dividends from subsidiary $670,631 $644,173 $1,220,663
Interest and dividends 83,954 111,895 104,114
Security gains 39,377 -- 9,779
---------- ----------- ----------
793,962 756,068 1,334,556
Expenses 66,161 58,423 68,229
---------- ----------- ----------
Income before income taxes and
equity in undistributed net income
of subsidiary 727,801 697,645 1,266,327
Income tax expense 8,585 820 13,312
---------- ---------- ----------
719,216 696,825 1,253,015
Equity in undistributed net
income of subsidiary 1,309,207 1,196,494 638,914
---------- ---------- ----------
Net income $2,028,423 $1,893,319 $1,891,929
---------- ---------- ----------
---------- ---------- ----------
F-20
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
17. Parent Company Financial Information (Continued)
Statements of Cash Flows
- - ------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- - ------------------------------------------------------------------------------
Cash flows from operating activities
Cash dividends from subsidiary $ 670,631 $644,173 $1,220,663
Interest and dividends received 44,577 111,895 70,376
Cash paid to suppliers (32,241) (49,601) (59,076)
Income taxes (paid) refunded (9,612) (7,628) (14,999)
---------- ---------- -----------
673,355 698,839 1,216,964
---------- ---------- -----------
Cash flows from investing activities
Net (increase) decrease in
interest-bearing deposits 1,033,117 34,132 (881,872)
Proceeds from sales of
securities available for sale 68,008 -- 19,327
Proceeds from maturities of
securities available for sale -- -- 2,800,000
Purchases of securities available
for sale (1,191,238) (358,630) (2,664,059)
---------- ---------- ----------
(90,113) (324,498) (726,604)
---------- ---------- ----------
Cash flows from financing activities
Dividends paid (587,967) (542,729) (529,447)
Common stock repurchase and
retirement -- (459,140) --
---------- ---------- ----------
(587,967) (1,001,869) (529,447)
---------- ---------- ----------
Net (decrease) increase in cash (4,725) (627,528) (39,087)
Cash at beginning of year 5,000 632,528 671,615
---------- ---------- ----------
Cash at end of year $275 $5,000 $632,528
---------- ---------- ----------
---------- ---------- ----------
Reconciliation of net income to net cash provided by operating activities
Net income $2,028,423 $1,893,319 $1,891,929
Adjustments to reconcile net
income to net cash provided by
operating activities
Equity in undistributed income of
subsidiary (1,309,207) (1,196,494) (638,914)
Amortization of premiums and
discounts -- -- (35,363)
Security gains (39,377) -- (9,779)
Amortization of organization costs -- 3,847 9,233
Decrease (increase) in accounts
receivable (483) -- 1,625
Increase (decrease) in accounts
payable (6,001) (1,833) (1,767)
----------- ---------- ----------
$673,355 $698,839 $1,216,964
----------- ---------- ----------
----------- ---------- ----------
F-21
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
18. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are
summarized below. The fair values of a significant portion of these
financial instruments are estimates derived using present value techniques
prescribed by the FASB and may not be indicative of the net realizable or
liquidation values. Also, the calculation of estimated fair values is based
on market conditions at a specific point in time and may not reflect current
or future fair values.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying amount Fair value Carrying amount Fair value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 20,391,197 $ 20,391,197 $ 16,203,646 $ 16,203,646
Federal funds sold 700,000 700,000 3,700,000 3,700,000
Interest-bearing deposits -- -- 100,000 99,886
Investment securities
(total) 86,277,768 86,499,131 86,422,263 86,749,574
Loans, net 149,753,004 149,408,516 134,194,025 133,870,591
Accrued interest
receivable 1,956,674 1,956,674 2,045,660 2,045,660
Financial liabilities
Noninterest-bearing
deposits $ 30,229,596 $ 30,229,596 $ 30,027,955 $ 30,027,955
Interest-bearing
deposits 195,555,484 196,738,850 187,181,343 188,106,209
Federal funds purchased 1,949,809 1,949,809 1,369,724 1,369,724
Notes payable - U.S.
