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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, 1997
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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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
344 North Charles Street, Suite 300
Baltimore, Maryland 21201-4301
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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. $25,168,081.
Aggregate market value of the voting stock held by
non-affiliates: $36,018,581.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 1,454,288 shares as of
March 16, 1998.
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
chartered by an act of the General Assembly of Maryland (chapter 727)
approved April 10, 1900. The Bank 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.
- Credit and charge card services.
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- Merchant credit card deposit processing.
- Brokerage services for stocks, bonds, mutual funds and annuities.
- A 24-hour ATM Network.
- 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, made principally through a new
subsidiary, Carrollton Mortgage Services Inc., 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. There were no losses
during 1997 and 1995. There were $50,000 of residential mortgage loans
delinquent more than 90 days at December 31, 1997. 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 1.5%. 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. The Bank also has a program which
will finance up to 125% of the value of the home, subject to stricter income
and debt ratios, with a maximum loan amount of $25,000. 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, the overall risk of loss on home equity loans is also
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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 net
recoveries on home equity loans during 1997 and 1995 of $12,000 and $10,000,
respectively. There were no home equity loans delinquent more than 90 days at
December 31, 1997. 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 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 1997, 1996 or 1995. There were $213,000 of
commercial mortgage loans past due more than 90 days at December 31, 1997. 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 1997,
1996 or 1995. There were no construction and land development loans past due
more than 90 days at December 31, 1997. 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 to other factors. The
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Bank had net losses of $24,000 in 1997, net recoveries of $6,000 in 1996,
and did not experience any time and demand loan or line of credit losses in
1995. There were no time and demand and line of credit loans delinquent more
than 90 days at December 31, 1997. 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 1997 and 1996, the Bank had net charge-offs of home
improvement loans of approximately $49,000 and $34,000, respectively. 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. There were no home improvement
loans delinquent more than 90 days at December 31, 1997. 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 1997 of
$5,000, in 1996 of $11,000 and in 1995 of $5,000. There were no automobile or
other vehicle loans past due more than 90 days at December 31, 1997. 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
1997, 1996 and 1995 were approximately $113,000, $98,000, and $30,000,
respectively. There were approximately $6,000 of credit card, overdraft loans
and other personal loans past due more than 90 days at December 31, 1997. There
are no discernible delinquency or loss trends relating to credit card or
overdraft lines known to management, however, the increased losses for 1997 and
1996 relate primarily to a higher level of personal bankruptcy filings.
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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 1997, 1996
or 1995. There were no loans secured by savings accounts or stock and bond
certificates past due more than 90 days at December 31, 1997. 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-11 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 14 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 the loans it makes, with the
exception of residential mortgage loans and home equity loans and lines of
credit. These types of loans are predominately loans purchased from a network
of brokers or other types of originators with whom the Bank does business.
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, 1997.
INVESTMENT ACTIVITIES. The Bank maintains a portfolio of investment
securities to provide liquidity and income. The current portfolio amounts to
about 29% of total assets, and is invested primarily in U.S. Treasury, U.S.
Government Agency, state and municipal bonds, and mortgage backed securities
with maturities varying from 1998 to 2023. Reference is made to Note 3 of the
Notes to Consolidated Financial Statements included on page F-9 of this
Report and to the Statistical Disclosures on page 14 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 offer certificates of deposit over $100,000
to its retail and commercial customers. The Bank does not
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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-14 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 1997, commission and other income totalled $869,689
and income after taxes was $193,447.
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, and sponsorships of
various prominent events in the Bank's market area. 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, Anne Arundel County and Carroll 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, Anne Arundel County and Carroll 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. The recent addition of a mortgage subsidiary is expected to result in
growth in residential mortgage lending. 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. Increased usage of wholesale
funding sources over the past two years has been necessary to support growth
in the loan portfolio.
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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 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, 1997, the Bank and its subsidiaries had 157
full time equivalent employees, 29 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
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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 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 and subsequent amendments thereto,
examinations of insured nonmember banks having assets of $250,000,000 or more
must be conducted no less frequently than every 12 months,and examinations of
insured nonmember banks having assets of less than $250,000,000 must be
conducted no less frequently than every 18 months.
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The Bank is subject to 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
-9-
<PAGE>
by the risk factor assigned to that category. The sum of the resulting
amounts constitutes total risk-weighted assets.
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
rule making 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
-10-
<PAGE>
specified by FDICIA for undercapitalized banks include increased monitoring
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
-11-
<PAGE>
of its subsidiaries with affiliates of such bank are subject to the affiliate
transactions restrictions contained in Section 23A 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
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<PAGE>
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 legislation during 1996, BIF insured financial institutions
are assessed for repayment of the Financing Corporation (FICO) bonds. The
currently assessed annual FICO BIF rate is .013% of deposits. 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, 1997, the Bank had a tax bad debt reserve of
$608,000 and a book bad debt reserve of $2.3 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
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<PAGE>
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 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 certain of the Company's 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 its headquarters building in Baltimore City, and three 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 purchased new computer equipment used in the
data processing department which supports its operations in early 1998.
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 26 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 1997,
1996 and 1995, 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.
-14-
<PAGE>
AVERAGE BALANCES, INTEREST, AND YIELDS
<TABLE>
<CAPTION>
1997
-------------------------------------------
AVERAGE BALANCE INTEREST YIELD
--------------- ------------- -----
<S> <C> <C> <C>
Assets
Federal funds sold....................................................... $ 2,879,315 $ 158,874 5.52%
Interest-bearing deposits................................................ -- -- --
Investment securities
U.S. Treasury.......................................................... 3,664,192 255,452 6.97
U.S. Government agency................................................. 36,833,642 2,534,690 6.88
State and municipal.................................................... 21,046,244 1,515,037 7.20
Mortgage-backed securities............................................. 22,295,487 1,462,834 6.56
Other.................................................................. 4,123,865 259,251 6.29
--------------- ------------- ---
87,963,430 6,027,264 6.85
--------------- ------------- ---
Loans
Demand and time........................................................ 29,086,133 2,969,332 10.21
Mortgage and construction.............................................. 117,434,568 9,936,247 8.46
Installment and credit card............................................ 12,678,653 1,163,251 9.17
--------------- ------------- ---
159,199,354 14,068,830 8.84
--------------- ------------- ---
Total interest-earning assets............................................ 250,042,099 20,254,968 8.10
Non-interest-bearing cash................................................ 17,516,297
Bank premises and equipment.............................................. 5,400,850
Other assets............................................................. 4,387,500
Allowance for loan losses................................................ (2,289,402)
Unrealized gains available for sale (losses) on securities............... 509,357
--------------- ------------- ---
Total assets........................................................... $ 275,566,701 $ 20,254,968
--------------- ------------- ---
--------------- ------------- ---
Liabilities and Shareholders' Equity
Interest-bearing deposits
Savings and NOW........................................................ $ 71,913,572 $ 1,632,158 2.27%
Money market........................................................... 58,261,504 2,580,236 4.43
Other time............................................................. 68,450,581 3,915,808 5.72
--------------- ------------- ---
198,625,657 8,128,202 4.09
Borrowed funds......................................................... 16,221,009 847,610 5.23
--------------- ------------- ---
214,846,666 8,975,812 4.18
Non-interest-bearing deposits............................................ 30,438,957
Other liabilities................ ....................................... 1,321,627
Shareholders' equity..................................................... 28,959,451
--------------- ------------- ---
Total liabilities and equity........................................... $ 275,566,701 $ 8,975,812
--------------- ------------- ---
--------------- ------------- ---
Net yield on interest-earning assets....................................... $ 250,042,099 $ 11,279,156 4.51%
--------------- ------------- ---
--------------- ------------- ---
</TABLE>
Interest on investments and loans is presented on a fully taxable equivalent
basis, using regular income tax rates.
-15-
<PAGE>
Average Balances, Interest, and Yields
(Continued)
<TABLE>
<CAPTION>
1996
------------------------------------------
AVERAGE BALANCE INTEREST YIELD
--------------- -------- ------
<S> <C> <C> <C>
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
-------------- ------------- ---
Total assets........................................................... $ 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%
-------------- ------------- ---
-------------- ------------- ---
</TABLE>
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>
1995
----------------------------------------
AVERAGE BALANCE INTEREST YIELD
--------------- ----------- -----
<S> <C> <C> <C>
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.................................................................. 2,164,974 157,606 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)
-------------- ------------- ---
Total assets........................................................... $ 234,912,310 $ 17,434,773
-------------- ------------- ---
-------------- ------------- ---
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%
-------------- ------------- ---
-------------- ------------- ---
</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>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
---------------------- -----------------------
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................. $ 4,249 $ 47,221 $ 51,470 $ (11,164) $ (213,074) $ (224,238)
Interest-bearing deposits.......... -- (4,781) (4,781) (800) (1,034) (1,834)
Investment securities
U.S. Treasury...................... 18,410 (169,691) (151,281) 12,340 (159,383) (147,043)
U.S. Government agency............. 185,961 (220,235) (34,274) 203,440 (90,459) 112,981
State and municipal................ 9,748 283,942 293,690 (76,451) 393,204 316,753
Mortgage backed securities......... (13,996) (87,024) (101,020) (51,831) 533,520 481,689
Other.............................. 42,484 68,011 110,495 (57,262) 48,412 (8,850)
---------- ---------- ---------- ----------- ---------- -----------
242,607 (124,997) 117,610 30,236 725,294 755,530
---------- ---------- ---------- ----------- ---------- -----------
Loans
Demand and time.................... (4,763) 265,645 260,882 (93,238) 585,781 492,543
Mortgage and construction.......... (26,564) 1,102,245 1,075,681 (373,890) 973,877 599,987
Installment and credit card........ 75,223 (261,861) (186,638) 37,598 (153,615) (116,017)
---------- ---------- ---------- ----------- ---------- -----------
43,896 1,106,029 1,149,925 (429,530) 1,406,043 976,513
---------- ---------- ---------- ----------- ---------- -----------
Total interest earned.............. 290,752 1,023,472 1,314,224 (411,258) 1,917,229 1,505,971
---------- ---------- ---------- ----------- ---------- -----------
Interest expense on
Deposits
Savings and NOW.................... (143,511) 35,577 (107,934) (133,083) 157,940 24,857
Money market....................... 59,438 (148,366) (88,928) 38,037 608,711 646,748
Other time......................... (78,796) 295,933 217,137 (44,123) 333,627 289,504
Borrowed funds..................... 7,593 399,202 406,795 (103,211) (176,544) (279,755)
---------- ---------- ---------- ----------- ---------- -----------
Total interest expense............. (155,276) 582,346 427,070 (242,380) 923,734 681,354
---------- ---------- ---------- ----------- ---------- -----------
Net interest income................ $ 446,028 $ 441,126 $ 887,154 $ (168,878) $ 993,495 $ 824,617
---------- ---------- ---------- ----------- ---------- -----------
---------- ---------- ---------- ----------- ---------- -----------
</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-9 for the amortized cost of investments at the end of 1997 and
1996. The amortized cost of investments at the end of 1995 was as follows:
<TABLE>
<CAPTION>
BOOK VALUE
-------------
<S> <C>
Available for Sale
U.S. Government agency................................... $ 33,782,658
Mortgage backed securities............................... 20,179,310
State and municipal...................................... 6,027,788
Federal Home Loan Bank Stock............................. 743,700
Equity securities........................................ 1,587,433
-------------
$ 62,320,889
-------------
-------------
Held to Maturity
U.S. Treasury............................................. $ 7,892,471
U.S. Government agency.................................... 7,803,241
Mortgage backed securities................................ 992,200
State and municipal....................................... 7,363,462
Foreign bonds............................................. 50,000
-------------
$ 24,101,374
-------------
-------------
</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, 1997. 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 1997 in Part II, Item 7.
