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U.S. SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
FORM 10-K
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Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
(Fee required)
For the fiscal year ended December 31, 1999
Commission file number: 0-23090
Carrollton Bancorp
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(Name of Small Business Issuer in Its Charter)
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<S> <C>
Maryland 52-1660951
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
344 North Charles Street, Suite 300 21201-4301
Baltimore, Maryland ---------------------------------------------
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(Address of Principal Executive Offices)
(410) 536-4600
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
None on Which Registered
--------------------------------------------- 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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Indicate by checkmark if disclosure of delinquent filers in response to Item 405
of Regulation S-K 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-K
or any amendment to this
Form 10-K. / /
Issuer's revenues for its most recent fiscal year. $33,167,339.
As of February 29, 2000, the aggregate market value of the voting stock held by
non-directors and executive officers: $34,185,605.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 2,771,029 shares as of February 29,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
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ITEM 1: DESCRIPTION OF BUSINESS
GENERAL. - 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 principally by
geographic area. 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 in southern
Pennsylvania. The Bank also has deposit customers who live in Harford County and
Howard County, Maryland. The Bank also operates an ATM network of 164 machines
in Maryland, Virginia, Pennsylvania, West Virginia, and Delaware, and performs
credit card servicing for merchants throughout Maryland. The Bank also sponsors
national retailers in various electronic networks operating as regional switches
for electronic transactions throughout the country.
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 debit card services.
- - Merchant credit card deposit servicing.
- - 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 third party vendors 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, 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 8 show the
classification by type of loan for the whole portfolio.
First and second residential mortgage loans, made principally through a
subsidiary of the Bank, Carrollton Mortgage Services Inc., ("CMSI") enable
customers to purchase or refinance residential properties. These loans are
secured by liens on the residential property. All first mortgage loans with a
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<PAGE>loan to value greater then 80% have private mortgage insurance coverage
equal to or greater than the amount required under the Federal National
Mortgage Association guidelines. CMSI offers a wide variety of adjustable
rate and fixed rate mortgage products. The borrower is required to meet the
income and debt criteria consistent with the underwriting standards of the
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation. CMSI also reviews the credit history of each applicant. CMSI
offers a community homebuyer program for qualified purchasers whose income is
less than or equal to 115% of the median income for the Baltimore
Metropolitan Statistical Area. Under this program, CMSI will finance 100% of
the purchase price, plus up to $5,000 toward closing costs. The customer must
pay their pre-paids out of their own funds, and must have two months cash
reserves. The borrower(s) must also obtain homebuyer counseling. While the
primary emphasis of this program is first time homebuyer, low to moderate
income move-up borrowers may still qualify for the program. It is intended
for those homeowners that will not experience a significant gain on the sale
of their current residence. They cannot own any other real estate at the time
of settlement of the community homebuyer loan. Residential loans are
considered low risk based on the type of collateral (residential property)
and the underwriting standards used. The Bank experienced no losses on
residential mortgage loans during 1999, 1998 and 1997. There were no
residential mortgage loans delinquent more than 90 days at December 31, 1999.
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 considered low due to the underlying values of the
collateral. The Bank experienced net losses on home equity loans during 1999 of
$44,000 and net recoveries on home equity loans during 1997 of $12,000. There
were no losses or recoveries on home equity loans during 1998. There were
approximately $305,000 of home equity loans delinquent more than 90 days at
December 31, 1999. 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 experienced net losses on
commercial mortgage loans in 1998 of $81,000. The Bank did not experience any
losses on commercial mortgage loans during 1999 and 1997. There were $193,000 of
commercial mortgage loans past due more than 90 days at December 31, 1999. 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
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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 1999,
1998 or 1997. There were no construction and land development loans past due
more than 90 days at December 31, 1999. 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 Bank had net losses of
$71,000, $236,000 and $24,000 in 1999, 1998 and 1997, respectively. There were
$531,000 of time and demand and line of credit loans delinquent more than
90 days at December 31, 1999. 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 1998 and 1997, the Bank had net charge-offs of home
improvement loans of approximately $4,000, and $49,000 respectively and net
recoveries in 1999 of $5,000. There were no home improvement loans delinquent
more than 90 days at December 31, 1999. 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, 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 no net losses on automobile loans in 1999, and net losses
for 1998 and 1997 of $1,000, and $5,000, respectively. There were no automobile
or other vehicle loans past due more than 90 days at December 31, 1999. There
are no discernible delinquency or loss trends relating to automobile or other
vehicle loans known to management.
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 attempts to mitigate
significant risk by establishing fairly low credit limits. Net charge-offs in
1999, 1998 and 1997 were approximately $60,000, $209,000, and $113,000,
respectively. There were no overdraft loans and other personal loans past due
more than 90 days at December 31, 1999. There are no discernible delinquency or
loss trends relating to overdraft lines and other Personal Loans known to
management, however, the increased losses for the three year period relate
primarily to a higher level of personal bankruptcy filings.
Loans secured by savings accounts in the Bank and stock and bond certificates
are secured lending
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arrangements. 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 1999, 1998 or 1997. There were no loans
secured by savings accounts or stock and bond certificates past due more than
90 days at December 31, 1999. 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 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 in 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 has begun
to sell loans into the secondary market and therefore derives a small amount of
noninterest income from serviced loans. 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,
1999.
INVESTMENT ACTIVITIES. - The Bank maintains a portfolio of investment
securities to provide liquidity and income. The current portfolio amounts to
about 20% of total assets, and is invested primarily in U.S. Treasury, U.S.
Government Agencies, state and municipal bonds, and mortgage backed securities
with maturities varying from 2000 to 2024. Reference is made to Note 3 of the
Notes to Consolidated Financial Statements included in this Report and
Statistical Disclosures 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 has used deposit brokers in the past and may do so in the
future to meet liquidity needs. 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 in this Report for additional information concerning
deposits of 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 1999, commission and other income totaled $1,013,251
and income after taxes was $197,374.
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. 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
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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, both
commercial and residential. The addition of a mortgage subsidiary in late 1997
resulted in growth in residential mortgage lending during 1998 and 1999; due to
the company's liability sensitive position in an increasing rate environment a
decision to place the mortgage subsidiary in an inactive status has been made.
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.
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, 1999, the Bank and its subsidiaries had 155
full time equivalent employees, 44 of whom were officers. Each officer generally
has responsibility for one or more loan, banking, customer contact, operations,
or subsidiary 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.
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
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also requires any bank holding company which controls an undercapitalized
insured bank to act as a "source of strength" to such bank. See "Holding
Company Guaranty" below. Finally, FDICIA permits the appropriate federal bank
regulatory agency to require a bank holding company to divest itself of a
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 theCompany; 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 June 1, 1997, subject to each
states' separate decision to allow interstate branch banking within the state.
As a result of such legislation, 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, issuance 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 must be conducted no
less frequently than every 18 months. 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
7
<PAGE>
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
orinterests in real estate and made for the purpose of financing the
construction of a building or other improvements to real estate. The FDIC
regulations require insured nonmember banks to establish and maintain written
internal real estate lending policies consistent with safe and sound banking
practices and appropriate to the size of the bank. These policies must
include loan portfolio diversification standards, prudent underwriting
standards (including clear and measurable loan-to-value limits), loan
administration procedures, and documentation, approval and reporting
requirements to monitor compliance with the policies. Finally, the
regulations require insured nonmember banks to monitor conditions in its real
estate market to ensure that its lending policies continue to be
appropriately based on current market conditions.
CAPITAL REQUIREMENTS. - Under regulations promulgated by the FDIC, insured
nonmember banks currently are required to maintain "core" or "tier 1" capital of
at least 3% of total assets (the "Leverage Ratio"). For all but the most highly
rated banks, the minimum Leverage Ratio requirement will be 4% to 5% of total
assets. Tier 1 capital consists of: (i) common shareholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries; (ii) minus intangible assets (other than certain purchased
mortgage and credit card servicing rights); (iii) minus certain losses, and
minus investments in certain securities subsidiaries.
In addition, each insured nonmember bank also must maintain a "tier 1
risk-based capital ratio" of 4%. The "tier 1 risk-based capital ratio" is
defined in FDIC regulations as the ratio of tier 1 capital to "risk-weighted
assets." A bank's total risk-weighted assets are determined by: (i) converting
each of its off-balance sheet items to an on-balance sheet credit equivalent
amount; (ii) assigning each on-balance sheet asset and the credit equivalent
amount of each off-balance sheet item to one of the five risk categories
established in the FDIC's regulations; and (iii) multiplying the amounts in each
category by the risk factor assigned to that category. The sum of the resulting
amounts constitutes total risk-weighted assets.