Treasury 1,646,478 1,646,478 1,387,611 1,387,611
Securities sold under
agreements to repurchase 3,346,934 3,346,934 1,834,125 1,834,125
Advances from the
Federal Home Loan Bank 5,000,000 5,001,524 -- --
Accrued interest payable 207,666 207,666 237,101 237,101
</TABLE>
The fair value of interest-bearing deposits with other financial
institutions is estimated based on quoted interest rates for certificates of
deposit with similar remaining terms.
The fair values of U.S. Treasury and Government agency securities and
listed equity securities are determined using market quotations. For state
and municipal securities, the fair values are estimated using a matrix that
considers yield to maturity, credit quality, and marketability.
The fair value of fixed-term loans is estimated to be the present value
of scheduled payments, and anticipated prepayments in the case of residential
mortgages, discounted using interest rates currently in effect for loans of
the same class and term. The fair value of variable-rate loans is estimated
to equal the carrying amount. The valuations of fixed-term and variable-rate
loans are adjusted for possible loan losses.
The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of
fixed-maturity time deposits is estimated based on interest rates currently
offered for deposits of similar remaining maturities.
It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.
F-22
<PAGE>
Carrollton Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Continued)
19. Consolidated Quarterly Results of Operations (Unaudited)
Year Ended December 31, 1996:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest income $ 4,435,346 $ 4,574,015 $ 4,726,666 $ 4,782,878
Interest expense (2,036,747) (2,083,151) (2,235,035) (2,193,809)
----------- ----------- ----------- -----------
Net interest income 2,398,599 2,490,864 2,491,631 2,589,069
Provision for
loan losses (35,000) (37,500) (55,000) (60,000)
Security gains
(losses) 2,839 14,688 39,377 --
Other income 690,012 761,596 1,165,262 1,146,367
Operating expenses (2,356,315) (2,571,216) (2,867,069) (3,023,741)
----------- ----------- ----------- -----------
Income before taxes 700,135 658,432 774,201 651,695
Tax provision (214,861) (168,774) (210,161) (162,244)
----------- ----------- ----------- -----------
Net income $485,274 $489,658 $564,040 $489,451
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share $0.35 $0.35 $0.40 $0.35
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash dividends
per share $0.10 $0.10 $0.10 $0.11
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Market prices: high $24.77 $24.53 $24.77 $22.86
low $23.10 $23.10 $20.96 $20.48
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Year Ended December 31, 1995:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest income $ 3,945,226 $ 4,168,262 $ 4,483,959 $ 4,531,222
Interest expense (1,745,957) (1,896,830) (2,114,841) (2,109,760)
Net interest income 2,199,269 2,271,432 2,369,118 2,421,462
Provision for
loan losses -- -- -- --
Security gains
(losses) -- (28,534) 149 30,663
Other income 538,669 605,580 696,842 694,444
Operating expenses (2,191,200) (2,187,962) (2,277,483) (2,364,733)
----------- ----------- ----------- -----------
Income before taxes 546,738 660,516 788,626 781,836
Tax provision (164,644) (205,191) (261,091) (253,471)
----------- ----------- ----------- -----------
Net income $382,094 $455,325 $527,535 $528,365
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share $0.27 $0.33 $0.38 $0.38
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash dividends
per share $0.10 $0.10 $0.10 $0.10
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Market price: high $26.85 $22.64 $22.64 $24.05
low $21.01 $20.08 $20.55 $21.48
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
All per share amounts have been adjusted to reflect the 5% stock
dividend declared in January, 1997.