-19-
<PAGE>
MATURITY DISTRIBUTION--AMORTIZED COST
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
----------------------------
DESCRIPTION LESS THAN 1 YEAR 1 TO 5 YEARS 5 TO 10 YEARS GREATER THAN 10 YEARS
- ------------ ----------------- ------------- ------------- ----------------------
<S> <C> <C> <C> <C>
U.S. Government agency.................... $ 6,899,376 $ 11,746,755 $ 10,767,432 $ 500,000
Mortgage backed securities (1)............ 2,117,303 7,493,864 649,652 9,833,095
State and municipal....................... -- 1,967,124 4,824,776 8,813,662
------------ ------------- ------------- -------------
$ 9,016,679 $ 21,207,743 $ 16,241,860 $ 19,146,757
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
----------------------------
DESCRIPTION LESS THAN 1 YEAR 1 TO 5 YEARS 5 TO 10 YEARS GREATER THAN 10 YEARS
- ------------ ----------------- ------------- ------------- ----------------------
<S> <C> <C> <C> <C>
U.S. Treasury............................. $ 1,999,597 $ 798,573 $ -- $ --
U.S. Government Agency.................... 1,499,990 -- -- --
Mortgage backed securities (1)............ 426,155 -- -- --
State and municipal....................... -- 2,023,640 4,548,414 479,238
Foreign..................................... -- -- 50,000 --
------------ ------------- ------------ --------------
$ 3,925,742 $ 2,822,213 $ 4,598,414 $ 479,238
------------ ------------- ------------ --------------
------------ ------------- ------------ --------------
</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
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
----------------------------
DESCRIPTION LESS THAN 1 YEAR 1 TO 5 YEARS 5 TO 10 YEARS GREATER THAN 10 YEARS
- ------------ ----------------- ------------- ------------- ----------------------
<S> <C> <C> <C> <C>
U.S. Government agency................... 5.33% 6.48% 6.88% 6.83%
Mortgage backed securities............... 5.94% 6.71% 7.43% 6.91%
State and municipal (1).................. -- 6.37% 7.36% 7.76%
------- ------- ------- -------
5.47% 6.55% 7.04% 7.30%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
----------------------------
DESCRIPTION LESS THAN 1 YEAR 1 TO 5 YEARS 5 TO 10 YEARS GREATER THAN 10 YEARS
- ------------ ----------------- ------------- ------------- ----------------------
<S> <C> <C> <C> <C>
U.S. Treasury........................... 7.30% 6.40% -- --
U.S. Government Agency.................. 5.06% -- -- --
Mortgage backed securities.............. 6.99% -- -- --
State and municipal (1)................. -- 7.33% 7.96% 8.33%
Foreign................................. -- -- 5.50% --
------- ------- ------- -------
6.41% 7.06% 7.93% 8.33%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(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-11 for the classification of loans at the end of 1997 and
1996. In addition to that information, the following information concerning
loans is presented.
<TABLE>
<CAPTION>
1995 1994 1993
------------- -------------- --------------
<S> <C> <C> <C>
Real Estate:
Residential........................... $ 70,754,025 $ 69,158,861 $ 64,227,030
Commercial............................ 29,019,851 26,751,432 21,995,974
onstruction & land development........ 2,904,008 780,254 1,204,388
Demand and time......................... 18,718,070 14,911,369 13,175,668
Installment & credit card............... 15,041,537 16,317,472 12,362,361
Lease financing......................... -- -- --
-------------- --------------- --------------
136,437,497 127,919,388 112,965,421
Allowance for loan losses............... 2,243,472 1,931,345 1,902,507
-------------- --------------- --------------
Loans, net.............................. $ 134,194,025 $ 125,988,043 $ 111,062,914
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
-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, 1997 is presented below:
<TABLE>
<CAPTION>
CONTRACTUALLY DUE
------------------
ONE YEAR OR AFTER ONE YEAR THROUGH AFTER FIVE YEARS
LESS FIVE YEARS
VARIABLE FIXED VARIABLE FIXED
--------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Construction and land development....... $ 1,356,111 -- -- $ 506,187 --
Commercial demand and time............. $ 22,586,144 -- -- -- --
</TABLE>
RISK ELEMENTS
Reference is made to Note 4 of Notes to Consolidated Financial Statements
on page F-11 for nonaccrual, past due and restructured loans at the end of
1997, 1996 and 1995. In addition to that information, the following
information concerning risk elements is presented.
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Nonaccrual.................................... $ 256,858 $ 352,607
Restructured.................................. -- --
---------- ----------
$ 256,858 $ 352,607
---------- ----------
---------- ----------
Accruing loans past due more than 90 days...... $ 22,898 $ 76,247
---------- ----------
---------- ----------
</TABLE>
As of December 31, 1997, there is one loan amounting to $788,841 known to
management other than those previously disclosed about which management has
any information about possible credit problems of borrower's which causes
management to have serious doubts as to the borrower's ability to comply with
present loan repayment terms. While the loan has ranged from current to 60
days past due over the last year, the borrower's business has been
deteriorating steadily. Any further deterioration in the borrower's business
would cause management to question how much longer the borrower could sustain
the cash flow necessary to service the debt. 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
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
DESCRIPTION 1997 1996 1995 1994 1993
- ----------- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year... $ 2,241,148 $ 2,243,472 $ 1,931,345 $ 1,902,507 $ 1,881,787
Charge-offs:
Commercial..................... 35,914 -- -- 4,318 --
Real Estate:
Residential................... -- 52,613 -- 69,452 --
Commercial.................... -- -- -- -- --
Construction.................. -- -- -- -- --
Installment.................... 221,855 218,950 172,375 151,108 129,193
----------- ------------ ------------ ------------ ------------
257,769 271,563 172,375 224,878 129,193
----------- ------------ ------------ ------------ ------------
Recoveries:
Commercial..................... 12,051 -- -- 23,466
Real Estate:
Residential................... -- 2,000 10,134 29,155 3,655
Commercial.................... -- 6,406 -- -- --
Construction.................. -- -- -- -- --
Installment.................... 67,551 73,333 474,368 75,095 81,258
----------- ------------ ------------ ------------ ------------
79,602 81,739 484,502 127,716 84,913
------------ ------------ ------------ ------------ ------------
Net charge-offs................ 178,167 189,824 (312,127) 97,162 44,280
----------- ------------ ------------ ------------ ------------
Provision charged to operations 240,000 187,500 -- 126,000 65,000
------------ ------------ ------------ ------------ ------------
Balance at end of the year..... $ 2,302,981 $ 2,241,148 $ 2,243,472 $ 1,931,345 $ 1,902,507
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Ratio of net charge-offs to
average loans outstanding...... .11% .13% .00% .08% .04%
</TABLE>
The provision charged to operations for 1995, 1996 and 1997 is discussed in
the section on Management's Discussion and Analysis of Financial Condition
and Results of Operations beginning on page 26 of this document. The
Company's provisions in 1994 and 1993 related to the level of net losses
incurred and to loan portfolio growth in each year.
-23-
<PAGE>
Allocation of the Allowance for Loan Losses
Allocated Amount of the Allowance--Years Ended December 31
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995 1994 1993
- -------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial(a)............................... $ 423,782 $ 563,820 $ 289,203 $ 388,420 $ 629,942
Real Estate:
Residential............................... 565,113 433,873 531,480 436,614 339,641
Commercial................................ 682,604 386,825 357,384 278,181 413,526
Construction.............................. 9,311 7,610 15,805 15,605 24,087
Installment................................. 211,704 269,147 219,159 181,315 196,959
Unallocated................................. 410,467 579,873 830,441 631,210 298,352
-------------- ------------ ------------ ------------ ------------
$ 2,302,981 $ 2,241,148 $ 2,243,472 $ 1,931,345 $ 1,902,507
-------------- ------------ ------------ ------------ ------------
-------------- ------------ ------------ ------------ ------------
</TABLE>
Percent of Loans in Each Category to Total Loans--Years Ended December 31
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995 1994 1993
- ------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial (a)................................... 15.5% 15.3% 17.8% 11.7% 11.6%
Real Estate:
Residential.................................... 57.2% 54.4% 49.1% 54.1% 56.9%
Commercial..................................... 20.0% 20.2% 18.6% 20.9% 19.4%
Construction................................... 1.1% 1.3% 2.3% .6% 1.1%
Installment...................................... 6.2% 8.8% 12.2% 12.7% 11.0%
--------- --------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(a) Commercial loans includes lease financing.
-24-
<PAGE>
ITEM 5: DEPOSITS
Reference is made to the tables for Average Balances, Interest and Yields
under Item 1 of this section on page 14. Reference is made to Note 8 of Notes to
Consolidated Financial Statements on page F-14 for additional information
concerning deposits.