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
8
<PAGE>
adopted by the FDIC, an institution will be considered: (i) "well
capitalized" if the institution has a total risk-based capital ratio of 10%
or greater, a tier 1 risk-based capital ratio of 6% or greater, and a
Leverage Ratio of 5% or greater (provided the institution is not subject to
an order, written agreement, capital directive or prompt corrective action to
meet and maintain a specified capital level for any capital measure); (ii)
"adequately capitalized" if the institution has a total risk-based capital
ratio of 8% or greater, a tier 1 risk-based capital ratio of 4% or greater,
and a Leverage Ratio of 4% or greater (3% or greater if the institution is
rated composite 1 in its most recent report of examination); (iii)
"undercapitalized" if the institution has a total risk-based capital ratio of
less than 8%, or a tier 1 risk-based capital ratio of less than 4%, or a
Leverage Ratio of less than 4% (3% if the institution is rated composite 1 in
its most recent report of examination); (iv) "significantly undercapitalized"
if the institution has a total risk-based capital ratio of less than 6%, or a
tier 1 risk-based capital ratio of less than 3%, or a Leverage Ratio that is
less than 3%; and (v) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets that is less than 2%. The regulation
also permits the FDIC to determine that an institution should be placed in a
lower category based on the existence of an unsafe and unsound condition or
on other information, such as the institution's examination report, after
written notice.
The degree of regulatory intervention mandated by FDICIA and the prompt
corrective action regulation is tied to an insured nonmember bank's capital
category, with increasing scrutiny and more stringent restrictions being imposed
as a bank's capital declines. The prompt corrective actions specified by FDICIA
for undercapitalized banks include increased monitoring 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
9
<PAGE>
FDICIA and the regulations of the FDIC promulgated pursuant thereto, an
insured nonmember bank may engage only in those activities, and make only
those investments, as are permissible for national banks. National banks
generally are permitted to engage in certain enumerated banking functions and
all such activities as are incidental thereto. Further, national banks, and
as a result of FDICIA, insured nonmember banks are severely limited as to the
types of debt and equity securities in which such banks may invest.
TRANSACTIONS WITH AFFILIATES. - Transactions engaged in by an insured
nonmember bank or one of its subsidiaries with affiliates of such bank are
subject to the affiliate transactions restrictions contained in Section 23A
and 23B of the Federal Reserve Act in the same manner and to the same extent
as such restrictions apply to transactions engaged in by a Federal Reserve
System member bank or one of its subsidiaries with affiliates of that member
bank. Section 23A of the Federal Reserve Act imposes both quantitative and
qualitative restrictions on transactions engaged in by a member bank or one
of its subsidiaries with an affiliate, while Section 23B of the Federal
Reserve Act requires, among other things, that all transactions with
affiliates be on terms substantially the same, or at least as favorable to
the member bank or the subsidiary, as the terms that would apply, or would be
offered in, a comparable transaction with an unaffiliated party.
Loans made by an insured nonmember bank to its directors, executive officers
and principal shareholders, to the directors, executive officers and principal
shareholders of its affiliates, or to the related interests of any of the
foregoing (collectively, "insiders") must comply with Maryland law and the
requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and certain
of the regulations of the Board of Governors promulgated pursuant thereto,
except to the extent more stringent requirements are established by the FDIC.
Among other things, Sections 22(g) and 22(h) of the Federal Reserve Act require
that all loans to insiders be made on substantially the same terms as those
prevailing at the time for comparable transactions with unaffiliated borrowers
and not involve more than the normal risk of repayment or present other
unfavorable features. Maryland law further requires that such loans with limited
exceptions be approved by the board of directors or executive committee and be
reviewed every six months by the board. Additionally, the aggregate amount of
loans or extensions of credit outstanding to any insider may not exceed the
loans to one borrower limitation applicable to national banks. Further, FDICIA
limits the aggregate amount of loans or extension of credit outstanding to all
insiders to 100% of the amount of unimpaired capital and unimpaired surplus of
the institution.
REGULATORY RESTRICTIONS ON THE PAYMENT OF DIVIDENDS BY THE BANK TO THE
COMPANY. - FDICIA restricts the ability of federally-insured banks to pay any
dividend (other than a dividend in the form of additional shares, or options to
purchase additional shares, of the bank) if, after paying the dividend, the bank
would be undercapitalized.
COMMUNITY REINVESTMENT. - The Community Reinvestment Act (the "CRA") and the
regulations of the FDIC promulgated pursuant thereto require each insured
nonmember bank to delineate its local community, adopt a CRA statement listing
the local community and the types of credit the bank is prepared to extend in
that community and to make its CRA statement available for public inspection.
The FDIC periodically evaluates performance and compliance with the CRA
statement. The failure to adequately perform community reinvestment activities
could result in the denial of applications to acquire banking and non-banking
institutions, establish branches, obtain deposit insurance for newly-chartered
banks, or to relocate the main office or a branch office of a bank.
INSURANCE OF DEPOSITS. - The Bank's deposits are insured by the FDIC through
the Bank Insurance Fund (the "BIF") up to a maximum of $100,000 for each insured
depositor. The insurance premium payable by each BIF member is based on the
institution's assessment base (generally total deposit accounts subject to
certain adjustments). The premiums are paid in quarterly assessments. The FDIC
promulgated regulations establishing a risk-based assessment system commencing
in 1993.
Under the risk-based assessment system, each institution is assigned to one of
three capital groups and to one of three supervisory subgroups for purposes of
determining an assessment rate. The capital group is determined by the
institution's regulatory capital position. The supervisory subgroup assignments
are based on a determination by the FDIC's Director of the Division of
Supervision. Institutions can request a review of the supervisory subgroup
assignment. Under this formula, well-capitalized institutions classified as
Subgroup "A" (financially sound institutions with only a few minor weaknesses)
will pay the most favorable assessment rate of 0%, subject to a minimum
assessment, while undercapitalized institutions classified as Subgroup "C"
(institutions which pose a substantial probability of loss to the BIF unless
corrective action is taken) will pay the least favorable assessment rate of
0.27%. In addition, as a result of federal 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
10
<PAGE>
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.
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, 1999, the Bank had a tax bad debt reserve of
$608,000 and a book bad debt reserve of $2.8 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.
SECURITIES LAWS. - The Company and certain of its directors, officers and
shareholders are subject to the Securities Act of 1934 and a broad range of both
federal and state securities laws including, by way of example, the obligation
to file annual, quarterly and other periodic reports with the appropriate
authorities, soliciting proxies and conducting shareholders' meetings in
accordance with the 1934 Act's proxy rules, and complying with the reporting and
"short-swing" profit recovery provisions imposed by 1934 Act Section 16.
MONETARY POLICIES. - Banking is a business which depends on interest rate
differentials. In general, the differences between the interest paid by a bank
on its deposits and other borrowings and the interest received by the bank on
loans extended to its customers and securities held in its investment portfolio
constitute the major portion of a bank's earnings. Consequently, the earnings
growth of the Bank is influenced by economic conditions generally, both domestic
and foreign, and also on the monetary and fiscal policies of the United States
and its agencies, particularly the Federal Reserve Board, which regulates the
supply of money through various means, including open market transactions in
United States government securities. The nature and timing of changes in such
policies and their impact on the Bank cannot be predicted, although this
instrument of monetary policy may 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 executive and
administrative offices are located in the Bank's headquarters building which it
owns in downtown Baltimore, Maryland. The Bank owns buildings for three of its
other branch office locations as well. The Bank leases space for the remaining
eight branches, and for its operations center which primarily houses support
functions. Current lease terms expire in 2000 through 2014 and contain renewal
options ranging from 5 to 20 years.
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.
11
<PAGE>
PART II
- -------------------
ITEM 5: MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
TRADING AND DIVIDENDS
As of December 31, 1999, there were approximately 528 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.
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 2 for 1 stock split declared in May, 1999 and a 5% stock dividend
declared by the Company in January, 1998.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
PAID
PERIOD PRICE PER SHARE PER SHARE
-------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1999 1998
High Low High Low
---- --- ---- ---
<CAPTION>
1st Quarter $ 18.00 $ 16.25 $ 18.75 $ 16.665 $ .0725 $ .07
2nd Quarter 18.00 16.125 19.50 17.625 .0725 .07
3rd Quarter 19.25 17.25 19.125 16.25 .08 .07
4th Quarter 18.00 14.25 17.155 16.25 .0825 .075
</TABLE>
ITEM 6: SELECTED FINANCIAL DATA
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. 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.
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 6A: 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 1999, 1998
and 1997, 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.
12
<PAGE>
1999 AVERAGE BALANCES, INTEREST, AND YIELDS
<TABLE>
<CAPTION>
1999
Average balance Interest Yield
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold $ 1,828,582 $ 100,572 5.50%
Investment securities
U.S. Treasury 1,566,850 97,391 6.22
U.S. Government agency 33,942,948 2,264,792 6.67
State and municipal 25,626,795 1,807,008 7.05
Mortgage-backed securities 7,944,031 498,237 6.27
Other 6,397,245 311,266 4.87
------------ ----------- -----
75,477,869 4,978,694 6.60
------------ ----------- -----
Loans
Demand and time 20,660,078 2,518,184 12.19
Residential mortgage 151,981,178 10,618,154 6.99
Commercial mortgage and construction 42,649,999 3,851,809 9.03
Installment and credit card 6,965,809 672,279 9.65
Lease financing 2,333,351 334,229 14.32
------------ ----------- -----
224,590,415 17,994,655 8.01
------------ ----------- -----
Total interest-earning assets 301,896,866 23,073,921 7.64
Non-interest-bearing cash 22,658,844
Premises and equipment 7,709,859
Other assets 5,084,922
Allowance for loan losses (2,633,176)
Unrealized gains on available for sale securities 978,015
------------ -----------
$335,695,330 $23,073,921
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW $ 75,424,807 $ 1,488,646 1.97%
Money market 52,409,615 2,164,581 4.13
Other time 78,044,054 4,331,174 5.55
------------ ----------- -----
205,878,476 7,984,401 3.88
Borrowed funds 58,298,888 2,969,248 5.09
------------ ----------- -----
264,177,364 10,953,649 4.15
Non-interest-bearing deposits 38,549,704
Other liabilities 1,873,242
Shareholders' equity 31,095,020
------------ -----------
Total liabilities and equity $335,695,330 $10,953,649
============ ===========
NET YIELD ON INTEREST-EARNING ASSETS $301,896,866 $12,120,272 4.01%
============ =========== =====
</TABLE>
INTEREST ON INVESTMENTS AND LOANS IS PRESENTED ON A FULLY TAXABLE EQUIVALENT
BASIS, USING REGULAR INCOME TAX RATES.