F-23
<PAGE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
At no time whatsoever during the Company's two most recent fiscal years
or any subsequent interim period, an independent accountant who was
previously engaged as the principal accountant to audit the Company's
financial statements, or an independent accountant who was previously engaged
to audit a significant subsidiary and on whom the principal accountant
expressed reliance in its report, has resigned, declined to stand for
reelection or been dismissed.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Directors and Executive Officers of the Corporation are as follows:
Directors Whose Terms Expire in 1997
Albert R. Counselman.......Mr. Counselman, age 48, has served as a
director of Carrollton Bank, a Maryland state chartered commercial bank, and
the principal subsidiary of the Company (the "Bank"), since April 1985, and
of the Company since its inception in 1990. He has been President of Riggs,
Counselman, Michaels & Downes, Inc., an insurance brokerage firm, since
September 1987, and served in various executive positions with that firm from
1972 to September 1987. (1)
John P. Hauswald...........Mr. Hauswald, age 74, has served as a director
of the Bank since 1964 and of the Company since its inception in 1990. He
was, until his retirement in October 1989, President of The Hauswald Bakery.
Since October 1989, he has been President of The Hauswald Company, Inc. (1)
(2)
Samuel D. Miller...........Mr. Miller, age 58, has served as a director
of the Bank and the Company since December 1992. He has been Executive Vice
President of the Bank since June 1994. Previously Mr. Miller had been Senior
Vice President and Cashier of the Bank since December 1990, having served as
Vice President - Operations from December 1982 until December 1990. Mr.
Miller has served as Vice President of the Company since October 1993, having
served as Treasurer of the Company from October 1991 until October 1993.
William C. Rogers, Jr......Mr. Rogers, age 70, has served as a director
of the Bank since 1955 and of the Company since its inception in 1990. He
has been a partner in the law firm of Rogers, Moore and Rogers, counsel to
the Bank, since 1970. He has been Chairman of the Board of The Security
Title Guarantee Corporation of Baltimore since 1970 and a director since
1952, and was President from 1970 until March 1989. Mr. Rogers is President
of Maryland Mortgage Company where he has been a director since 1953. He is
also President of Moreland Memorial Park Cemetery, Inc. where he has been a
director since 1959. He is the brother of John Paul Rogers, a director of
the Bank and the Company.
Directors Whose Terms Expire in 1998
-38-
<PAGE>
Dallas R. Arthur.............Mr. Arthur, age 52, has served as a director
of the Bank and the Company since October 1991. He has been President of
both the Company and the Bank since October 1993, and Chief Executive Officer
of both the Company and the Bank since February 1994. Mr. Arthur was
Executive Vice President of the Bank from October 1991 until October 1993,
and had served as First Senior Vice President of the Bank from December 1990
until October 1991, and as Vice President and Cashier of the Bank from
December 1984 until December 1990. He had served as Vice President and
Secretary of the Company from October 1991 until October 1993, and as
Treasurer of the Company from its inception in 1990 until October 1991.
C. Edward Hoerichs...........Mr. Hoerichs, age 85, has served as a
director of the Bank since 1970 and of the Company since its inception in
1990. He is the founder of Edward Hoerichs & Sons, Inc., a mechanical
contracting firm, and was its President from 1975 to its dissolution in 1993.
Allen Quille................Mr. Quille, age 77, has served as a director
of the Bank since 1976 and of the Company since its inception in 1990. He
has been President of Quille's Parking, Inc. since 1933. Mr. Quille has also
been Secretary of Quille-Crown Parking of Maryland since 1983, and Secretary
of The Forum Caterers since 1983. (1)
John Paul Rogers.............Mr. Rogers, age 61, has served as a director
of the Bank since 1970 and of the Company since its inception in 1990. Mr.
Rogers has been Chairman of the Bank since February 1994. He was a partner
in the law firm of Rogers, Moore and Rogers, counsel to the Bank, from 1970
until December 1992. Mr. Rogers was senior title officer of The Security
Title Guarantee Corporation of Baltimore from May 1991 until December 1992,
having served as President from March 1989 until May 1991, and as Executive
Vice President from March 1970 until March 1989. He is Vice President and
Treasurer of Moreland Memorial Park Cemetery, Inc., and a Director of
Maryland Mortgage Company and The Security Title Guarantee Corporation of
Baltimore. He is the brother of William C. Rogers, Jr., a director of the
Bank and the Company.
Directors Whose Terms Expire in 1999
Steven K. Breeden..........Mr. Breeden, age 38, has served as a director
of the Bank since June 1994, and of the Company since October 1995. Mr.