ITEM 6: RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
DESCRIPTION 1997 1996 1995
- ----------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Return on average assets................................................................. .78% .78% .81%
Return on average equity................................................................. 7.39% 7.47% 7.50%
Dividend payout ratio.................................................................... 35.07% 28.99% 28.67%
Average equity to average assets......................................................... 10.51% 10.41% 10.74%
</TABLE>
ITEM 7: SHORT-TERM BORROWINGS
Reference is made to Note 10 of Notes to Consolidated Financial Statements
on page F-15 for description of the general terms of short-term borrowings, and
for information related to repurchase agreements.
Other short term borrowings, consisting of the combined amounts for Advances
from the Federal Home loan Bank and Notes Payable-U.S. Treasury, are as follows.
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Other short-term borrowings:
Total outstanding at period-end....................................... $ 11,706,255 $ 6,646,478 $ 1,387,611
Average amount outstanding during period.............................. 9,121,290 3,780,494 7,974,469
Maximum amount outstanding at any period-end.......................... 19,416,627 8,702,977 14,005,097
Weighted average interest rate at period-end.......................... 5.55% 6.16% 5.15%
Weighted average interest rate for the period......................... 5.68% 5.42% 6.63%
</TABLE>
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
TRADING AND DIVIDENDS
As of December 31, 1997, there were approximately 550 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 two broker-dealers who make a market in the Common Stock.
-25-
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
PRICE PER SHARE
------------------------------------------ CASH DIVIDENDS PAID
1997 1996 PER SHARE
-------------------- -------------------- ------------------------
PERIOD HIGH LOW HIGH LOW 1997 1996
- ------------- --------- --------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter.. $ 23.23 $ 20.42 $ 23.60 $ 22.01 $ .12 $ .10
2nd Quarter.. 27.63 22.15 23.37 22.01 .12 .10
3rd Quarter.. 28.35 24.77 23.60 19.97 .13 .10
4th Quarter.. 34.78 27.87 21.78 19.51 .13 .11
</TABLE>
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.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1997 AS COMPARED TO 1996
EARNINGS
SUMMARY
Carrollton Bancorp reported net income for 1997 of $2,139,000, or $1.46 per
share (as adjusted for a 5% stock dividend declared in January, 1998),
representing a 5.5% increase over 1996 net income of $2,028,000, or $1.39 per
share (as adjusted). The loan portfolio grew 12.4% to $170,800,000 which
resulted in a 6% increase in the net interest margin. Non-interest income
continued its strong growth trend, increasing by 46% over 1996. In addition to
fees generated by the ATM network of 85 machines, income from merchant services
and national point of sale sponsorships grew significantly during 1997. Included
in expense growth in 1997 was a non-recurring charge for relocation of a branch,
and start up expenses for a mortgage subsidiary.
-26-
<PAGE>
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 1997, net interest income on a taxable equivalent basis increased by
$887,000 over 1996 to $11.3 million as a result of increased volume in the loan
portfolio, an improvement in the yield on securities, and a reduction of the
rates paid on deposit accounts. On average, the loan portfolio increased 9% over
1996 while the investment portfolio decreased by 3%. The yield on the loan
portfolio held at 8.84% in 1997 compared to 8.83% in 1996. The prime rate
increase in March, 1997 helped maintain the yield of the loan portfolio in a
very competitive loan market. The yield on investment securities increased to
6.85% in 1997 from 6.56% in 1996. The Company continued to invest in agency
issues with imbedded options (callable agency securities) to increase the yield
on the securities portfolio. In addition, purchases of municipal bonds during
late 1996 and the first half of 1997 helped improved the yield in 1997. These
factors resulted in a rise in total interest income on a tax equivalent basis
from $18.9 million in 1996 to $20.3 million in 1997.
Interest expense increased $0.5 million to $9.0 million in 1997 from $8.5
million in 1996. Interest expense increased primarily due to increased
borrowings. Interest expense on deposits increased only slightly from 1996 to
1997. The cost of interest-bearing deposits fell to 4.09% in 1997 from 4.15% in
1996. The cost of borrowed funds increased slightly from 5.18% in 1996 to 5.23%
in 1997. The table for Rate and Volume Variance Analysis shows the increase in
interest expense resulted from increased borrowings. The growth in
interest-bearing liabilities supported loan portfolio growth.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $240,000 for 1997 compared to $187,500 for
1996. Nonaccrual, restructured, and delinquent loans over 90 days to total loans
stayed level at .61% in 1997 and .63% in 1996. Restructured loans decreased from
1996 to 1997 while nonaccrual loans increased.
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 1997, non-interest income excluding securities gains increased by 43.5%
over 1996. Service charges on deposit accounts increased $60,000 or 4.7% as a
result of increased numbers of accounts. Brokerage commissions rose $25,000 or
3.0% in 1997 due to the continued strong stock market. Other fees and
commissions increased $1.6 million due to increases in ATM fee income generated
by instituting an ATM surcharge fee, by additional machines placed in service,
by an increase in the number of merchants receiving credit card deposit
services, and as a result
-27-
<PAGE>
of an increase in point of sale/debit card activities.
Net securities gains in 1997 were $175,000 compared to $57,000 in 1996. The
gains in 1997 came principally from the restructuring of an equity portfolio
which was moved to outside management. These gains amounted to $142,000. The
remaining net gains of $33,000 were generated on sales of securities with a book
value of $3.8 million. Security sale transactions were generally undertaken to
increase portfolio yield or to provide liquidity, but were not significant
activities for the Company in 1997.
NON-INTEREST EXPENSES
In 1997, non-interest expenses increased by $2.3 million or 21.4%. Salaries
and benefits increased by $697,000, or 13.8% due to staff additions and merit
increases. Full time equivalent staff increased from 144 positions at the end of
1996 to 157 positions at December 31, 1997. Most of this increase is
attributable to the new mortgage unit added in November, 1997. Other staff
additions occurred in the branch system in preparation of opening a new branch
in February, 1998, and in the electronic banking area to support the merchant
services business growth. Occupancy expenses increased $246,000, or 18.6%. This
included a non-recurring charge of $91,000 related to the relocation of a
branch. In addition, two leased branch locations opened in 1996 were leased for
the full year of 1997. The Company also purchased a building in April, 1997 and
is in the process of relocating various departments from leased facilities.
Furniture and equipment expense increased due to the equipment and furnishings
in the branches opened in 1996 and depreciated for a full year in 1997, and in
the building acquired in April, 1997. These increases were partially offset by
the change in the useful life of ATM machines from five to ten years. Other
operating expenses increased $1.3 million, or 34.6%. Approximately half of this
increase relates to increased volumes of fee generating activities, in
particular merchant services and ATM transactions. As fee income grows in those
areas, related expenses will grow, but the Company earns a spread. Many other
expenses also increased modestly during 1997 related to the Company's growth.
During 1997, the Company experienced a significant increase in robbery and fraud
losses as well as expenses related to security. These trends occurred throughout
the financial services industry.
INCOME TAX PROVISION
For 1997, the effective tax rate for the Company decreased to 24.1% as
compared to 27.2% for 1996. During 1997, 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. In
1997, the benefit of this change was 75% compared to 50% in 1996. The full
benefit is available in 1998.
FINANCIAL CONDITION
SUMMARY
Total assets of the Company increased by 7.8% to $287.9 million at December
31, 1997 versus $267.2 million at the end of 1996. Investment securities
declined slightly to $83.6 million at December 31, 1997. Total loans at December
31, 1997 grew 12.4% to $170.8 million as compared to $152.0 million at the end
of 1996. Interest earning assets increased to $254.4 million and were 87.7% of
total assets.
-28-
<PAGE>
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 $700,000 from the end of 1996. The
decrease resulted because short term investments were used to fund loans.
INVESTMENT SECURITIES
Securities decreased from $86.3 million at December 31, 1996 to $83.6
million at December 31, 1997. 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 $4.3 million of available for sale securities during
1997. These transactions were principally undertaken to increase yield or
provide liquidity.
LOANS
Total loans increased $18.8 million or 12.4% from 1996 to $170.8 million at
December 31, 1997. Approximately 25% 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 and
leases increased by $3.2 million to $26.5 million, while commercial mortgage
loans increased by $3.4 million to $36.1 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 1997 principally
as a result of an emphasis on home equity lines of credit. At December 31, 1997,
residential real estate loans, including home equity loans, increased to $97.7
million from $82.6 million at the end of 1996. 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, 1997 and totalled $108.3 million.
ALLOWANCE FOR LOAN LOSSES
At December 31, 1997, the allowance for loan losses was $2.3 million, a
slight increase from the end of 1996. At December 31, 1997, the ratio of the
allowance to total loans was 1.35% as compared to 1.47% at December 31, 1996.
This ratio fell as a result of portfolio growth. The ratio of net loan losses to
average loans outstanding for 1997 was .11% as compared to .13% for 1996. The
ratio of nonaccrual loans, restructured loans, plus loans delinquent more than
90 days to total loans decreased to .61% at December 31, 1997 from .63% at the
end of 1996.
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.
-29-
<PAGE>
Funding Sources
Total deposits at December 31, 1997 increased by $8.7 million to $234.5
million from the end of 1996. Interest-bearing accounts increased by $5.5
million and non-interest bearing deposits increased by $3.2 million. Deposit
growth is attributed primarily to new account relationships and interest credits
retained.
Other borrowings increased significantly in 1997 to fund loan growth.
Advances from the Federal Home Loan Bank increased to $9.0 million at the end of
1997 compared to $5.0 million at the end of 1996. Borrowings for federal funds
purchased and securities sold under agreements to repurchase increased by $5.7
million at December 31, 1997. Part of this increase occurred as the Company
accessed other available short term borrowing lines.