13
<PAGE>
1998 AVERAGE BALANCES, INTEREST, AND YIELDS
<TABLE>
<CAPTION>
1998
Average balance Interest Yield
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold $ 1,762,230 $ 115,545 6.56%
Investment securities
U.S. Treasury 1,963,488 134,260 6.84
U.S. Government agency 24,681,036 1,678,398 6.80
State and municipal 24,570,127 1,755,723 7.15
Mortgage-backed securities 14,277,000 915,588 6.41
Other 4,838,476 268,689 5.55
------------ ----------- ----
70,330,127 4,752,658 6.76
------------ ----------- ----
Loans
Demand and time 26,357,879 2,610,069 9.90
Residential mortgage 114,356,278 8,907,738 7.79
Commercial mortgage and construction 37,011,680 3,518,657 9.51
Installment and credit card 9,718,837 906,869 9.33
Lease financing 3,764,111 311,465 8.27
------------ ----------- ----
191,208,785 16,254,798 8.50
------------ ----------- ----
Total interest-earning assets 263,301,142 21,123,001 8.02
Non-interest-bearing cash 22,365,140
Premises and equipment 6,816,953
Other assets 5,029,286
Allowance for loan losses (2,250,497)
Unrealized gains on available for sale securities 1,669,556
------------ -----------
$296,931,580 $21,123,001
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW $ 73,497,430 $ 1,566,593 2.13%
Money market 55,545,497 2,404,556 4.33
Other time 69,855,240 3,950,261 5.65
------------ ----------- ----
198,898,167 7,921,410 3.98
Borrowed funds 32,087,248 1,675,313 5.22
------------ ----------- ----
230,985,415 9,596,723 4.15
Non-interest-bearing deposits 32,968,381
Other liabilities 2,339,801
Shareholders' equity 30,637,983
------------ -----------
Total liabilities and equity $296,931,580 $ 9,596,723
============ ===========
NET YIELD ON INTEREST-EARNING ASSETS $263,301,142 $11,526,278 4.38%
============ =========== ====
</TABLE>
INTEREST ON INVESTMENTS AND LOANS IS PRESENTED ON A FULLY TAXABLE EQUIVALENT
BASIS, USING REGULAR INCOME TAX RATES.
14
<PAGE>
1997 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
Premises and equipment 5,400,850
Other assets 4,387,500
Allowance for loan losses (2,289,402)
Unrealized gains on available for sale 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>
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.
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
CHANGE DUE TO VARIANCE IN CHANGE DUE TO VARIANCE IN
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON
Federal funds sold (19,324) $ 4,351 (14,973) $ 18,309 $(61,638) $(43,329)
INVESTMENT SECURITIES
U.S. Treasury (9,748) (27,121) (36,869) (2,626) (118,566) (121,192)
U.S. Government agency (43,449) 629,843 586,394 (20,016) (836,276) (856,292)
State and municipal (24,222) 75,507 51,285 (12,985) 253,671 240,686
Mortgage backed securities (11,216) (406,135) (417,351) (21,143) (526,103) (547,246)
Other (43,984) 86,561 42,577 (35,487) 44,925 9,438
---------- ---------- ---------- ----------- ----------- -----------
(132,619) 358,655 226,036 (92,257) (1,182,349) (1,274,606)
---------- ---------- ---------- ----------- ----------- -----------
LOANS
Demand and time 472,335 (564,220) (91,885) (158,710) 110,209 (48,501)
Residential mortgage (1,220,361) 2,930,777 1,710,416 (184,754) 2,552,026 2,367,272
Commercial mortgage and construction (202,876) 536,028 333,152 (54,424) 177,300 122,876
Installment and credit card 22,296 (256,886) (234,590) 15,178 (271,560) (256,382)
Lease financing 141,154 (118,390) 22,764 1,797 (1,094) 703
---------- ---------- ---------- ----------- ----------- -----------
(787,452) 2,527,309 1,739,857 (380,913) 2,566,881 2,185,968
---------- ---------- ---------- ----------- ----------- -----------
TOTAL INTEREST EARNED (939,394) 2,890,314 1,950,920 (454,861) 1,322,894 868,033
---------- ---------- ---------- ----------- ----------- -----------
INTEREST EXPENSE ON
Deposits
Savings and NOW (119,029) 41,082 (77,947) (101,512) 35,947 (65,565)
Money market (104,223) (135,752) (239,975) (55,396) (120,284) (175,680)
Other time (82,158) 463,071 380,913 (45,902) 80,355 34,453
BORROWED FUNDS (74,606) 1,368,541 1,293,935 (1,369) 829,072 827,703
---------- ---------- ---------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE (380,016) 1,736,942 1,356,926 (204,179) 825,090 620,911
---------- ---------- ---------- ----------- ----------- -----------
NET INTEREST INCOME $ (559,378) $1,153,372 $ 593,994 $ (250,682) $ 497,804 $ 247,122
========== ========== ========== =========== =========== ===========
</TABLE>
INTEREST ON INVESTMENTS AND LOANS 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.
16
<PAGE>
ITEM 6B: INVESTMENT PORTFOLIO
AMORTIZED COST OF INVESTMENTS
Reference is made to Note 3 of Notes to Consolidated Financial Statements for
the amortized cost of investments at the end of 1999 and 1998. The carrying
value of investments at the end of 1997 was as follows:
<TABLE>
<S> <C>
AVAILABLE FOR SALE
U.S. Government agency $ 29,934,441
Mortgage backed securities 20,641,120
State and municipal 16,004,310
Federal Home Loan Bank Stock 1,448,200
Equity securities 3,753,952
------------
$ 71,782,023
============
HELD TO MATURITY
U.S. Treasury $ 2,798,169
U.S. Government agency 1,499,990
Mortgage backed securities 426,155
State and municipal 7,051,291
Foreign bonds 50,000
------------
$ 11,825,605
============
</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, 1999. 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 1999 in Part II,
Item 8.
MATURITY DISTRIBUTION--AMORTIZED COST
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
1 TO 5 5 TO 10
DESCRIPTION < 1 YEAR YEARS YEARS > 10 YEARS
<S> <C> <C> <C> <C>
U.S. Treasury $500,150 $ 799,628 $ -- $ --
U.S. Government agency -- 14,401,134 25,893,394 --
Mortgage backed securities (1) -- 1,082,577 292,947 4,979,590
State and municipal 254,184 4,519,485 8,204,436 8,798,986
-------- ----------- ----------- -----------
$754,334 $20,802,824 $34,390,777 $13,778,576
======== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
1 TO 5 5 TO 10
DESCRIPTION < 1 YEAR YEARS YEARS > 10 YEARS
-------- ------- ------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury $ -- $ -- $ -- $ --
U.S. Government Agency -- -- -- --
Mortgage backed securities (1) -- -- -- --
State and municipal -- -- -- --
Foreign -- 50,000 -- --
---- ----------- ----------- -----------
$ -- $ 50,000 $ -- $ --
==== =========== =========== ===========
</TABLE>
- ------------------------------
(1) Mortgage backed securities are included in the maturity distribution table
based on the average life of the security using anticipated prepayment
rates.