Breeden is currently Vice President and Secretary of Security Development
Corporation, a real estate development company, a position he has held for
the past five years. (2)
David L. Costello, III.....Mr. Costello, age 45, has been a director of
the Company since February 1994. Mr. Costello is not a director of the Bank.
Mr. Costello has been Senior Vice President and Chief Financial Officer of
the Bank since June 1994 and previously was Vice President-Finance and Chief
Financial Officer of the Bank since July 1993. Mr. Costello has served as
Treasurer of the Company since October 1993. He was Senior Vice President
and Controller of the Bank of Baltimore from March 1988 to September 1992.
Samuel M. Dell, Jr.........Mr. Dell, age 88, has served as a director of
the Bank since 1974 and of the Company since its inception in 1990. He is
the founder of Crest Contracting Company, Inc., and has been its President
and Treasurer since 1948. Mr. Dell is also the founder of Carrollton
Equipment Company, and has been a partner of Dellcrest Realty Company, a real
estate investment partnership, since 1977.
-39-
<PAGE>
Leo A. O'Dea...............Mr. O'Dea, age 66, has served as a director of
the Bank since 1983 and of the Company since its inception in 1990. Mr.
O'Dea was elected Chairman of the Company in February 1994. He has been
President of Hamilton & Spiegel, Inc., a sheet metal contractor, since 1979.
(2)
- - ---------------------------------
(1) -- Member of the Audit Committee
(2) -- Member of the Compensation Committee
OTHER EXECUTIVE OFFICERS AND DIRECTORS OF THE BANK
Certain information regarding directors and significant employees of the Bank
other than those previously mentioned is set forth below.
Robert A. Altieri..........Mr. Altieri, age 35, has been Senior Vice
President - Lending of the Bank since June 1994 and previously was Vice
President - Commercial Lending since September 1991. He was Vice President
- - -Commercial Lending of Suburban Bank of Virginia, N.A. from January 1989
until August 1991.
Edward R. Bootey...........Mr. Bootey, age 50, has been Senior Vice President
- - - Automation & Technology since October , 1995, and was Senior Vice President
- - - Operations of the Bank from June 1994 to October 1995. Mr. Bootey
previously was Vice President - Operations since January 1991. He served as
Assistant Vice President - Operations from December 1987 until January 1991.
Jeffrey E. Brown...........Mr. Brown, age 55, has been Vice President
- - -Consumer Lending of the Bank since July 1991, and was Assistant Vice
President - Consumer Lending from March 1990 until July 1991. He was Vice
President - Consumer Lending of Sharon Federal Savings Bank, F.S.B. from
August 1988 until March 1990, and served in various management positions with
the Bank of Baltimore from March 1968 to August 1988.
Dr. Thelma T. Daley........Dr. Daley, age 65, has been a director of the Bank
since November 1995. Dr. Daley is not a director of the Company. Dr. Daley
retired as the Coordinator of Counseling and Guidance for The Baltimore
County Board of Education.
Eunice W. Taylor...........Ms. Taylor, age 43, has been Vice President
- - -Electronic Banking since October, 1996. Prior to that date, she had been
Vice President - Marketing and Sales since January 1995. She also served as
Secretary of the Bank from November 1993 to January, 1997, and was Secretary
of the Company from October 1993 to January, 1997. Ms. Taylor first joined
the Bank in October 1985.
Board Committees
The Board of Directors of the Company met six times and the Board of
Directors of the Bank met 36 times during the year ended December 31, 1996.
Since May, 1996, the Board of Directors has met twice a month. Prior to
June, 1996, the Board of Directors met weekly. No director attended fewer
than 75% of the total number of meetings of both Boards and committees to
which they were assigned during the year ended December 31, 1996.
-40-
<PAGE>
The Board of Directors does not have a standing nominating committee.