Capital
At December 31, 1997, shareholders' equity was $29.8 million, an increase of
$1.7 million over 1996. The Company paid shareholders dividends totalling
$750,000, and net income for 1997 was $2.1 million. Although stockholders'
equity was not affected in total, the Company declared a 5% stock dividend in
January, 1998. The effects of the stock dividend were recorded retroactively in
the financial statements as of December 31, 1997. This resulted in the addition
of 69,017 shares for a total of 1,454,288 shares outstanding after the dividend
was distributed on March 13, 1998. Stockholders' equity amounted to 10.35% of
total assets at December 31, 1997 as compared to 10.51% at the end of 1996. 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 institution's risk profile. The following chart shows the
regulatory capital levels for the Company at December 31, 1997 and 1996. 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>
AT DECEMBER 31,
--------------------
RATIO MINIMUM 1997 1996
- ----------------------------------------------------- --------------- --------- ---------
<S> <C> <C> <C>
Leverage Ratio....................................... 4% 9.5% 10.0%
Risk-based Capital:
Tier 1 (Core).................................... 4% 15.9% 16.8%
Tier 2 (Total)................................... 8% 17.1% 18.0%
</TABLE>
-30-
<PAGE>
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. Securities
classified as available for sale 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 $7 million, secured
lines of $6.0 million, and has borrowing capacity with the Federal Home Loan
Bank of $30 million which is collateralized by a blanket security interest in
the Company's residential first mortgage loans.
At December 31, 1997, the Company had outstanding loan commitments and
unused lines of credit totalling $78.0 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. Management also calculates and
monitors other ratios on a monthly basis that provide additional information
relating to certain aspects of asset/liability management. 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, 1997, the Company was in a liability sensitive position
amounting to 2.3% of assets within a one year time horizon. This is within the
targets as established by 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, 1997. 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 have been 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
-31-
<PAGE>
taken a conservative approach by using a lower time horizon in the gap table
than the age of the account. 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.
<TABLE>
<CAPTION>
Period from December 31, 1997 in
which assets and liabilities reprice
-----------------------------------------------------------------
0 TO 90 91 TO > 1 TO 2 > 2 TO 5 > 5
($000) DAYS 365 DAYS YEARS YEARS YEARS
--------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Short term investments
Securities............................................... $ 15,756 $ 23,028 $ 11,090 $ 14,025 $ 19,709
Loans.................................................... 71,348 13,249 13,019 28,545 44,673
--------- ---------- ---------- --------- ---------
87,104 36,277 24,109 42,570 64,382
--------- ---------- ---------- --------- ---------
LIABILITIES:
Deposits................................................. 61,954 54,771 24,795 28,363 31,161
Borrowings............................................... 16,730 1,000 5,000
--------- ---------- ---------- --------- ---------
$ 78,684 $ 55,771 $ 24,795 $ 33,363 $ 31,161
--------- ---------- ---------- --------- ---------
Gap position:
Period................................................. $ 8,420 $ (19,494) $ (686) $ 9,207 $ 33,221
% of Assets............................................ 2.9% (6.8%) (0.2%) 3.2% 11.5%
Cumulative............................................. $ 8,420 $ (11,074) $ (11,760) $ (2,553) $ 30,668
% of Assets............................................ 2.9% (3.8%) (4.1%) (0.9%) 10.7%
Cumulative risk sensitive assets to risk sensitive
liabilities............................................ 1.11 .92 .93 .99 1.14
</TABLE>
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued four standards during
1997. Statement No. 128, Earnings per Share, and Statement No. 129, Disclosure
of Information about Capital Structure, are effective for the accompanying
financial statements, and the Company has complied with the provisions of these
statements where applicable. Statement No. 130, Reporting Comprehensive Income,
and Statement No. 131, Disclosures about Segments of an Enterprise and Related
-32-
<PAGE>
Information, become effective for years beginning after December 15, 1997.
Statement No. 130 requires disclosure of a supplemental income statement and
balance sheet based on the concept of comprehensive income. For financial
institutions, the supplemental financial statements for comprehensive income
will include the unrealized gains and losses on investments. Statement No. 131
requires public enterprises to report financial and descriptive information
about reportable operating segments. Operating segments are deemed reportable if
separate financial information is available that is evaluated regularly by the
chief operating decision maker. For financial institutions, this may require
disclosure about geographic operations and greater information about fee based
lines of business within an organization. Management does not expect these
statements to have any material effect on the Company's financial position or
results of operations since they are ultimately concerned with increased
disclosures.
The Year 2000 Issue
This issue relates to computer programs which use only two digits to
identify a year in the date field. Unless corrected, these programs will read
the year 2000 as the year 1900, and likely will adversely affect any number of
calculations that are made using that date field.
The Company has formed a committee of the Board of Directors for purposes
of oversight of management's efforts in addressing this issue. Within the
Company, a committee of senior managers was formed which has developed a plan
to address this issue and a timetable by which certain key tasks will need to
be performed. In general, the Company buys most data processing services,
software programs and personal computers from outside vendors. The vendors
are generally large, reputable companies with products generally accepted and
widely used by other financial institutions. Not withstanding this fact, the
Company's plan requires each vendor with whom it deals to notify the Company
whether or not their products are Year 2000 compliant. The Company is also
developing testing procedures to be able to test all of the programs and
personal computers it uses. The Company expects that it may be billed for
certain costs incurred by the vendors who provide software services and
programs for their costs in addressing the Year 2000 issue, but management
does not anticipate the costs to the Company will be significant.
1996 AS COMPARED TO 1995
EARNINGS
Summary
Carrollton Bancorp reported net income for 1996 of $2,028,000, or $1.39 per
share, representing a 7% increase over 1995 net income of $1,893,000, or $1.30
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 additional ATMs will serve to increase fee
based income as the volume of those transactions grows.
-33-
<PAGE>
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 12% 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 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.
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.
-34-
<PAGE>
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 convenience 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.
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 $239.0
million and were 88.7% 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.
-35-
<PAGE>
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 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.
-36-
<PAGE>
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
66,182 shares for a total of 1,394,747 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 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>
-37-
<PAGE>
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 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.
-38-
<PAGE>
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%
Cumulative risk sensitive assets to risk sensitive
liabilities............................................. 1.14 .87 .94 1.03 1.15
</TABLE>
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
-39-
<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, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the three years ended December 31, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for the three years ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Rowles & Company, LLP
- -------------------------
Baltimore, Maryland
February 27, 1998
<PAGE>
Carrollton Bancorp and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------- --------------
<S> <C> <C>
Assets
Cash and due from banks.......................................................... $ 25,063,180 $ 20,391,197
Federal funds sold............................................................... -- 700,000
Investment securities
Available for sale............................................................. 71,782,023 69,961,952
Held to maturity (approximate market value of $12,092,724 and $16,537,179)..... 11,825,605 16,315,816
Loans less allowance for loan losses of $2,302,981 and $2,241,148................ 168,531,267 149,753,004
Bank premises and equipment...................................................... 5,973,203 4,868,469
Accrued interest receivable...................................................... 2,147,801 1,956,674
Deferred income taxes............................................................ -- 524,439
Other assets..................................................................... 2,584,313 2,685,609
-------------- --------------
$287,907,392 $ 267,157,160
-------------- --------------
-------------- --------------
Liabilities and Shareholders' Equity
Deposits
Non-interest-bearing........................................................... $ 33,426,327 $ 30,229,596
Interest-bearing............................................................... 201,044,078 195,555,484
-------------- --------------
Total deposits................................................................. 234,470,405 225,785,080
Federal funds purchased and securities sold under agreements to repurchase....... 11,024,441 5,296,743
Notes payable--U.S. Treasury..................................................... 2,706,255 1,646,478
Advances from Federal Home Loan Bank............................................. 9,000,000 5,000,000
Accrued interest payable......................................................... 204,617 207,666
Deferred income taxes............................................................ 92,105 --
Other liabilities................................................................ 617,335 1,150,743
-------------- --------------
258,115,158 239,086,710
-------------- --------------
Shareholders' equity
Common stock, par value $10.00 per share; authorized 5,000,000 shares; issued and
outstanding 1,454,288 in 1997 and 1,394,747 in 1996............................ 14,542,880 13,947,470
Surplus.......................................................................... 8,594,145 6,973,666
Retained earnings................................................................ 5,811,387 6,941,366
Net unrealized holding gains on available for sale securities.................... 843,822 207,948
-------------- --------------
29,792,234 28,070,450
-------------- --------------
$287,907,392 $ 267,157,160
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans........................................ $ 14,038,685 $ 12,898,277 $ 11,942,392
Interest and dividends on securities:
Taxable interest income......................................... 4,142,274 4,539,551 4,091,924
Nontaxable interest income...................................... 1,046,628 844,158 624,513
Dividends....................................................... 118,360 54,542 59,084
Interest on federal funds sold and other interest income.......... 247,635 182,377 410,756
------------- ------------- -------------
Total interest income........................................... 19,593,582 18,518,905 17,128,669
------------- ------------- -------------
Interest expense
Deposits.......................................................... 8,128,202 8,107,927 7,146,818
Other............................................................. 847,610 440,815 720,570
------------- ------------- -------------
Total interest expense.......................................... 8,975,812 8,548,742 7,867,388
------------- ------------- -------------
Net interest income............................................. 10,617,770 9,970,163 9,261,281
Provision for loan losses........................................... 240,000 187,500 --
------------- ------------- -------------
Net interest income after provision for loan losses............... 10,377,770 9,782,663 9,261,281
Other operating income
Service charges on deposit accounts............................... 1,323,396 1,263,484 1,167,855
Brokerage commissions............................................. 863,797 839,289 606,522
Other fees and commissions........................................ 3,211,929 1,660,464 761,158
Security gains.................................................... 175,377 56,904 2,278
------------- ------------- -------------
Total other income.............................................. 5,574,499 3,820,141 2,537,813
------------- ------------- -------------
Other expenses
Salaries.......................................................... 4,708,188 4,073,251 3,354,434
Employee benefits................................................. 1,044,119 982,507 826,515
Occupancy......................................................... 1,567,594 1,321,776 1,216,350
Furniture and equipment........................................... 932,892 814,559 617,165
Other operating expenses.......................................... 4,882,434 3,626,248 3,006,914
------------- ------------- -------------
Total other expenses............................................ 13,135,227 10,818,341 9,021,378
------------- ------------- -------------
Income before income taxes.......................................... 2,817,042 2,784,463 2,777,716