17
<PAGE>
WEIGHTED AVERAGE YIELD
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
1 TO 5 5 TO 10
DESCRIPTION < 1 YEAR YEARS YEARS > 10 YEARS
-------- ------ ------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury 5.33% 5.99% -- --
U.S. Government agency -- 6.15% 6.10%
Mortgage backed securities -- 6.16% 6.06% 6.47%
State and municipal (1) 8.42 6.08% 7.44% 7.18%
-------- ----------- ----------- -----------
6.37% 6.13% 6.42% 6.93%
======== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
1 TO 5 5 TO 10
DESCRIPTION < 1 YEAR YEARS YEARS > 10 YEARS
-------- ------ ------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury -- -- -- --
U.S. Government Agency -- -- -- --
Mortgage backed securities -- -- -- --
State and municipal (1) -- -- -- --
Foreign -- 5.5% -- --
---- ----------- ----------- -----------
-- 5.5% -- --%
==== =========== =========== ===========
</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 6C: LOAN PORTFOLIO
CLASSIFICATION OF LOANS
Reference is made to Note 4 of Notes to Consolidated Financial Statements for
the classification of loans at the end of 1999 and 1998. In addition to that
information, the following information concerning loans is presented.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Real Estate:
Residential $ 97,681,753 $ 82,576,975 $ 70,754,025
Commercial 34,247,855 30,761,597 29,019,857
Construction & land development 1,862,298 1,942,861 2,904,008
Demand and time 22,586,144 19,937,561 18,718,070
Installment & credit card 10,583,871 13,410,083 15,041,537
Lease financing 3,872,327 3,365,075 --
------------ ------------ ------------
170,834,248 151,994,152 136,437,497
Allowance for loan losses 2,302,981 2,241,148 2,243,472
------------ ------------ ------------
Loans, net $168,531,267 $149,753,004 $134,194,025
============ ============ ============
</TABLE>
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, 1999
is presented below:
<TABLE>
<CAPTION>
CONTRACTUALLY DUE
AFTER ONE YEAR
ONE YEAR OR THROUGH FIVE
LESS YEARS AFTER FIVE YEARS
Variable Fixed Variable Fixed
<S> <C> <C> <C> <C> <C>
Construction and land development $ 1,741,078 -- -- -- --
Commercial demand and time $10,454,880 -- -- -- --
</TABLE>
18
<PAGE>
RISK ELEMENTS
Reference is made to Note 4 of Notes to Consolidated Financial Statements for
nonaccrual, past due and restructured loans at the end of 1999, 1998 and 1997.
In addition to that information, the following information concerning risk
elements is presented.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Nonaccrual $ 84,312 $ 447,073
Restructured 812,072 834,341
-------- ----------
$896,384 $1,281,414
======== ==========
Accruing loans past due more than 90 days $ 62,988 $ 121,893
======== ==========
</TABLE>
There are no other interest-bearing assets that would be required to be
reported under this section if such assets were loans.
ITEM 6D: 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.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
DESCRIPTION 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,387,732 $2,302,981 $2,241,148 $2,243,472 $1,931,345
Charge-offs:
Commercial 180,313 294,432 35,914 -- --
Real Estate:
Residential -- -- -- 52,613 --
Commercial -- 102,300 -- -- --
Construction -- -- -- -- --
Installment 122,512 276,951 221,855 218,950 172,375
---------- ---------- ---------- ---------- ----------
302,825 673,683 257,769 271,563 172,375
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial 109,292 57,710 12,051 -- --
Real Estate:
Residential -- -- -- 2,000 10,134
Commercial -- 22,258 -- 6,406 --
Construction -- -- -- -- --
Installment 44,252 63,466 67,551 73,333 474,368
---------- ---------- ---------- ---------- ----------
153,544 143,434 79,602 81,739 484,502
---------- ---------- ---------- ---------- ----------
Net charge-offs 149,281 530,249 178,167 189,824 (312,127)
---------- ---------- ---------- ---------- ----------
Provision charged to operations 597,840 615,000 240,000 187,500 --
---------- ---------- ---------- ---------- ----------
Balance at end of the year $2,836,291 $2,387,732 $2,302,981 $2,241,148 $2,243,472
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
outstanding .07% .28% .11% .13% .00%
</TABLE>
The provision charged to operations for 1999, 1998 and 1997 is discussed in the
section on Management's Discussion and Analysis of Financial Condition and
Results of Operations. The Company's provisions in 1996 and 1995 related to the
level of net losses incurred and to loan portfolio growth in each year.
19
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
ALLOCATED AMOUNT OF THE ALLOWANCE--YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
PORTFOLIO 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial(a) $ 565,474 $ 739,235 $ 423,782 $ 563,820 $ 289,203
Real Estate:
Residential 434,500 508,999 565,113 433,873 531,480
Commercial 356,711 955,747 682,604 386,825 357,384
Construction -- 6,767 9,311 7,610 15,805
Installment 341,190 116,312 211,704 269,147 219,159
Unallocated 1,138,416 60,672 410,467 579,873 830,441
---------- ---------- ---------- ---------- ----------
$2,836,291 $2,387,732 $2,302,981 $2,241,148 $2,243,472
========== ========== ========== ========== ==========
</TABLE>
PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS--YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
PORTFOLIO 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial (a) 12.2% 14.7% 15.5% 15.3% 17.8%
Real Estate:
Residential 68.8% 63.0% 57.2% 54.4% 49.1%
Commercial 15.7% 16.0% 20.0% 20.2% 18.6%
Construction .7% .6% 1.1% 1.3% 2.3%
Installment 2.6% 5.7% 6.2% 8.8% 12.2%
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
- ------------------------------
(a) Commercial loans includes lease financing.
ITEM 6E: DEPOSITS
Reference is made to the tables for Average Balances, Interest and Yields under
Item 6A of this section. Reference is made to Note 8 of Notes to Consolidated
Financial Statements for additional information concerning deposits.
ITEM 6F: RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
DESCRIPTION 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on average assets .85% 1.00% .78%
Return on average equity 9.15% 9.71% 7.39%
Dividend payout ratio 30.37% 27.63% 35.07%
Average equity to average assets 9.26% 10.32% 10.51%
</TABLE>
ITEM 6G: SHORT-TERM BORROWINGS
Reference is made to Note 10 of Notes to Consolidated Financial Statements for a
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>
OTHER SHORT-TERM BORROWINGS 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total outstanding at period-end $67,830,856 $35,414,906 $11,706,255
Average amount outstanding during period 43,553,054 19,414,143 9,121,290
Maximum amount outstanding at any period-end 67,830,856 35,414,906 19,416,627
Weighted average interest rate at period-end 5.17% 5.11% 5.55%
Weighted average interest rate for the period 5.34% 5.68% 5.68%
</TABLE>
20
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EARNINGS 1999 AS COMPARED TO 1998
SUMMARY
Carrollton Bancorp reported net income for 1999 of $2,846,000, or $1.01 per
share, representing a 4% decrease from 1998 net income of $2,974,000, or $1.04
per share. Part of the earnings decrease was due to the difference between
nonrecurring gains. In 1998 a nonrecurring gain amounted to $1,250,000, or $.44
per share, on an after tax basis. In 1999, a non-recurring gain on the sale of
the merchant services unit amounted to a $823,000 or $.29 per share on an after
tax basis. The loan portfolio grew 23% to $260,005,000 as a result of
residential and commercial loan production. The loan portfolio growth
contributed to a 9% increase in interest income over 1998. Non-interest income
from fees continued its trend, increasing by 39% over 1998. In addition to fees
generated by the ATM network of 164 machines, income from merchant services and
national point of sale sponsorships grew significantly during 1999. Included in
expense growth in 1999 were the variable cost components of fee income which
grew in relation to fee growth.
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 or state
tax benefit, to dividends from equity stocks which achieve a dividend exclusion,
and to certain loans which are tax exempt.
In 1999, net interest income on a taxable equivalent basis increased by
$594,000 over 1998 to $12.1 million as a result of increased volume in the loan
portfolio and a reduction of the rates paid on deposit accounts. On average, the
loan portfolio increased 17% over 1998 while the investment portfolio decreased
by 7%. The yield on the loan portfolio decreased from 8.50% in 1998 to 8.01% in
1999. Changes in loan portfolio mix and a very competitive loan market caused
the loan yield to fall. The yield on investment securities also decreased to
6.60% in 1999 from 6.76% in 1998. The growth in the loan portfolio overshadowed
the falling yields to cause total interest income on a tax equivalent basis to
rise from $21.1 million in 1998 to $23.1 million in 1999.
Interest expense increased $1.4 million to $11.0 million in 1999 from
$9.6 million in 1998. Interest expense increased primarily due to increased
borrowings, which increased on average by 82%. Interest expense on deposits
increased in 1999 from 1998 due to higher deposit levels while the cost of
interest-bearing deposits fell from 3.98% in 1998 to 3.88% in 1999. The cost of
borrowed funds decreased due to changes in the composition of funding sources to
5.09% in 1999 from 5.22% in 1998. The table for Rate and Volume Variance
Analysis included in this report shows the increase in interest expense resulted
from increased volume of borrowings. The growth in interest-bearing liabilities
supported loan portfolio growth.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $597,840 for 1999 compared to $615,000 for
1998. Non accrual, restructured, and delinquent loans over 90 days to total
loans decreased to .41% at the end of 1999 compared to 1.02% in 1998. This
decline was from decreased delinquencies. The ratio of loan losses to average
loans also decreased in 1999 to .07% compared to .28% for 1998. This decrease
was attributable to a reduction in commercial loan losses recognized.
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 1999, non-interest income excluding securities gains, gains on the sale of
a business unit, and gains on loan sales increased by 28% over 1998. Brokerage
commissions increased $92,000 or 10% in 1999 due to the continued strong stock
market. Other fees and commissions increased $1.8 million principally as a
result of increased merchant services income, POS fees, and ATM fees. Merchant
services income rose due to an increase in the number of merchants receiving
credit card deposit services. ATM fee income growth came about from an increase
in the convenience fee in August, 1998 and by additional machines placed in
service.