The Audit Committee held four meetings during 1996. Its current members are
Messrs. Counselman, Hauswald and Quille. Only nonemployee directors are
eligible to serve on the Audit Committee. The duties of the Audit Committee
include reviewing the annual financial statements of the Company and the
scope of the independent annual audit and internal audits. It also reviews
the independent accountant's letter to management concerning the
effectiveness of the Company's internal financial and accounting controls and
management's response to that letter. In addition, the Committee reviews and
recommends to the Board the firm to be engaged as the Company's independent
accountants. The Committee may also examine and consider other matters
relating to the financial affairs of the Company as it determines appropriate.
The Compensation Committee met three times during 1996. Its current members
are Messrs. Breeden, Hauswald, and O'Dea. The purpose of the Compensation
Committee is to review and approve major compensation and benefit policies of
the Company and the Bank. In addition, the committee recommends to the Board
the compensation to be paid to all officers of the Bank.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than ten percent of
the Company's Common Stock ("a Section 16 Insider") to file monthly and
annual reports with both the Securities and Exchange Commission and the
National Association of Securities Dealers. Based on a review of the reports
submitted to the Company, the Company believes that all Section 16(a)
reporting requirements applicable to the Company's directors, officers and
10% shareholders were satisfied on a timely basis.
ITEM 10: EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or allocated for
services rendered to the Company in all capacities during the years ended
December 31, 1994, 1995 and 1996 to the chief executive officer of the
Company. The compensation of the other members of executive management is
not required to be provided because the base compensation of each of such
individuals does not exceed $100,000.
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary($) Bonus($)
- - ------------------------------------------------------------------------------
Dallas R. Arthur, 1996 $109,140 $-0-
President and Chief 1995 103,000 -0-
Executive Officer 1994 95,241 9,500
- - ------------------------------------------------------------------------------
Directors' Fees
Directors who are not employees of the Bank receive a monthly fee of $760 for
Board meetings, and $175 per committee meeting attended. Prior to June,
1996, directors received $160 per meeting held of the Board of Directors of
the Bank and $160 per committee meeting attended. Directors do not receive
additional fees for their service as directors of the Company. Employee
directors are not compensated for attendance at Board meetings.
-41-
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1996, certain information
concerning shares of the Common Stock of the Company beneficially owned by
(i) the chief executive officer of the Company; (ii) all directors and
nominees for directors of the Company and the Bank; (iii) all directors and
officers of the Company and the Bank as a group; and (iv) other significant
shareholders.
Amount and
Name and address of Nature of Beneficial Percent of
Beneficial Owner (11) Ownership (1)(10) Class (1)
- - --------------------- -------------------- ----------
Directors:
- - ----------
Dallas R. Arthur 2,119(2) *
Steven K. Breeden 1,820 *
David L. Costello, III 1,463 *
Albert R. Counselman 10,710 *
Thelma T. Daley 53 *
Samuel M. Dell, Jr. 7,087 *
John P. Hauswald 11,620(3) *
C. Edward Hoerichs 2,027 *
Samuel D. Miller 1,346(4) *
Leo A. O'Dea 8,350(5) *
Allen Quille 1,853 *
John Paul Rogers 119,391(6)(7) 8.56%
William C. Rogers, Jr. 142,402(7)(8) 10.22%
All Directors and Executive
Officers of the Company as
a group (17 persons) 253,121 18.15%
Other Significant Shareholder:
- - ------------------------------
Edward Q. Rogers 69,447(9) 4.98%
- - ------------------------------
* Less than 1%
(1) Unless otherwise indicated, the named person has sole voting and
investment power with respect to all shares.
(2) Includes 1,289 shares owned jointly by Mr. Arthur and his wife. Excludes
451 shares owned by Mr. Arthur's wife.
(3) Includes 5,472 shares owned jointly by Mr. Hauswald and his wife and
5,999 shares owned by a trust for the benefit of Margaret V. Hauswald, for
which Mr. Hauswald serves as trustee. Excludes 5,019 shares owned by Mr.
Hauswald's wife.
-42-
<PAGE>
(4) Includes 938 shares owned jointly by Mr. Miller and his wife. Excludes
166 shares owned by Mr. Miller's wife.
(5) Excludes 11,040 shares owned by Mr. O'Dea's wife.