Income taxes........................................................ 677,550 756,040 884,397
------------- ------------- -------------
Net income.......................................................... $ 2,139,492 $ 2,028,423 $ 1,893,319
------------- ------------- -------------
------------- ------------- -------------
Earnings per share--basic........................................... $ 1.46 $ 1.39 $ 1.30
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
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
<TABLE>
<CAPTION>
NET UNREALIZED
HOLDING GAINS
(LOSSES)
ON AVAILABLE
COMMON STOCK FOR
------------------------- SALE RETAINED
SHARES PAR VALUE SURPLUS SECURITIES EARNINGS
---------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
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, $0.37 per share.......... -- -- -- (542,729)
Change in net unrealized holding gains 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%....................... 66,182 661,820 893,716 -- (1,555,536)
Cash dividends, $0.40 per share.......... -- -- -- (587,967)
Change in net unrealized holding gains on
available for sale securities.......... -- -- (188,033) --
---------- ------------- ------------ -------------- ------------
Balance, December 31, 1996............... 1,394,747 13,947,470 6,973,666 207,948 6,941,366
Net income............................... -- -- -- 2,139,492
Shares acquired and canceled............. (9,476) (94,760) (208,472) -- --
Stock dividend, 5%....................... 69,017 690,170 1,828,951 -- (2,519,121)
Cash dividends, $0.51 per share.......... -- -- -- (750,350)
Change in net unrealized holding gains on
on available for sale securities....... -- -- 635,874 --
---------- ------------- ------------ -------------- ------------
Balance, December 31, 1997............... 1,454,288 $ 14,542,880 $ 8,594,145 $ 843,822 $ 5,811,387
---------- ------------- ------------ -------------- ------------
---------- ------------- ------------ -------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Interest received................................................. $ 19,407,645 $ 18,614,576 $ 16,732,878
Fees and commissions received..................................... 5,354,162 3,730,618 2,481,860
Interest paid..................................................... (8,978,860) (8,578,177) (7,790,876)
Cash paid to suppliers and employees.............................. (12,553,563) (9,912,396) (8,586,439)
Income taxes paid................................................. (549,109) (725,103) (719,171)
------------- ------------- -------------
2,680,275 3,129,518 2,118,252
------------- ------------- -------------
Cash flows from investing activities
Proceeds from maturities of securities held to maturity........... 4,482,897 7,900,000 5,925,000
Purchases of securities held to maturity.......................... -- (298,688) (10,870,504)
Proceeds from sales of securities available for sale.............. 4,336,419 2,642,196 3,873,492
Proceeds from maturities of securities available for sale......... 16,471,626 15,525,721 11,719,130
Purchases of securities available for sale........................ (21,414,652) (25,880,858) (30,119,456)
Proceeds from sale of loans....................................... -- -- 2,424,396
Net decrease in interest-bearing deposits......................... -- 100,000 376,977
Loans made, net of principal collected............................ (5,351,561) (7,109,287) (5,219,950)
Purchase of loans................................................. (13,666,702) (8,637,192) (5,410,428)
Purchases of premises and equipment............................... (1,985,537) (1,523,435) (1,617,621)
------------- ------------- -------------
(17,127,510) (17,281,543) (28,918,964)
------------- ------------- -------------
Cash flows from financing activities
Net increase in time deposits..................................... 7,541,439 4,446,031 9,275,221
Net increase in other deposits.................................... 1,143,886 4,129,751 17,750,299
Acquired deposits................................................. -- -- 22,765,077
Premium on acquired deposits...................................... -- -- (1,847,663)
Net increase (decrease) in other borrowed funds................... 10,787,475 7,351,761 (11,796,674)
Common stock repurchase and retirement............................ (303,232) -- (459,140)
Dividends paid.................................................... (750,350) (587,967) (542,729)
------------- ------------- -------------
18,419,218 15,339,576 35,144,391
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................ 3,971,983 1,187,551 8,343,679
Cash and cash equivalents at beginning of year...................... 21,091,197 19,903,646 11,559,967
------------- ------------- -------------
Cash and cash equivalents at end of year............................ $ 25,063,180 $ 21,091,197 $ 19,903,646
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by operating
activities
Net income............................................................ $ 2,139,492 $ 2,028,423 $ 1,893,319
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for loan losses............................................. 240,000 187,500 --
Depreciation and amortization......................................... 876,362 710,176 649,352
Deferred income taxes................................................. 216,457 100,039 241,328
Amortization of premiums and discounts................................ 5,190 6,685 (55,966)
Gain on disposal of securities........................................ (175,377) (56,904) (2,278)
(Increase) decrease in:
Accrued interest receivable....... ................................ (191,127) 88,986 (339,825)
Other assets........................ .............................. 105,737 (214,490) (53,675)
Increase (decrease) in:
Accrued interest payable............................................ (3,048) (29,435) 76,512
Income taxes payable................................................ (166,246) (69,102) (76,102)
Other liabilities................................................... (367,165) 377,640 (214,413)
------------ ------------ ------------
$ 2,680,275 $ 3,129,518 $ 2,118,252
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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.
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. Loans are considered impaired when, based on current
information, management considers it unlikely that the collection of
principal and interest payments will be made according to contractual terms.
Generally, loans are not reviewed for impairment until the accrual of
interest has been discontinued. If collection of principal is evaluated as
doubtful, all payments are applied to principal.
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 average shares of common stock
outstanding giving retroactive effect to a 5% stock dividend declared January
22, 1998. The Consolidated Balance Sheet at December 31, 1997 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 23, 1997 have been adjusted in the
December 31, 1996 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 $11,900,000 during 1997 and
$9,000,000 during 1996, was 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 1997 and 1996, the Company maintained average
compensating balances of approximately $1,607,000 and $1,373,000, respectively,
of which $1,000,000 in each year was maintained at the Federal Reserve Bank. In
addition, the Company paid $18,298, $11,673 and $4,673, respectively, in account
charges in 1997, 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, 1997 COST GAINS LOSSES VALUE
----------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government agency................................. $ 29,913,564 $ 77,210 $ 56,333 $ 29,934,441
Mortgage backed securities............................. 20,228,300 433,818 20,998 20,641,120
State and municipal.................................... 15,605,559 406,458 7,707 16,004,310
Federal Home Loan Bank stock........................... 1,448,200 -- -- 1,448,200
Equity securities...................................... 3,211,649 823,752 281,449 3,753,952
------------- ------------ ----------- -------------
$ 70,407,272 $ 1,741,238 $ 366,487 $ 71,782,023
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
Held to Maturity
U.S. Treasury.......................................... $ 2,798,169 $ 22,988 $ 435 $ 2,820,722
U.S. Government agency................................. 1,499,990 -- 3,640 1,496,350
Mortgage backed securities............................. 426,155 903 -- 427,058
State and municipal.................................... 7,051,291 247,316 13 7,298,594
Foreign bonds.......................................... 50,000 -- -- 50,000
------------- ------------ ----------- -------------
$ 11,825,605 $ 271,207 $ 4,088 $ 12,092,724
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
December 31, 1996
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
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
</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, 1997 and 1996
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, 1997
-------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- ----------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Maturing
Within one year..................................... $ 6,899,376 $ 6,886,724 $ 3,499,587 $ 3,507,135
Over one to five years.............................. 13,713,878 13,724,080 2,822,213 2,856,690
Over five to ten years.............................. 15,592,207 15,737,853 4,598,412 4,791,864
Over ten years...................................... 9,313,662 9,590,094 479,238 509,977
Mortgage backed securities.......................... 20,228,300 20,641,120 426,155 427,058
------------- ------------- ------------- -------------
$ 65,747,423 $ 66,579,871 $ 11,825,605 $ 12,092,724
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- ----------------------------
<CAPTION>
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST 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>
At December 31, 1997 and 1996, securities with a cost basis of $10,548,160
(market value of $10,561,905), and $7,789,478 (market value of $7,836,567) were
pledged as collateral for government deposits and for securities sold under
repurchase agreements.
In 1997, 1996, and 1995, the Company realized gains on sales of securities
of $193,580, $63,467, and $40,585, respectively, and losses of $18,203, $6,563,
and $38,307 on securities sales. Income taxes on net security gains were
$67,731, $21,976, and $880 in 1997, 1996, and 1995, respectively.
F-10
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
4. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Real estate
Residential.................................................................... $ 97,681,753 $ 82,576,975
Commercial..................................................................... 34,247,855 30,761,597
Construction and land development.............................................. 1,862,298 1,942,861
Demand and time.................................................................. 22,586,144 19,937,561
Lease financing.................................................................. 3,872,327 3,365,075
Installment and credit card...................................................... 10,583,871 13,410,083
-------------- --------------
170,834,248 151,994,152
Allowance for loan losses........................................................ 2,302,981 2,241,148
-------------- --------------
Loans, net....................................................................... $ 168,531,267 $ 149,753,004
-------------- --------------
-------------- --------------
</TABLE>
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:
<TABLE>
<S> <C> <C>
Repricing or maturing within one year............................ $84,013,124 $73,611,421
Maturing over one to five years.................................. 41,563,765 39,672,657
Maturing over five years......................................... 45,257,359 38,710,074
----------- -----------
$170,834,248 $151,994,152
----------- -----------
----------- -----------
</TABLE>
Loan balances have been adjusted by the following deferred amounts:
<TABLE>
<S> <C> <C>
Deferred origination costs and premiums.............................. $1,458,422 $1,020,526
Deferred origination fees and unearned discounts..................... (918,322) (1,009,019)
---------- ----------
Net deferred (fees) costs............................................ $ 540,100 $ 11,507
---------- ----------
---------- ----------
</TABLE>
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Beginning balance....................................................... $ 2,241,148 $ 2,243,472 $ 1,931,345
Provision charged to operations......................................... 240,000 187,500 --
Recoveries.............................................................. 79,602 81,739 484,502
------------ ------------ ------------
2,560,750 2,512,711 2,415,847
Loans charged off....................................................... 257,769 271,563 172,375
------------ ------------ ------------
Ending balance.......................................................... $ 2,302,981 $ 2,241,148 $ 2,243,472
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-11
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS (CONTINUED)
At December 31, 1997, 1996, and 1995, the accrual of interest has been
discontinued on loans of $357,621, $84,312, and $447,073, respectively. The
amount of interest income that would have been recorded in 1997, 1996 and 1995
on non-accrual loans if those loans had been handled in accordance with their
contractual terms totaled $36,312, $10,339 and $34,479. The amount of interest
income actually recorded on non-accrual loans totaled $28,576, $6,880 and
$13,068 for 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, the Company had impaired loans amounting to
$408,565 and $812,072, respectively, that were classified as impaired because
they had been restructured to accept interest only payments for a period of
time. The average balance of impaired loans amounted to $412,915, $828,155 and
$842,041 in 1997, 1996 and 1995, respectively. The Company has not provided for
a specific allowance for impaired loans. During 1997, 1996 and 1995, the Company
received total payments on impaired loans amounting to $53,947, $121,910 and
$101,768, respectively. Of these amounts, $49,698, $101,688, and $84,724 was
recorded as interest income for 1997, 1996 and 1995, respectively. The remainder
was applied to reduce principal.