Net securities gains in 1999 were $240,000 compared to $2,404,000 in 1998.
The gains in 1998 included $2,036,000 on the sale of an equity position in a
non-public company that operated as a regional switch for electronic banking
transactions, such as ATM and point of sale transactions.
The Company continued to sell loans generated by its mortgage unit, as well as
other loans held in its portfolio. These transactions generated gains of
21
<PAGE>
$250,000 in 1999 compared to $449,000 in 1998. At December 31, 1999, the Company
serviced loans for others totaling $11,658,098.
NON-INTEREST EXPENSES
In 1999, non-interest expenses increased by $2.0 million or 13%. Salaries and
benefits increased by $438,000, or 7% due to loan officer additions and merit
increases. In certain areas of the Company, staff reductions occurred through
attrition and the positions were eliminated. Full time equivalent staff
decreased from 161 positions at the end of 1998 to 155 positions at
December 31, 1999. Occupancy expenses decreased $55,000 to $1,590,000 in 1999.
Furniture and equipment expense increased primarily due to the depreciation of
ATM machines purchased plus the related maintenance contracts expense. Other
operating expenses increased $1.4 million, or 22%. A significant portion of this
increase relates to increased volumes of fee generating activities, in
particular merchant services and ATM transactions. Other expenses also increased
during 1999 related to the Company's growth, such as data processing, telephone
and carrier services.
INCOME TAX PROVISION
For 1999, the effective tax rate for the Company decreased to 24% compared to
27% for 1998. This decrease was primarily due to a decrease in taxable income
associated with the gains on the non-recurring items. During 1999 and 1998, 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 in 1996 to provide an exemption from state tax on the income earned on
certain qualifying investments, which was 100% effective for 1999 and 1998
compared to 75% effective for 1997.
FINANCIAL CONDITION
SUMMARY
Total assets of the Company increased by 18% to $375.6 million at
December 31, 1999 versus $317.9 million at the end of 1998. Investment
securities increased to $75.8 million at December 31, 1999. Total loans at
December 31, 1999 grew 23% to $260.0 million compared to $210.8 million at the
end of 1998. Interest earning assets increased to $340.0 million and were 90.5%
of total assets at December 31, 1999.
INVESTMENT SECURITIES
Securities increased to $75.8 million at December 31, 1999 from $65.1 million
at December 31, 1998. The portfolio consists primarily 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. Certain agency securities are exempt from
state income taxes. The Company uses its investment portfolio as a source of
both liquidity and earnings.
The Company liquidated $14.5 million of available for sale securities during
the fourth quarter of 1999. These transactions were principally undertaken to
increase liquidity and reduce interest rate risk.
The company transferred securities from the held to maturity classification to
the available for sale classification on its balance sheet as permitted by
Financial Accounting Standards No. 133 in the fourth quarter of 1999. The amount
of the assets reclassified as available for sale was $6,657,271.
LOANS
Total loans increased $49 million or 23% from 1998 to $260.0 million at
December 31, 1999. Loan growth was primarily in commercial real estate lending,
equity loans and lines of credit with other consumer products declining during
the year. Both the residential mortgage and equity loan units are principally
wholesale operations. Commercial loans equaled 29% of total loans at the end of
the year and amounted to $76 million. Consumer loans amounted to $184 million
and were 71% of total loans.
ALLOWANCE FOR LOAN LOSSES
At December 31, 1999, the allowance for loan losses was $2.8 million, a 19%
increase from the end of 1998. At December 31, 1999, the ratio of the allowance
to total loans was 1.09% compared to 1.13% at December 31, 1998. This ratio fell
as a result of portfolio growth. The ratio of net loan losses to average loans
outstanding for 1999 was .07% compared to .28% for 1998. The ratio of
non-accrual loans, restructured loans, and loans delinquent more than 90 days to
total loans decreased to .41% at December 31, 1999 from 1.02% at the end of
1998. The ratio of real estate secured loans to total loans increased to 85% at
the end of 1999 from 82% at the end of 1998.
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, 1999 increased by $25.5 million to
$262.4 million from the end of 1998. Interest-bearing accounts increased by
$21.3 million and non-interest bearing deposits increased by $4.1 million.
Deposit growth is attributed primarily to new account relationships resulting
from the opening of a new branch in a
22
<PAGE>
new market area, and implementation of a retail division sales force.
Other borrowings increased significantly in 1999 to fund loan and investment
growth. Advances from the Federal Home Loan Bank increased to $66 million at the
end of 1999 compared to $35 million at the end of 1998. Borrowings for federal
funds purchased, securities sold under agreements to repurchase and notes
payable to the US Treasury increased by $2.2 million from December 31, 1998 to
1999.
CAPITAL
At December 31, 1999, shareholders' equity was $29.9 million, a decrease of
$1.0 million from 1998. The decrease in stockholders' equity was largely due to
the fair market value adjustment of the investment portfolio as required by
Statement No. 115 of the Financial Accounting Standards Board. The Company paid
shareholders dividends totaling $864,393, and net income for 1999 was
$2.8 million. In addition, the Company purchased and retired common stock for
$.9 million in 1999. The company declared a 2 for 1 stock split in 1999 and
restructured the par value of the stock from $10 to $1. Stockholders' equity
amounted to 7.96% of total assets at December 31, 1999 compared to 9.71% at the
end of 1998. The decrease in this ratio was caused by asset growth and a
negative change in the unrealized holding gains (losses) on available for sale
securities, but remains at a very strong level.
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 shareholders' 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 and Bank at December 31, 1999 and
1998. 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
CARROLlTON CARROLlTON
BANCORP BANK
Ratio Minimum 1999 1998 1999 1998
- ----- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Leverage Ratio 4% 7.3% 9.4% 7.0% 8.1%
Risk-based Capital:
Tier 1 (Core) 4% 11.0% 15.0% 10.6% 13.3%
Tier 2 (Total) 8% 12.4% 16.8% 11.7% 14.6%
</TABLE>
LIQUIDITY
Liquidity management ensures that funds are available when required to meet
deposit withdrawals, loan commitments, and operating expenses. These funds are
supplied by deposits, loan repayments, security maturities and can be raised by
liquidating assets or through additional borrowings. 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 $4 million, secured lines of
$20 million, and has borrowing capacity with the Federal Home Loan Bank of
$90 million which is collateralized by a blanket security interest in the
Company's residential first mortgage loans.
At December 31, 1999, the Company had outstanding loan commitments and unused
lines of credit totaling $92.2 million. Of this total, management places a high
probability for funding within 1 year on approximately $23.0 million. The
remaining amount is mainly unused home equity lines of credit 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
23
<PAGE>
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, 1999, the Company was in a liability sensitive position
amounting to 7.1% 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. Although the Company was at a negative asset/liability
position at December 31, 1999, the Company can experience significant volatility
in its asset/ liability position by virtue of its funding of longer term
mortgage loans with relatively short repricing borrowings while it works to sell
the loans. Management continues to work to structure borrowing terms that more
closely match asset repricing characteristics, keeping in mind the overall
balance sheet strategy of the Company. Theoretically, 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, and an asset
sensitive position is preferable in a rising rate environment.
The following chart shows the static gap position for interest sensitive
assets and liabilities of the Company as of December 31, 1999. 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 open between two and five years are
reflected in the 1 to 2 year time horizon in the table. Accounts open over five
years are reflected in the 2 to 5 year horizon. In addition, the maturities of
investments shown in the gap table will differ from contractual maturities due
to anticipated calls of certain securities based on current interest rates.
While this chart indicates the opportunity to reprice assets and liabilities
within certain time frames, it does not reflect the fact that interest rate
changes occur in disproportionate increments for various assets and liabilities.
PERIOD FROM DECEMBER 31, 1999 IN WHICH ASSETS AND LIABILITIES REPRICE
<TABLE>
<CAPTION>
0 TO 90 91 TO 365 > 1 TO 2 > 2 TO 5 >5
DAYS DAYS YEARS YEARS YEARS
------- --------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
ASSETS:
Short term investments $ 2,840
Securities 27,407 13,159 5,969 5,640 23,622
Loans 78,521 14,616 9,065 48,116 107,129
------- ------- ------- ------- -------
108,768 27,775 15,034 53,756 130,751
------- ------- ------- ------- -------
LIABILITIES:
Deposits 33,382 63,243 62,921 60,699 247
Borrowings 66,481 -- 10,000 5,000 --
------- ------- ------- ------- -------
99,863 63,243 72,921 65,699 247
------- ------- ------- ------- -------
Gap position:
Period 8,905 (35,468) (57,887) (11,943) 130,504
% of Assets 2.4% (9.4)% (15.4)% (3.2)% 34.7%
Cumulative 8,905 (26,563) (84,450) (96,393) 34,111
% of Assets 2.4% (7.1)% (22.5)% (25.7)% 9.1%
Cumulative risk sensitive assets to risk
sensitive liabilities 1.09 .84 0.64 0.68 1.11
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued three standards during
1998, and one in early 1999. Statement No. 132, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS--AN AMENDMENT OF FASB STATEMENTS
NO. 87, 88 AND 106, is effective for the accompanying financial statements, and
the Company has complied with the provisions of this statements where
applicable. Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, and Statement No. 134, ACCOUNTING FOR MORTGAGE-BACKED SECURITIES
RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE
BANKING ENTERPRISE, become effective for fiscal quarters beginning after
June 15, 1999 and December 15, 1998, respectively. Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position, and measure those
instruments at fair value and provides for a one time reclassification of assets
which the bank
24
<PAGE>
elected in the fourth quarter of 1999. Statement No. 134 amends Statements
No. 65 and 115 regarding accounting for mortgage backed securities. Statement
No. 135, RESCISSION OF FASB STATEMENT NO 75 AND TECHNICAL CORRECTIONS, is
effective for fiscal years beginning after February 15, 1999, and rescinds
FASB Statement No. 75. Management does not expect these statements to have
any material effect on the Company's financial position or results of
operations.