(6) Includes 56,334 shares owned jointly by Mr. Rogers and his wife, 1,208
shares owned by a trust for the benefit of John Paul Rogers, Jr., and 951
shares owned by a trust for the benefit of Elizabeth B. Seuferling, for which
Mr. Rogers and his wife serve as trustees. Excludes 5,524 shares owned by
Mr. Rogers' wife.
(7) Includes 21,574 shares owned by the Moreland Memorial Park Cemetery,
Inc. Perpetual Care Fund and 3,746 shares owned by Moreland Memorial Park,
Inc. Bronze Perpetual Care Fund, for which John Paul Rogers and William C.
Rogers, Jr. serve as trustees. Also includes 30,431 shares owned by The
Security Title Guarantee Corporation of Baltimore and 4,337 shares owned by
Maryland Mortgage Company, of which John Paul Rogers is a director, and of
which William C. Rogers, Jr. is Chairman and President, respectively, as well
as a director.
(8) Includes 61,238 shares owned jointly by Mr. Rogers and his wife and
20,466 shares owned by Mr. Rogers as trustee for the William E. Long Trust.
Excludes 5,348 shares owned by Mr. Roger's wife.
(9) Includes 34,679 shares owned jointly by Mr. Rogers and his wife. Also
includes 30,431 shares owned by The Security Title Guarantee Corporation of
Baltimore and 4,337 shares owned by Maryland Mortgage Company, of which Mr.
Rogers is a principal shareholder. Excludes 42,411 shares owned by Mr.
Roger's wife which, if included, would result in Mr. Rogers beneficially
owning a total of 111,858 shares or 8.02% of shares outstanding.
(10) Reflects the effect of a 5% stock dividend declared January 23, 1997 and
distributed March 14, 1997.
(12) All directors, executive officers and other significant shareholders may
be contacted at the Company's corporate offices by addressing correspondence
to the appropriate person, care of Carrollton Bancorp, 15 Charles Plaza,
Suite 200, Baltimore, Maryland 21201
-43-
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past year the Bank has had banking transactions in the ordinary
course of its business with: (i) its directors and nominees for directors;
(ii) its executive officers; (iii) its 5% or greater shareholders; (iv)
members of the immediate family of its directors, nominees for directors or
executive officers and 5% shareholders; and (v) the associates of such
persons on substantially the same terms, including interest rates,
collateral, and repayment terms on loans, as those prevailing at the same
time for comparable transactions with others. The extensions of credit by
the Bank to these persons have not and do not currently involve more than the
normal risk of collectibility or present other unfavorable features. At
December 31, 1996, the balance of loans outstanding to directors, executive
officers, owners of 5% or more of the outstanding Common Stock, and their
associates, including loans guaranteed by such persons, aggregated
$6,031,967, which represented approximately 21.5% of the Company's equity
capital accounts.
William C. Rogers, Jr., a director of both the Company and the Bank, is a
partner of the law firm of Rogers, Moore and Rogers which performs legal
services for the Company and its subsidiaries. Management believes that the
terms of these transactions were at least as favorable to the Company as
could have been obtained elsewhere.
Albert R. Counselman, a director of both the Company and the Bank, is
President of Riggs, Counselman, Michaels & Downes, Inc., an insurance
brokerage firm through which the Company and the Bank place various insurance
policies. The Company and the Bank paid total premiums for insurance
policies placed by Riggs, Counselman, Michaels & Downes, Inc in 1996 of
$30,376. Management believes that the terms of these transactions were at
least as favorable to the Company as could have been obtained elsewhere.