Amounts past due 90 days or more, excluding nonaccrual loans are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------ ----------
<S> <C> <C> <C>
Mortgage.................................................................... $ 263,059 $ -- $ 83,767
Demand and time............................................................. -- 30,604 10,944
Installment and credit card................................................. 5,872 32,384 27,182
---------- ------------ ----------
$ 268,931 $ 62,988 $ 121,893
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
5. CREDIT COMMITMENTS
Outstanding loan commitments, unused lines and letters of credit were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Loan commitments
Mortgage loans................................................................... $ 4,726,038 $ 910,400
Construction and land development................................................ 2,339,201 4,636,931
Commercial loans................................................................. 3,952,974 2,070,000
Installment loans................................................................ 1,165,040 235,640
------------- -------------
$ 12,183,253 $ 7,852,971
------------- -------------
------------- -------------
Unused lines of credit
Home equity lines................................................................ $ 50,636,921 $ 36,027,020
Commercial lines................................................................. 10,506,283 11,993,901
Unsecured consumer lines......................................................... 3,219,138 2,508,658
------------- -------------
$ 64,362,342 $ 50,529,579
------------- -------------
------------- -------------
Letters of credit.................................................................. $ 1,416,000 $ 927,947
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CREDIT COMMITMENTS (CONTINUED)
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.
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, 1997, 1996 and
1995, the amounts of such loans outstanding were $2,776,990, $6,031,967, and
$5,849,790, respectively. During 1997, 1996 and 1995, additions to loans
outstanding were $1,194,850, $1,066,260, and $3,492,140, respectively, and
repayments of loans were $4,449,827, $884,083, and $4,353,904.
7. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land and improvements................................................................. $ 464,474 $ 464,474
Bank buildings........................................................................ 2,484,216 1,759,509
Leasehold improvements................................................................ 2,864,581 2,698,934
Equipment and fixtures................................................................ 6,785,462 5,764,215
------------ ------------
12,598,733 10,687,132
Accumulated depreciation and amortization............................................. 6,625,530 5,818,663
------------ ------------
$ 5,973,203 $ 4,868,469
------------ ------------
------------ ------------
</TABLE>
Depreciation and amortization of bank premises and equipment was $841,833,
$678,786, and $557,757 for 1997, 1996, and 1995, respectively. Amortization of
intangible assets, excluding amortization of deposit premiums, was $33,617,
$31,390 and $30,005, for 1997, 1996, and 1995, respectively.
The Company increased the depreciable life of ATM machines in March, 1997
from five to ten years based on its actual experience. This change reduced
depreciation expense that would have been recorded in 1997 on ATM machines by
$114,000. In addition, at December 31, 1997, the Company has a commitment to
purchase equipment for its proof operations which amounts to $535,000.
F-13
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEPOSITS
Major classifications of interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
NOW and SuperNOW................................................................. $ 29,091,540 $ 26,323,859
Money market..................................................................... 55,292,824 58,817,398
Savings.......................................................................... 43,418,402 44,714,354
Certificates of deposit of $100,000 or more...................................... 12,181,703 6,882,212
Other time deposits.............................................................. 61,059,609 58,817,661
-------------- --------------
$ 201,044,078 $ 195,555,484
-------------- --------------
-------------- --------------
</TABLE>
Certificates of deposit of $100,000 or more mature as follows:
<TABLE>
<S> <C> <C>
Three months or less...................................... $9,632,870 $ 2,097,388
Over three through twelve months.......................... 1,822,548 3,740,304
Over one to five years.................................... 726,285 1,044,520
----------- ---------
$12,181,703 $6,882,212
----------- ----------
----------- ----------
</TABLE>
Interest expense associated with certificates of deposit of $100,000 or more
was $453,459, $388,157, and $356,796 for the years ended December 31, 1997,
1996, and 1995, respectively.
Other time deposits mature as follows:
<TABLE>
<S> <C> <C>
Maturing within one year........................................... $48,587,645 $44,114,096
Maturing over one to five years.................................... 12,137,806 14,420,710
Maturing over five years........................................... 334,158 282,855
----------- -----------
$61,059,609 $58,817,661
----------- -----------
----------- -----------
</TABLE>
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 for both 1997 and 1996, respectively, and
$61,590 for 1995. The remaining unamortized balance at December 31, 1997 was
$1,539,713. This amount is included in other assets in the Consolidated Balance
Sheet.
F-14
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BORROWINGS
Federal funds purchased and securities sold under agreements to
repurchase represent both transactions with customers for correspondent or
commercial account cash management services, and borrowings by the Company
under lines of credit with other institutions. The transactions with
customers are overnight borrowing arrangements with interest rates discounted
from the federal funds sold rate. Securities underlying the customer
repurchase agreements are maintained in the Company's control. Additional
information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Total outstanding at period end....................................... $ 11,024,441 $ 5,296,743 $ 3,203,849
Average amount outstanding during period.............................. 7,098,332 4,731,779 3,862,087
Maximum amount outstanding at any month end........................... 11,024,441 9,254,123 4,019,026
Weighted average interest rate at period end.......................... 4.82% 4.64% 4.97%
Weighted average interest rate for the period......................... 4.56% 4.80% 4.63%
</TABLE>
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
$9,000,000 and $5,000,000 at December 31, 1997 and 1996, respectively. Advances
averaged $8,282,192 and $2,986,339 for 1997 and 1996, respectively, with
weighted average costs of 5.75% for 1997 and 5.57% for 1996. At December 31,
1997, the advances carried a weighted average interest rate of 5.83%, and
matured at various dates through September 24, 2002. At December 31, 1996, the
advances carried a weighted average interest rate of 5.61% and matured within
one year. The Bank has a total available secured line of $30 million with the
FHLB for which the Bank granted the FHLB a blanket security interest in its
residential first mortgage loans.
As noted above, the Company borrows under available unsecured federal funds
lines of credit of $7 million and secured lines of credit of $6 million with
other institutions. The balance outstanding under these lines was $4,500,000 at
December 31, 1997. These lines were unused at December 31, 1996.
F-15
<PAGE>
CARROLLTON BANCORP AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. OTHER OPERATING EXPENSES
Other operating expenses include the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
ATM services............................................................ $ 1,272,969 $ 762,617 $ 374,439
Data processing services................................................ 551,878 488,465 478,453
Professional services................................................... 133,749 119,643 173,018
Marketing............................................................... 280,733 343,535 309,130
Printing, stationery, and supplies...................................... 260,121 284,912 252,429
Credit card............................................................. 577,500 238,268 144,668
Telephone............................................................... 128,871 120,437 123,881
Liability insurance..................................................... 91,357 78,064 73,196
FDIC assessment......................................................... 27,893 2,000 197,272
Postage and freight..................................................... 167,828 149,200 131,032
Directors' fees......................................................... 116,126 97,239 90,090
Deposit premium amortization............................................ 123,180 123,180 61,590
Other................................................................... 1,150,229 818,688 597,716
------------ ------------ ------------
$ 4,882,434 $ 3,626,248 $ 3,006,914
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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, 1997 and 1996, the capital ratios and minimum
capital requirements are as follows.
<TABLE>
<CAPTION>
CAPITAL TO BE WELL
ACTUAL ADEQUACY CAPITALIZED
------------------------ -------------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- ----- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Total Capital
(to risk-weighted assets).................. $ 29,564,359 17.14% $ 13,796,196 Greater $ 17,245,245 Greater
than or than or
equal equal
to 8.0% to 10.0%
Tier 1 Capital
(to risk-weighted assets).................. $ 27,408,699 15.89% $ 6,898,098 Greater $ 10,347,147 Greater
than or than or
equal equal
to 4.0% to 6.0%
Tier 1 Capital
(to average assets)........................ $ 27,408,699 9.54% $ 11,490,592 Greater $ 14,363,240 Greater
than or than or
equal equal
to 4.0% to 5.0%
</TABLE>
F-16
<PAGE>
CARROLLTON BANCORP AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CAPITAL STANDARDS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Total Capital
(to risk-weighted assets).................. $ 28,180,322 18.01% $ 12,516,560 Greater $ 15,645,700 Greater
than or than or
equal equal
to 8.0% to 10.0%
Tier 1 Capital
(to risk-weighted assets).................. $ 26,224,609 16.76% $ 6,258,280 Greater $ 9,387,420 Greater
than or than or
equal equal
to 4.0% to 6.0%
Tier 1 Capital
(to average assets)........................ $ 26,224,609 10.05% $ 10,436,146 Greater $ 13,045,183 Greater
than or than or
equal equal
to 4.0% to 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 69% of the trust assets are invested in an immediate participation
guarantee fund, and the balance is invested in equity funds.