THE YEAR 2000 ISSUE
Carrollton Bancorp is pleased to report to our shareholders and depositors that
due to our efforts to prepare for the operational challenges associated with the
millennium change, we experienced no issues that affected the way we manage the
bank or service our customers.
EARNINGS
1998 AS COMPARED TO 1997
SUMMARY
Carrollton Bancorp reported net income for 1998 of $2,974,000, or $2.07 per
share, representing a 39% increase over 1997 net income of $2,139,000, or $1.46
per share. Part of the earnings increase resulted from a nonrecurring, one-time
gain on an equity position that was sold in the third quarter of 1998. This
nonrecurring gain amounted to $1,250,000, or $.87 per share, on an after tax
basis. The loan portfolio grew 23% to $210,800,000 as a result of residential
mortgage production. The loan portfolio growth resulted in a 4% increase in
interest income over 1997. Non-interest income from fees continued its trend,
increasing by 28% over 1997. In addition to fees generated by the ATM network of
120 machines, income from merchant services and national point of sale
sponsorships grew significantly during 1998. Included in expense growth in 1998
were the variable cost components of fee income which grew in relation to fee
growth.
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 or state
tax benefit, to dividends from equity stocks which achieve a dividend exclusion,
and to certain loans which are tax exempt.
In 1998, net interest income on a taxable equivalent basis increased by
$247,000 over 1997 to $11.5 million as a result of increased volume
in the loan portfolio and a reduction of the rates paid on deposit accounts. On
average, the loan portfolio increased 20% over 1997 while the investment
portfolio decreased by 20%. The yield on the loan portfolio decreased from 8.84%
in 1997 to 8.50% in 1998. The prime rate decreases in late 1998 and a very
competitive loan market caused the loan yield to fall. The yield on investment
securities also decreased to 6.76% in 1998 from 6.85% in 1997. The securities
portfolio yield declined as a result of general declines in market rates from
1997. The growth in the loan portfolio overshadowed the falling yields to cause
total interest income on a tax equivalent basis to rise from $20.3 million in
1997 to $21.1 million in 1998.
Interest expense increased $0.6 million to $9.6 million in 1998 from
$9.0 million in 1997. Interest expense increased primarily due to increased
borrowings, which increased on average by 98%. Interest expense on deposits
decreased from 1997 to 1998 as the cost of interest-bearing deposits fell from
4.09% in 1997 to 3.98% in 1998. The cost of borrowed funds was about the same at
5.22% in 1998 and 5.23% in 1997. The table for Rate and Volume Variance Analysis
shows the increase in interest expense resulted from increased volume of
borrowings. The growth in interest-bearing liabilities supported loan portfolio
growth.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $615,000 for 1998 compared to $240,000 for
1997. Non accrual, restructured, and delinquent loans over 90 days to total
loans increased to 1.02% at the end of 1998 compared to .61% in 1997. This rise
was from increased delinquencies and non-accrual loans. The ratio of loan losses
to average loans also increased in 1998 to .28% compared to .11% for 1997. This
increase was attributable to various commercial loan losses recognized.
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 1998, non-interest income excluding securities gains and gains on loan
sales increased by 28% over 1997. Brokerage commissions increased $57,000 or 7%
in 1998 due to the continued strong stock market. Other fees and commissions
increased $1.5 million principally as a result of increased merchant services
income and ATM fees. Merchant services income rose due to an increase in the
number of merchants receiving credit card deposit services. ATM fee income
growth came about from an increase in the convenience fee and by additional
machines placed in service.
25
<PAGE>
Net securities gains in 1998 were $2,404,000 compared to $175,000 in 1997. The
gains in 1998 included $2,036,000 on the sale of an equity position in a
non-public company that operated as a regional switch for electronic banking
transactions, such as ATM and point of sale transactions. Other equity gains
from the restructuring of an equity portfolio by an outside manager amounted to
$273,000. The remaining net gains of $95,000 were generated on sales of debt
securities with a book value of $9.4 million. The debt security sales were
undertaken to move into issues that are state tax exempt in Maryland.
The Company also began in this year to sell loans generated by its mortgage
unit, as well as other loans held in its portfolio. These transactions generated
gains of $448,000 on principal balances sold of $24,377,000. At December 31,
1998, the Company serviced loans totaling $5,379,000.
NON-INTEREST EXPENSES
In 1998, non-interest expenses increased by $2.7 million or 20%. Salaries and
benefits increased by $692,000, or 12% due to staff additions and merit
increases. Full time equivalent staff increased from 157 positions at the end of
1997 to 161 positions at December 31, 1998. Most of this increase is
attributable to the branch opened in the White Marsh area in February, 1998. In
certain areas of the Company, staff reductions occurred through attrition and
the positions were eliminated. Occupancy expenses increased $78,000 over 1997
due to rents incurred for the new branch, and expenses related to the
headquarters office building purchased and occupied in late 1997. These expenses
were offset by a reduction in expenses from 1997 for the write-off of leasehold
improvements in a branch that was required to be relocated. Furniture and
equipment expense increased for depreciation on the imaging equipment and ATM
machines purchased in late 1997 and early 1998, plus the related maintenance
contracts expense. Other operating expenses increased $1.6 million, or 32%.
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 during 1998 related to
the Company's growth, such as data processing, marketing, carrier services,
telephone and postage.
INCOME TAX PROVISION
For 1998, the effective tax rate for the Company increased to 27% as compared
to 24% for 1997. This increase was primarily due to an increase in income before
taxes. During 1998, 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 in 1996 to provide an exemption from state tax on the
income earned on certain qualifying investments, which was 100% effective for
1998 compared to 75% effective for 1997. However, the increased benefit from
investment income was not sufficient to offset the increase in taxes due to a
higher pre-tax income amount.
FINANCIAL CONDITION
SUMMARY
Total assets of the Company increased by 10% to $317.9 million at December 31,
1998 versus $287.9 million at the end of 1997. Investment securities declined to
$65.1 million at December 31, 1998. Total loans at December 31, 1998 grew 23% to
$210.8 million as compared to $170.8 million at the end of 1997. Interest
earning assets increased to $274.0 million and were 86.2% of total assets at
December 31, 1998.
INVESTMENT SECURITIES
Securities decreased from $83.6 million at December 31, 1997 to $65.1 million
at December 31, 1998. 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. Certain agency securities are exempt from state income
taxes. The Company uses its investment portfolio as a source of both liquidity
and earnings.
The Company liquidated $9.4 million of available for sale securities during
1998. These transactions were principally undertaken to increase yield or
provide liquidity. The security which generated the significant gain on sale in
the third quarter was classified as available for sale, but had no published
market value and was therefore carried at cost.
LOANS
Total loans increased $40 million or 23% from 1997 to $210.8 million at
December 31, 1998. Approximately 82% of the growth came from residential loan
production by the mortgage unit, which was added in late 1997. The remaining
growth was in equity loans and lines of credit with other consumer products
declining during the year. Both the residential mortgage and equity loan units
are principally wholesale operations. The commercial lines of business declined
in the aggregate by 1%. Commercial loans equaled 29% of total loans at the end
of the year and amounted to $62 million. Consumer loans amounted to
$149 million and were 71% of total loans.
ALLOWANCE FOR LOAN LOSSES
At December 31, 1998, the allowance for loan losses was $2.4 million, a slight
increase from the end of 1997. At December 31, 1998, the ratio of the allowance
to total loans was 1.13% as compared to 1.35% at December 31, 1997. This ratio
fell as a result of portfolio growth. The ratio of net loan losses to average
loans outstanding for 1998 was .28% as compared to .11% for 1997. The ratio of
26
<PAGE>
non-accrual loans, restructured loans, plus loans delinquent more than 90 days
to total loans increased to 1.02% at December 31, 1998 from .45% at the end of
1997. The ratio of real estate secured loans to total loans increased to 82% at
the end of 1998 from 78% at the end of 1997.
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, 1998 increased by $2.6 million to
$237.0 million from the end of 1997. Interest-bearing accounts decreased by
$1.9 million and non-interest bearing deposits increased by $4.4 million.
Deposit growth is attributed primarily to new account relationships resulting
from the opening of a new branch in a new market area, and implementation of a
retail division sales force.
Other borrowings increased significantly in 1998 to fund loan growth. Advances
from the Federal Home Loan Bank increased to $35 million at the end of 1998
compared to $9 million at the end of 1997, and this increase principally funded
residential mortgage loan growth. Borrowings for federal funds purchased and
securities sold under agreements to repurchase increased by $1.8 million at
December 31, 1998.