-44-
<PAGE>
PART IV
ITEM 13: EXHIBITS LIST and REPORTS ON FORM 8-K
a) List of Exhibits:
Exhibit Number Description
- - -------------- -----------
3(i) Articles of Incorporation of Carrollton Bancorp *
3(ii) By-Laws of Carrollton Bancorp *
10.1 Lease dated January 24, 1989 by and between Hill Management
Services, Inc. and The Carrollton Bank of Baltimore. *
10.2 Lease dated July 21, 1989 by and between Hill Management
Services, Inc. and The Carrollton Bank of Baltimore. *
10.3 Lease dated October 30, 1959 between Arbutus Shopping Plaza,
Inc. and The Carrollton Bank of Baltimore, as amended. *
10.4 Lease dated August 3, 1976 between Arbutus Shopping Plaza,
Inc. and The Carrollton Bank of Baltimore. *
10.5 Lease dated March 28, 1968 by and between Charles Towers
Partnership and The Carrollton Bank of Baltimore. *
10.6 Lease dated November 18, 1983 by and between Charles Towers
Partnership and The Carrollton Bank of Baltimore. *
10.7 Lease dated May 20, 1971 by and between Home Mutual Life
Insurance Company and The Carrollton Bank of Baltimore. *
10.8 Lease dated April 17, 1974 by and between Liberty Plaza
Enterprises, Inc. and The Carrollton Bank of Baltimore. *
10.9 Lease dated July 19, 1988 by and between Northway Limited
Partnership and The Carrollton Bank of Baltimore. *
10.10 Lease dated August 11, 1994 by and between Kensington
Associates Limited Partnership and Carrollton Bank. **
10.11 Lease dated October 11, 1994 by and between Ridgeview
Associates Limited Partnership and Carrollton Bank. **
21.1 Subsidiaries of Carrollton Bancorp
23 Consent of Accountant
27 Financial Data Schedule
* Incorporated by reference from Registration Statement dated January 12,
1990 on SEC Form S-4 (1933 Act File No.: 33-33027).
** Incorporated by reference from Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994 (1934 Act File No.:0-23090).
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period
covered by this report
-45-
<PAGE>
SIGNATURES
In accordance with 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.
CARROLLTON BANCORP
March 27, 1997 By:/s/ Dallas R. Arthur
---------------------------
Dallas R. Arthur
President and Chief Executive Officer
In accordance with 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 27, 1997 By:/s/ Dallas R. Arthur
---------------------------
Dallas R. Arthur
President and Chief Executive Officer
Principal Financial and Accounting Officer
March 27, 1997 By:/s/ David L. Costello, III
---------------------------
David L. Costello, III
Treasurer
Board of Directors
March 27, 1997 /s/ Dallas R. Arthur
------------------------------
Dallas R. Arthur
Director
March 27, 1997 /s/ Steven K. Breeden
------------------------------
Steven K. Breeden
Director
II-1
<PAGE>
March 27, 1997 /s/ David L. Costello, III
------------------------------
David L. Costello, III
Director
March 27, 1997 /s/ Albert R. Counselman
------------------------------
Albert R. Counselman
Director
March 27, 1997 /s/ Samuel M. Dell, Jr.
------------------------------
Samuel M. Dell, Jr.
Director
March 27, 1997 /s/ John P. Hauswald
------------------------------
John P. Hauswald
Director
March 27, 1997 /s/ C. Edward Hoerichs
------------------------------
C. Edward Hoerichs
Director
March 27, 1997 /s/ Samuel D. Miller
------------------------------
Samuel D. Miller
Director
March 27, 1997 /s/ Leo A. O'Dea
------------------------------
Leo A. O'Dea
Director
March 27, 1997 /s/ Allen Quille
------------------------------
Allen Quille
Director
March 27, 1997 /s/ John Paul Rogers
------------------------------
John Paul Rogers
Director
March 27, 1997 /s/ William C. Rogers, Jr.
------------------------------
William C. Rogers, Jr.
Director
II-2
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
- - ------ ----------- ----
3(i) Articles of Incorporation of Carrollton Bancorp *
3(ii) By-Laws of Carrollton Bancorp *
10.1 Lease dated January 24, 1989 by and between *
Hill Management Services, Inc. and The
Carrollton Bank of Baltimore.
10.2 Lease dated July 21, 1989 by and between *
Hill Management Services, Inc. and The
Carrollton Bank of Baltimore.
10.3 Lease dated October 30, 1959 between *
Arbutus Shopping Plaza, Inc. and The
Carrollton Bank of Baltimore, as amended.