F-17
<PAGE>
CARROLLTON BANCORP AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. PENSION PLANS (CONTINUED)
The following table sets forth the financial status of the plan:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Accumulated benefit obligation
Vested................................................................ $ 4,169,435 $ 3,719,484 $ 3,726,634
Nonvested............................................................. 95,399 60,781 76,432
------------ ------------ ------------
$ 4,264,834 $ 3,780,265 $ 3,803,066
------------ ------------ ------------
------------ ------------ ------------
Plan assets at fair value............................................... $ 5,021,786 $ 4,288,052 $ 3,846,702
Projected benefit obligation............................................ 5,707,644 4,888,812 4,942,444
------------ ------------ ------------
Plan assets (less than) projected benefit obligation.................... (685,858) (600,760) (1,095,742)
Prior service cost...................................................... 353,885 404,950 456,015
Unrecognized net loss................................................... 595,081 388,935 828,070
Unamortized net asset from transition................................... (99,462) (145,941) (192,420)
------------ ------------ ------------
(Accrued) prepaid pension expense....................................... $ 163,646 $ 47,184 $ (4,077)
------------ ------------ ------------
------------ ------------ ------------
Assumptions used in measuring the projected benefit obligation were as
follows:
Discount rates........................................................ 7.25% 7.75% 7.25%
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.......................................................... $ 262,076 $ 211,181 $ 153,123
Interest cost......................................................... 372,592 351,902 328,026
Actual return on assets............................................... (375,427) (337,765) (306,394)
Net amortization and deferral......................................... 4,586 29,675 4,586
------------ ------------ ------------
Net pension expense................................................... $ 263,827 $ 254,993 $ 179,341
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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 $72,205, $63,542 and $53,734, for 1997, 1996, and
1995, 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-18
<PAGE>
CARROLLTON BANCORP AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal...................................................................... $ 407,013 $ 540,934 $ 476,530
State........................................................................ 54,080 115,067 166,539
---------- ---------- ----------
461,093 656,001 643,069
Deferred..................................................................... 216,457 100,039 241,328
---------- ---------- ----------
$ 677,550 $ 756,040 $ 884,397
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of the deferred tax charge (benefits) were as follows:
<TABLE>
<S> <C> <C> <C>
Provision for loan losses ................................................... $ (71,113) $ (72,412) $ --
Deferred origination fees and costs.......................................... 139,393 72,457 167,680
Deferred compensation plan................................................... (8,139) (12,497) (8,700)
Depreciation................................................................. 94,002 73,331 26,054
Discount accretion........................................................... 1,449 2,107 (1,329)
Retirement benefits.......................................................... 60,247 37,053 55,025
FHLB Stock dividends......................................................... -- -- 2,019
Ground rent losses........................................................... 618 -- 579
---------- ---------- ----------
$ 216,457 $ 100,039 $ 241,328
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of the net deferred tax assets were as follows:
<TABLE>
<S> <C> <C> <C>
Deferred tax assets
Allowance for loan losses.................................................. $ 654,276 $ 583,163 $ 510,751
Deferred origination fees and costs........................................ -- -- 22,544
Accrued retirement benefits................................................ -- 15,123 52,176
Deferred compensation plan................................................. 175,770 167,631 155,134
Allowance for ground rent losses........................................... 53,501 54,119 54,119
---------- ---------- ----------
883,547 820,036 794,724
---------- ---------- ----------
Deferred tax liabilities
Accrued retirement benefits................................................ (45,124) -- --
Deferred origination fees and costs........................................ (189,304) (49,913) --
Unrealized gains on available for sale investment securities............... (530,929) (130,840) (249,149)
Depreciation............................................................... (193,386) (99,385) (26,054)
Discount accretion......................................................... (14,890) (13,440) (11,333)
FHLB Stock dividends....................................................... (2,019) (2,019) (2,019)
---------- ---------- ----------
(975,652) (295,597) (288,555)
---------- ---------- ----------
Net deferred tax asset (liability) ................................. $ (92,105) $ 524,439 $ 506,169
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-19
<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:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate........................................................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt income......................................................................... (12.8) (10.0) (7.2)
State income taxes, net of federal income tax benefit..................................... 2.2 3.0 4.6
Other....................................................................................... .7 .2 .4
---------- --------- ---------
24.1% 27.2% 31.8%
---------- --------- ---------
---------- --------- ---------
</TABLE>
16. LEASE COMMITMENTS
The Company leases various branch and general office facilities to conduct
its operations. The leases have remaining terms which range from a period of 11
months to 16 years. Most leases contain renewal options which are generally
exercisable at increased rates. Some of the leases provide for increases in the
rental rates at specified times during the lease terms, prior to the expiration
dates.
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 $675,283, $634,376, and $604,187 for 1997, 1996, and 1995,
respectively.
Lease obligations will require rent payments as follows:
<TABLE>
<CAPTION>
PERIOD MINIMUM RENTALS
- --------------------------- ----------------
<S> <C>
1998 $ 659,767
1999 513,504
2000 468,849
2001 419,659
2002 386,337
Remaining years 2,464,274
-----------------
$ 4,912,390
-----------------
-----------------
</TABLE>
F-20
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
17. PARENT COMPANY FINANCIAL INFORMATION
The balance sheets for 1997 and 1996 and statements of income and cash flows
for Carrollton Bancorp (Parent Only) for 1997, 1996, and 1995, are presented
below:
<TABLE>
<CAPTION>
BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Assets
Cash............................................................................. $ 26,098 $ 275
Interest-bearing deposits in subsidiary.......................................... 285,983 576,635
Investment in subsidiary......................................................... 25,955,896 24,867,282
Investment securities available for sale......................................... 3,659,917 2,723,916
Other assets..................................................................... 19,869 483
------------- -------------
$ 29,947,763 $ 28,168,591
------------- -------------
------------- -------------
Liabilities and Shareholders' Equity
Liabilities...................................................................... $ 155,529 $ 98,141
Shareholders' Equity
Common Stock..................................................................... 14,542,880 13,947,470
Surplus.......................................................................... 8,594,145 6,973,666
Retained earnings................................................................ 5,811,387 6,941,366
Net unrealized holding gains on available for sale securities.................... 843,822 207,948
------------- -------------
29,792,234 28,070,450
------------- -------------
$ 29,947,763 $ 28,168,591
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Income
Dividends from subsidiary............................................. $ 1,370,657 $ 670,631 $ 644,173
Interest and dividends................................................ 126,014 83,954 111,895
Security gains........................................................ 142,363 39,377 --
------------ ------------ ------------
1,639,034 793,962 756,068
Expenses................................................................ 83,464 66,161 58,423
------------ ------------ ------------
Income before income taxes and equity in undistributed net income of
subsidiary............................................................ 1,555,570 727,801 697,645
Income tax expense...................................................... 40,381 8,585 820
------------ ------------ ------------
1,515,189 719,216 696,825
Equity in undistributed net income of subsidiary........................ 624,303 1,309,207 1,196,494
------------ ------------ ------------
Net income.............................................................. $ 2,139,492 $ 2,028,423 $ 1,893,319
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-21
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
17. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------ ------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Cash dividends from subsidiary........................................ $ 1,370,657 $ 670,631 $ 644,173
Interest and dividends received....................................... 107,107 44,577 111,895
Cash paid to suppliers................................................ (83,909) (32,241) (49,601)
Income taxes (paid) refunded.......................................... (90,974) (9,612) (7,628)
------------ ----------- ------------
1,302,881 673,355 698,839
------------ ----------- ------------
Cash flows from investing activities
Net (increase) decrease in interest-bearing deposits.................. 290,652 1,033,117 34,132
Proceeds from sales of securities available for sale.................. 492,636 68,008 --
Purchases of securities available for sale............................ (1,006,764) (1,191,238) (358,630)
------------ ----------- ------------
(223,476) (90,113) (324,498)
------------ ----------- ------------
Cash flows from financing activities
Dividends paid........................................................ (750,350) (587,967) (542,729)
Common stock repurchase and retirement................................ (303,232) -- (459,140)
------------ ----------- ------------
(1,053,582) (587,967) (1,001,869)
------------ ----------- ------------
Net (decrease) increase in cash......................................... 25,823 (4,725) (627,528)
Cash at beginning of year............................................... 275 5,000 632,528
------------ ----------- ------------
Cash at end of year..................................................... $ 26,098 $ 275 $ 5,000
------------ ----------- ------------
------------ ----------- ------------
Reconciliation of net income to net cash provided by operating
activities
Net income.............................................................. $ 2,139,492 $ 2,028,423 $ 1,893,319
Adjustments to reconcile net income to net cash provided by operating
activities
Equity in undistributed income of subsidiary.......................... (624,303) (1,309,207) (1,196,494)
Security gains........................................................ (142,363) (39,377) --
Amortization of organization costs.................................... -- -- 3,847
Decrease (increase) in accounts receivable............................ (19,386) (483) --
Increase (decrease) in accounts payable............................... (50,559) (6,001) (1,833)
------------ ----------- ------------
$ 1,302,881 $ 673,355 $ 698,839
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
F-22
<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, 1997 DECEMBER 31, 1996
------------------------------ -------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks...................... $ 25,063,180 $ 25,063,180 $ 20,391,197 $ 20,391,197
Federal funds sold........................... -- -- 700,000 700,000
Investment securities (total)................ 83,607,628 83,874,747 86,277,768 86,499,131
Loans, net................................... 168,531,267 169,305,234 149,753,004 149,408,516
Accrued interest receivable.................. 2,147,801 2,147,801 1,956,674 1,956,674
Financial liabilities
Noninterest-bearing deposits................. $ 33,426,327 $ 33,426,327 $ 30,229,596 $ 30,229,596
Interest-bearing deposits.................... 201,044,078 202,019,117 195,555,484 196,738,850
Federal funds purchased...................... 5,265,753 5,265,753 1,949,809 1,949,809
Notes payable--U.S. Treasury................. 2,706,255 2,706,255 1,646,478 1,646,478
Securities sold under agreements to
repurchase................................. 5,758,688 5,758,688 3,346,934 3,346,934
Advances from the Federal Home Loan Bank..... 9,000,000 8,870,702 5,000,000 5,001,524
Accrued interest payable..................... 204,617 204,617 207,666 207,666
</TABLE>
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.
The fair value of advances from the Federal Home Loan Bank is estimated
based on interest rates currently offered for advances of similar remaining
terms.
It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.