CAPITAL
At December 31, 1998, shareholders' equity was $30.9 million, an increase of
$1.1 million over 1997. The Company paid shareholders dividends totaling
$822,000, and net income for 1998 was $3.0 million. In addition, the Company
purchased and retired common stock for $1.0 million in 1998. Stockholders'
equity amounted to 9.71% of total assets at December 31, 1998 as compared to
10.35% at the
end of 1997. The decrease in this ratio was caused by asset growth in the
balance sheet, but is still at a very strong level.
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, 1998 and 1997. 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>
Carrollton Carrollton
Bancorp Bank
Ratio Minimum 1998 1997 1998 1997
- -------------- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Leverage Ratio % 4 % 9.4 % 9.4 % 8.1 % 8.4
Risk-based Capital:
Tier 1 (Core) 4% 15.0% 15.9% 13.3% 14.2%
Tier 2 (Total) 8% 16.8% 17.1% 14.6% 15.5%
</TABLE>
LIQUIDITY
Liquidity management ensures that funds are available when required to meet
deposit withdrawals, loan commitments, and operating expenses. These funds are
supplied by deposits, loan repayments, security maturities and can be raised by
liquidating assets or through additional borrowings. 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 million, and has borrowing capacity with the Federal Home Loan Bank of
$45 million which is collateralized by a blanket security interest in the
Company's residential first mortgage loans.
At December 31, 1998, the Company had outstanding loan commitments and unused
lines of credit totaling $85.9 million. Of this total, management places a high
probability for funding within 1 year on approximately $21.4 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.
27
<PAGE>
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, 1998, the Company was in a slightly liability sensitive
position amounting to 1.8% 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. Although the Company was at a slightly
negative asset/liability position at December 31, 1998, the Company can
experience significant volatility in its asset/ liability position by virtue of
its funding of longer term mortgage loans with relatively short repricing
borrowings while it works to sell the loans. Management works to structure
borrowing terms that more closely match asset repricing characteristics, keeping
in mind the overall balance sheet strategy of the Company. Theoretically, 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, and an asset sensitive position is preferable in a rising rate
environment.
The following chart shows the static gap position for interest sensitive
assets and liabilities of the Company as of December 31, 1998. 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 open between two and five years are
reflected in the 1 to 2 year time horizon in the table. Accounts open over five
years are reflected in the 2 to 5 year horizon. In addition, the maturities of
investments shown in the gap table will differ from contractual maturities due
to anticipated calls of certain securities based on current interest rates.
While this chart indicates the opportunity to reprice assets and liabilities
within certain time frames, it does not reflect the fact that interest rate
changes occur in disproportionate increments for various assets and liabilities.
PERIOD FROM DECEMBER 31, 1998 IN WHICH ASSETS AND LIABILITIES REPRICE
<TABLE>
<CAPTION>
0 TO 90 91 TO 365 > 1 TO 2 > 2 TO 5 > 5
DAYS DAYS YEARS YEARS YEARS
($000) -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
ASSETS:
Short term investments $ 22
Securities 16,922 $ 11,677 $ 2,862 $ 15,278 $18,394
Loans 99,782 23,332 17,159 33,492 37,036
------- -------- -------- -------- -------
116,726 35,009 20,021 48,770 55,430
------- -------- -------- -------- -------
LIABILITIES:
Deposits 58,053 66,184 34,305 39,651 968
Borrowings 33,231 10,000 5,000
------- -------- -------- -------- -------
$91,284 $ 66,184 $ 34,305 $ 49,651 $ 5,968
------- -------- -------- -------- -------
Gap position:
Period $25,442 $(31,175) $(14,284) $ (881) $49,462
% of Assets 8.0% (9.8)% (4.5)% (0.3)% 15.6%
Cumulative $25,442 $ (5,753) $(20,017) $(20,898) $28,564
% of Assets 8.0% (1.8)% (6.3)% (6.6)% 9.0%
Cumulative risk sensitive assets to risk
sensitive liabilities
1.28 0.96 0.90 0.91 1.12
</TABLE>
28
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
[LOGO]
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, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the three years ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for the three years ended December 31, 1999, in
conformity with generally accepted accounting principles.
Rowles & Company, LLP
[LOGO]
Baltimore, Maryland
March 3, 2000
29
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 24,795,534 $ 32,524,320
Federal funds sold 2,840,365 22,145
Investment securities
Available for sale 75,747,478 56,745,748
Held to maturity (approximate market value of $50,000 and
$8,737,125) 50,000 8,386,910
Loans held for sale 2,557,922 3,493,960
Loans less allowance for loan losses of $2,836,291 and
$2,387,732 254,611,044 204,919,155
Premises and equipment 8,456,257 6,894,713
Deferred income taxes 880,010 -
Accrued interest receivable 2,381,008 2,060,746
Other assets 3,299,583 2,806,292
------------ ------------
$375,619,201 $317,853,989
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest-bearing $ 41,957,674 $ 37,817,737
Interest-bearing 220,492,191 199,161,288
------------ ------------
Total deposits 262,449,865 236,979,025
Federal funds purchased and securities sold under agreements
to repurchase 13,650,176 12,816,453
Notes payable -- U.S. Treasury 1,830,856 414,906
Advances from Federal Home Loan Bank 66,000,000 35,000,000
Accrued interest payable 491,728 235,696
Deferred income taxes - 426,947
Other liabilities 1,311,999 1,108,434
------------ ------------
345,734,624 286,981,461
------------ ------------
Shareholders' equity
Common stock, par value $1.00 per share; authorized
10,000,000; shares issued and outstanding 2,776,904 in
1999. Common stock, par value $10.00 per share; authorized
5,000,000 shares; issued and outstanding 1,414,744 in 1998. 2,776,904 14,147,440
Surplus 18,016,419 7,559,137
Retained earnings 9,945,947 7,964,293
Accumulated other comprehensive income (854,693) 1,201,658
------------ ------------
29,884,577 30,872,528
------------ ------------
$375,619,201 $317,853,989
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
30
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $17,909,278 $16,196,046 $14,038,685
Interest and dividends on securities:
Taxable interest income 2,695,068 2,619,672 4,142,274
Nontaxable interest income 1,246,279 1,207,758 1,046,628
Dividends 119,588 110,140 118,360
Interest on federal funds sold and other interest income 285,683 225,586 247,635
----------- ----------- -----------
Total interest income 22,255,896 20,359,202 19,593,582
----------- ----------- -----------
INTEREST EXPENSE
Deposits 7,984,401 7,921,410 8,128,202
Borrowings 2,969,248 1,675,312 847,610
----------- ----------- -----------
Total interest expense 10,953,649 9,596,722 8,975,812
----------- ----------- -----------
Net interest income 11,302,247 10,762,480 10,617,770
PROVISION FOR LOAN LOSSES 597,840 615,000 240,000
----------- ----------- -----------
Net interest income after provision for loan losses 10,704,407 10,147,480 10,377,770
OTHER OPERATING INCOME
Service charges on deposit accounts 1,331,611 1,305,099 1,323,396
Brokerage commissions 1,013,251 921,048 863,797
Other fees and commissions 6,522,446 4,678,062 3,201,713
Security gains, net 239,669 2,404,348 175,377
Gain on sale of merchant services unit 1,554,526 -- --
Gains on loan sales 249,940 448,831 10,216
----------- ----------- -----------
Total other income 10,911,443 9,757,388 5,574,499
----------- ----------- -----------
OTHER EXPENSES
Salaries 5,579,917 5,261,730 4,708,188
Employee benefits 1,303,254 1,183,459 1,044,119
Occupancy 1,590,417 1,645,755 1,567,594
Furniture and equipment 1,498,386 1,279,403 932,892
Other operating expenses 7,892,580 6,456,389 4,882,434
----------- ----------- -----------
Total other expenses 17,864,554 15,826,736 13,135,227
----------- ----------- -----------
Income before income taxes 3,751,296 4,078,132 2,817,042
INCOME TAXES 905,249 1,103,783 677,550
----------- ----------- -----------
NET INCOME $ 2,846,047 $ 2,974,349 $ 2,139,492
=========== =========== ===========
NET INCOME PER SHARE-BASIC $1.01 $1.04 $.73
=========== =========== ===========
NET INCOME PER SHARE-DILUTED $1.01 $1.04 $.73
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
Retained comprehensive Comprehensive
Shares Par value Surplus earnings Income Income
------ --------- ------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 1,394,747 $ 13,947,470 $ 6,973,666 $ 6,941,366 $ 207,948
Net income - - 2,139,492 - $ 2,139,492
Change in net unrealized holding gains
(losses) on available for sale
securities, net of tax - - - 635,874 635,874
-----------
Comprehensive income $ 2,775,366
===========
Shares acquired and cancelled (9,476) (94,760) (208,472) -
Stock dividend, 5% 69,004 690,040 1,828,607 (2,518,647) -
Cash dividends, $0.255 per share - - (750,350) -
----------- ------------ ------------ ----------- -----------
BALANCE, DECEMBER 31, 1997 1,454,275 14,542,750 8,593,801 5,811,861 843,822
Net income - - 2,974,349 - $ 2,974,349
Change in net unrealized holding gains