10.4 Lease dated August 3, 1976 between Arbutus *
Shopping Plaza, Inc. and The Carrollton
Bank of Baltimore.
10.5 Lease dated March 28, 1968 by and between *
Charles Towers Partnership and The
Carrollton Bank of Baltimore.
10.6 Lease dated November 18, 1983 by and *
between Charles Towers Partnership and The
Carrollton Bank of Baltimore.
10.7 Lease dated May 20, 1971 by and between *
Home Mutual Life Insurance Company and The
Carrollton Bank of Baltimore.
10.8 Lease dated April 17, 1974 by and between *
Liberty Plaza Enterprises, Inc. and The
Carrollton Bank of Baltimore.
10.9 Lease dated July 19, 1988 by and between *
Northway Limited Partnership and The
Carrollton Bank of Baltimore.
10.10 Lease dated August 11, 1994 by and between **
Kensington Associates Limited Partnership
and Carrollton Bank.
10.11 Lease dated October 11, 1994 by and between **
Ridgeview Associates Limited Partnership
and Carrollton Bank.
21.1 Subsidiaries of Carrollton Bancorp
23 Consent of Accountant
27 Financial Data Schedule
* Incorporated by reference from Registration Statement dated January 12,
1990 on SEC Form S-4 (1933 Act File No.: 33-33027).
** Incorporated by reference from Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994 (1934 Act File No.: 0-23090).
II-3
<PAGE>
EXHIBIT 21.1
Subsidiaries of Carrollton Bancorp
Carrollton Bancorp
Carrollton Bank
Carrollton Financial Services, Inc.
Carrollton Community Development Corp.
Subsidiaries are indicated by indentation. All subsidiaries are 100% owned,
except for Carrollton Community Development Corp. which is 87.5% owned.
<PAGE>
EXHIBIT 23
[COMPANY LETTERHEAD ROWLES & COMPANY CERTIFIED PUBLIC ACCOUNTANTS]
Carrollton Bancorp
Baltimore, Maryland
We hereby consent to the use in this annual report on Form 10-KSB of our
report, dated February 5, 1997, on the consolidated financial statements of
Carrollton Bancorp and Subsidiary appearing in the annual report.
/s/ Rowles & Company LLP
Baltimore, Maryland
March 27, 1997
101 E. Chesapeake Avenue, Suite 300, Baltimore, Maryland 21286
(410) 583-6990 FAX (410) 583-7061
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Carrollton Bancorp's Form 10-KSB for the year ended December 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,391,197
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,961,952
<INVESTMENTS-CARRYING> 16,315,816
<INVESTMENTS-MARKET> 16,537,179
<LOANS> 151,994,152
<ALLOWANCE> 2,241,148
<TOTAL-ASSETS> 267,157,160
<DEPOSITS> 225,785,080
<SHORT-TERM> 11,943,221
<LIABILITIES-OTHER> 1,358,409
<LONG-TERM> 0
0
0
<COMMON> 13,947,580
<OTHER-SE> 14,122,870
<TOTAL-LIABILITIES-AND-EQUITY> 267,157,160
<INTEREST-LOAN> 12,898,277
<INTEREST-INVEST> 5,508,443
<INTEREST-OTHER> 112,185
<INTEREST-TOTAL> 18,518,905
<INTEREST-DEPOSIT> 8,107,927
<INTEREST-EXPENSE> 8,548,742
<INTEREST-INCOME-NET> 9,970,163
<LOAN-LOSSES> 187,500
<SECURITIES-GAINS> 56,904
<EXPENSE-OTHER> 10,818,341
<INCOME-PRETAX> 2,784,463
<INCOME-PRE-EXTRAORDINARY> 2,784,463
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,028,423
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
<YIELD-ACTUAL> 4.36
<LOANS-NON> 84,312
<LOANS-PAST> 62,988
<LOANS-TROUBLED> 812,072
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,243,472
<CHARGE-OFFS> 271,563
<RECOVERIES> 81,739
<ALLOWANCE-CLOSE> 2,241,148
<ALLOWANCE-DOMESTIC> 1,661,275
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 579,873
</TABLE>