F-23
<PAGE>
CARROLLTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Year Ended December 31, 1997:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest income................................... $ 4,602,900 $ 4,823,428 $ 5,039,018 $ 5,128,236
Interest expense.................................. (2,111,845) (2,178,463) (2,303,541) (2,381,963)
------------- -------------- ------------- --------------
Net interest income............................... 2,491,055 2,644,965 2,735,477 2,746,273
Provision for loan losses......................... (60,000) (60,000) (60,000) (60,000)
Security gains (losses)........................... 28,885 72,349 32,566 41,577
Other income...................................... 1,186,521 1,312,812 1,478,922 1,420,867
Operating expenses................................ (2,981,579) (3,124,891) (3,338,212) (3,690,545)
------------- -------------- ------------- --------------
Income before taxes............................... 664,882 845,235 848,753 458,172
Tax provision..................................... (161,882) (230,528) (221,163) (63,977)
------------- -------------- ------------- --------------
Net income........................................ $ 503,000 $ 614,707 $ 627,590 $ 394,195
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Earnings per share................................ $0.34 $0.42 $0.43 $0.27
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Cash dividends per share.......................... $0.12 $0.12 $0.13 $0.13
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Market prices: high............................... $23.23 $27.63 $28.35 $34.78
low................................ $20.42 $22.15 $24.77 $27.87
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
</TABLE>
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................................ $0.33 $0.33 $0.39 $0.33
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Cash dividends per share.......................... $0.10 $0.10 $0.10 $0.11
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Market price: high................................ $23.60 $23.37 $23.60 $21.78
low................................. $22.01 $22.01 $19.97 $19.51
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
</TABLE>
All earnings per share amounts have been adjusted to reflect the 5% stock
dividend declared in January, 1998.
F-24
<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 1998
Dallas R. Arthur.......... Mr. Arthur, age 53, has served as a director of
Carrollton Bank, a Maryland state chartered commercial bank, and the
principal subsidiary of the Company (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. Mr Arthur has been with the Bank since 1964.
C. Edward Hoerichs.......... Mr. Hoerichs, age 86, 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 78, 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 62, 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 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 39, has served as a director of the Bank
since June 1994,
-40-
<PAGE>
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 46, 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.
Samuel M. Dell, Jr........... Mr. Dell, age 89, 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.
Leo A. O'Dea.......... Mr. O'Dea, age 67, 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 was President of
Hamilton & Spiegel, Inc., a sheet metal contractor, from 1979 until his
retirement in 1997. (2)
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Albert R. Counselman.......... Mr. Counselman, age 49, has served as a
director of 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 75, 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 59, 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. Mr. Miller has been with the Bank
since 1970.
William C. Rogers, Jr........... Mr. Rogers, age 71, 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.
- ------------------------
-41-
<PAGE>
(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 36, 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 51, 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 56, 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 66, 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.
BOARD COMMITTEES
The Board of Directors of the Company met nine times and the Board of
Directors of the Bank met 25 times during the year ended December 31, 1997. The
Board of Directors of the Bank meets twice a month. 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, 1997.
As of the date of this report, the Board of Directors does not have a
standing nominating committee.
The Audit Committee held four meetings during 1997. 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.
-42-
<PAGE>
The Compensation Committee met six times during 1997. 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, 1995, 1996 and 1997 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 $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dallas R. Arthur,................................................................. 1997 $ 119,911 $ -0-
President and Chief 1996 109,140 -0-
Executive Officer 1995 103,000 -0-
</TABLE>
DIRECTORS' FEES
Directors who are not employees of the Bank receive a monthly fee of $790
for Board meetings, and $150 per committee meeting attended. The Chairman of the
Board of the Bank receives a monthly fee of $990. Directors do not receive
additional fees for their service as directors of the Company. Employee
directors are not compensated for attendance at Board meetings.
-43-
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1997, 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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(1) (1)
- ------------------------------------------------------------- ----------------------- ------------------
<S> <C> <C>
DIRECTORS:
Dallas R. Arthur............................................. 2,150(2) *
Steven K. Breeden............................................ 1,820 *
David L. Costello III........................................ 1,663 *
Albert R. Counselman......................................... 11,710 *
Thelma T. Daley.............................................. 53 *
Samuel M. Dell, Jr........................................... 7,087 *
John P. Hauswald............................................. 5,621(3) *
C. Edward Hoerichs........................................... 2,127 *
Samuel D. Miller............................................. 1,164(4) *
Leo A. O'Dea................................................. 5,341(5) *
Allen Quille................................................. 1,853 *
John Paul Rogers............................................. 92,863(6)(8) 6.70%
William C. Rogers............................................ 141,430(7)(8)(9) 10.21%
All Directors and Executive Officers of the Company as a
group (17 persons)........................................... 241,824 17.46%
Other Significant Shareholder:
Edward Q. Rogers ............................................ 69,446(10) 5.01%
</TABLE>
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, the named person has sole voting and
investment power with respect to all shares.
(2) Includes 1,300 shares owned jointly by Mr. Arthur and his wife. Excludes
465 shares owned by Mr. Arthur's wife.
-44-
<PAGE>
(3) Includes 5,472 shares owned jointly by Mr. Hauswald and his wife.
Excludes 5,019 shares owned by Mr. Hauswald's wife.
(4) Includes 938 shares owned jointly by Mr. Miller and his wife. Excludes
194 shares owned by Mr. Miller's wife.
(5) Excludes 8,466 shares owned by Mr. O'Dea's wife.
(6) Includes 951 shares owned by a trust for the benefit of Elizabeth B.
Seuferling, for which Mr. Rogers serves as trustee.
(7) Includes 22,157 shares owned by the Moreland Memorial Park Cemetery,
Inc. Perpetual Care Fund and 2,191 shares owned by Moreland Memorial
Park, Inc. Bronze Perpetual Care Fund, for which William C. Rogers, Jr.
serves as a trustee.
(8) 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.
(9) 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 5,392 shares owned by Mr. Roger's wife.
(10) Includes 32,937 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 111,857 shares or 8.07% of shares
outstanding.
(11) 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,
344 North Charles Street, Suite 300, Baltimore, Maryland 21201.
-45-
<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, 1997, 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
$2,776,990, which represented approximately 9.3% 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 1997 of $88,077.
Management believes that the terms of these transactions were at least as
favorable to the Company as could have been obtained elsewhere.
-46-
<PAGE>
PART IV
ITEM 13: EXHIBITS LIST and REPORTS ON FORM 8-K
a) List of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------------------
<S> <C>
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
</TABLE>
- ------------------------
* 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.
-47-
<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 26, 1998 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 26, 1998 By:/s/ Dallas R. Arthur
---------------------------
Dallas R. Arthur
President and Chief Executive Officer
Principal Financial and Accounting Officer
March 26, 1998 By:/s/ David L. Costello, III
---------------------------
David L. Costello, III
Treasurer
Board of Directors
March 26, 1998 /s/ Dallas R. Arthur
------------------------------
Dallas R. Arthur
Director
March 26, 1998 /s/ Steven K. Breeden
------------------------------
Steven K. Breeden
Director
II-1
<PAGE>
March 26, 1998 /s/ David L. Costello, III
------------------------------
David L. Costello, III
Director
March 26, 1998 /s/ Albert R. Counselman
------------------------------
Albert R. Counselman
Director
March 26, 1998 /s/ Samuel M. Dell, Jr.
------------------------------
Samuel M. Dell, Jr.
Director
March 26, 1998 /s/ John P. Hauswald
------------------------------
John P. Hauswald
Director
March 26, 1998 /s/ C. Edward Hoerichs C.
------------------------------
Edward Hoerichs
Director
March 26, 1998 /s/ Samuel D. Miller
------------------------------
Samuel D. Miller
Director
March 26, 1998 /s/ Leo A. O'Dea
------------------------------
Leo A. O'Dea
Director
March 26, 1998 /s/ Allen Quille
------------------------------
Allen Quille
Director
March 26, 1998 /s/ John Paul Rogers
------------------------------
John Paul Rogers
Director
March 26, 1998 /s/ William C. Rogers, Jr.
------------------------------
William C. Rogers, Jr.
Director
II-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION SEQUENTIALLY NUMBERED PAGE
- ----------- ----------------------------------------------------------------------------- -------------------------------
<S> <C> <C>
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
</TABLE>
- ------------------------
* 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.
Carrollton Mortgage Services, Inc.
Subsidiaries are indicated by indentation. All subsidiaries are 100% owned,
except for Carrollton Community Development Corp. which is 87.5% owned.
<PAGE>
EXHIBIT 23
Consent of Independent Public Accountant
Carrollton Bancorp
Baltimore, Maryland
We hereby consent to the use in this annual report on Form 10-KSB of our
report, dated February 27, 1998, on the consolidated financial statements of
Carrollton Bancorp and Subsidiary appearing in the annual report.
/s/ Rowles & Company, LLP
Baltimore, Maryland
March 26, 1998
<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, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,063,180
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,782,023
<INVESTMENTS-CARRYING> 11,825,605
<INVESTMENTS-MARKET> 12,092,724
<LOANS> 170,834,248
<ALLOWANCE> 2,302,981
<TOTAL-ASSETS> 287,907,392
<DEPOSITS> 234,470,405
<SHORT-TERM> 22,730,696
<LIABILITIES-OTHER> 709,440
<LONG-TERM> 0
0
0
<COMMON> 14,542,880
<OTHER-SE> 15,249,354
<TOTAL-LIABILITIES-AND-EQUITY> 287,907,392
<INTEREST-LOAN> 14,038,685
<INTEREST-INVEST> 5,307,262
<INTEREST-OTHER> 247,635
<INTEREST-TOTAL> 19,593,582
<INTEREST-DEPOSIT> 8,128,202
<INTEREST-EXPENSE> 8,975,812
<INTEREST-INCOME-NET> 10,617,770
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> 175,377
<EXPENSE-OTHER> 13,135,227
<INCOME-PRETAX> 2,817,042
<INCOME-PRE-EXTRAORDINARY> 2,817,042
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,139,492
<EPS-PRIMARY> 1.46<F1>
<EPS-DILUTED> 1.46
<YIELD-ACTUAL> 4.51
<LOANS-NON> 357,621
<LOANS-PAST> 268,931
<LOANS-TROUBLED> 408,565
<LOANS-PROBLEM> 788,841
<ALLOWANCE-OPEN> 2,241,148
<CHARGE-OFFS> 257,769
<RECOVERIES> 79,602
<ALLOWANCE-CLOSE> 2,302,981
<ALLOWANCE-DOMESTIC> 1,892,514
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 410,467
<FN>
<F1>The Company's simple capital structure does not require restatement of prior
period earnings per share amounts.
</FN>
</TABLE>