(losses) on available for sale
securities, net of tax - - - 357,836 357,836
-----------
Comprehensive income - - - $ 3,332,185
===========
Shares acquired and cancelled (39,531) (395,310) (1,034,664)
Cash dividends, $0.285 per share - - (821,917) -
----------- ------------ ------------ ----------- -----------
BALANCE, DECEMBER 31, 1998 1,414,744 14,147,440 7,559,137 7,964,293 1,201,658
Net income - - 2,846,047 - $ 2,846,047
Change in net unrealized holding gains
(losses) on available for sale
securities, net of tax - - - (2,056,351) (2,056,351)
-----------
Comprehensive income $ 789,696
===========
Shares acquired and cancelled (47,334) (101,406) (811,848) - -
Stock split in the form of a 100% stock
dividend 1,409,494 14,094,940 (14,094,940)
Change Par Value from $10 to $1 (25,364,070) 25,364,070
Cash dividends, $.3075 per share - - (864,393) -
----------- ------------ ------------ ----------- -----------
BALANCE, DECEMBER 31, 1999 2,776,904 $ 2,776,904 $ 18,016,419 $ 9,945,947 ($ 854,693)
=========== ============ ============ =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 21,978,252 $ 20,506,896 $ 19,407,645
Fees and commissions received 10,912,726 6,429,072 5,354,162
Interest paid (10,697,617) (9,565,643) (8,978,860)
Cash paid to suppliers and employees (17,534,032) (13,817,726) (12,553,563)
Proceeds from sale of loans held for sale 19,229,922 24,377,361 --
Origination of loans held for sale (18,043,944) (27,442,490) --
Income taxes paid (731,108) (1,082,194) (549,109)
------------ ------------ ------------
5,114,199 (594,724) 2,680,275
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities held to maturity 870,000 3,926,155 4,482,897
Purchases of securities held to maturity - (499,688) -
Proceeds from sales of securities available for sale 14,728,042 11,817,767 4,336,419
Proceeds from maturities of securities available for sale 10,004,025 34,661,946 16,471,626
Purchases of securities available for sale (39,170,091) (28,055,686) (21,414,652)
Loans made, net of principal collected (41,660,723) (28,359,430) (5,351,561)
Purchase of loans (8,878,946) (9,071,839) (13,666,702)
Purchases of premises and equipment (2,859,938) (2,098,608) (1,985,537)
------------ ------------ ------------
(66,967,631) (17,679,383) (17,127,510)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in time deposits 25,567,546 (3,578,200) 7,541,439
Net increase (decrease) in other deposits (96,706) 6,086,820 1,143,886
Net increase in other borrowed funds 33,249,673 25,500,663 10,787,475
Common stock repurchase and retirement (913,254) (1,429,974) (303,232)
Dividends paid (864,393) (821,917) (750,350)
------------ ------------ ------------
56,942,866 25,757,392 18,419,218
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (4,910,566) 7,483,285 3,971,983
Cash and cash equivalents at beginning of year 32,546,465 25,063,180 21,091,197
------------ ------------ ------------
Cash and cash equivalents at end of year $ 27,635,899 $ 32,546,465 $ 25,063,180
============ ============ ============
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income $ 2,846,047 $ 2,974,349 $ 2,139,492
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Provision for loan losses 597,840 615,000 240,000
Depreciation and amortization 1,238,373 1,079,583 876,362
Deferred income taxes (13,111) 109,694 216,457
Amortization of premiums and discounts 42,618 60,639 5,190
Gain on disposal of securities (239,669) (2,404,348) (175,377)
Loans held for sale made, net of principal sold 1,185,978 (3,065,129) --
Gain on sale of loans (249,940) (448,831) --
(Increase) decrease in:
Accrued interest receivable (320,262) 87,055 (191,127)
Other assets 92,255 (124,914) 105,737
Increase (decrease) in:
Accrued interest payable 256,032 31,079 (3,048)
Income taxes payable (338,182) (88,105) (166,246)
Other liabilities 16,220 579,204 (367,165)
------------ ------------ ------------
$ 5,114,199 $ (594,724) $ 2,680,275
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
33
<PAGE>
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, and also makes residential mortgage loans in Virginia, Pennsylvania
and Delaware.
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 HELD FOR SALE - Loans held for sale are carried at the lower of aggregate
cost or market value. Market value is determined based on outstanding investor
commitments or, in the absence of such commitments, based on current investor
yield requirements. Gains and losses on loan sales are determined using the
specific-identification method.
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.
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.
PREMISES AND EQUIPMENT - 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. The Company capitalizes the value of loan servicing
retained on loan sales, and amortizes the value over the estimated life of the
portfolio of loans serviced. The amortization period is adjusted quarterly for
changes in the prepayment speed of the loans serviced. Intangible assets are
included in other assets on the Consolidated Balance Sheets.
34
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 - Basic net income 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 any stock dividends and
splits declared. Diluted earnings per share is determined by adjusting average
shares of common stock outstanding by the potentially dilutive effects of stock
options outstanding. The dilutive effects of stock options are computed by using
the "treasury stock" method.
COMPREHENSIVE INCOME - The Company adopted Statement No. 130 of the Financial
Accounting Standards Board, REPORTING COMPREHENSIVE INCOME, in 1998.
Comprehensive income includes net income and the unrealized gain (loss) on
investment securities available for sale, net of income taxes.
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 $16.1 and $14.8 million during
1999 and 1998 respectively, is sufficient to satisfy the reserve requirements.
In order to cover the costs of services provided by correspondent banks, the
Company maintains compensating balance arrangements at these correspondent
banks, or pays fees in the event the credit earned on balances is not sufficient
to cover activity charges. During 1999 and 1998, the Company maintained average
compensating balances of approximately $1,000,000 and $1,369,000, respectively,
of which $1,000,000 in each year was maintained at the Federal Reserve Bank. In
addition, the Company paid $63,667, $31,144, and $18,298 respectively, in
account charges in 1999, 1998 and 1997.
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
cost gains losses Market value
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
December 31, 1999
AVAILABLE FOR SALE
U.S. Treasury $ 1,299,778 $ 698 $ 4,316 $ 1,296,160
U.S. Government Agency 40,552,503 - 1,710,687 38,841,816
Mortgage backed securities 6,355,114 21,607 90,410 6,286,311
State and municipal 21,519,116 73,532 438,923 21,153,725
Federal Home Loan Bank stock 3,300,000 - - 3,300,000
Equity securities 4,113,427 929,861 173,822 4,869,466
------------ ----------- ---------- ------------
$ 77,139,938 $ 1,025,698 $2,418,158 $ 75,747,478
============ =========== ========== ============
HELD TO MATURITY
Foreign bonds $ 50,000 $ - $ - $ 50,000
------------ ----------- ---------- ------------
$ 50,000 $ - $ - $ 50,000
============ =========== ========== ============
</TABLE>
35
<PAGE>
3. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
December 31, 1998
AVAILABLE FOR SALE
U.S. Treasury $ 500,567 $ 4,588 $ - $ 505,155
U.S. Government Agency 20,447,524 66,123 58,110 20,455,537
Mortgage backed securities 9,122,671 97,861 1,507 9,219,025
State and municipal 19,152,428 683,530 17,554 19,818,404
Federal Home Loan Bank stock 1,750,000 - - 1,750,000
Equity securities 3,814,822 1,365,035 182,230 4,997,627
------------ ----------- ---------- ------------
$ 54,788,012 $ 2,217,137 $ 259,401 $ 56,745,748
============ =========== ========== ============
HELD TO MATURITY
U.S. Treasury $ 1,298,856 $ 24,524 $ - $ 1,323,380
State and municipal 7,038,054 325,691 - 7,363,745
Foreign bonds 50,000 - - 50,000
------------ ----------- ---------- ------------
$ 8,386,910 $ 350,215 $ - $ 8,737,125
============ =========== ========== ============
</TABLE>
Contractual maturities of debt securities at December 31, 1999 and 1998 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, 1999
Available for sale Held to maturity
Amortized Market Amortized Market
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Maturing Cost Value Cost Value
Within one year $ 754,334 $ 755,984 $ - $ -
Over one to five years 19,720,247 19,270,911 50,000 50,000
Over five to ten years 34,097,830 32,826,704 - -
Over ten years 8,798,986 8,438,102 - -
Mortgage backed securities 6,355,114 6,286,311 - -
------------ ----------- ---------- ------------
$ 69,726,511 $67,578,012 $ 50,000 $ 50,000
============ =========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
Available for sale Held to maturity
Amortized Market Amortized Market
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Within one year $ - $ - $ 649,818 $ 654,891
Over one to five years 10,135,379 10,183,677 3,435,899 3,523,508
Over five to ten years 18,804,464 19,019,048 3,971,193 4,203,355
Over ten years 11,160,676 11,576,371 330,000 355,371
Mortgage backed securities 9,122,671 9,219,025 - -
------------ ----------- ---------- ------------
$ 49,223,190 $49,998,121 $8,386,910 $ 8,737,125
============ =========== ========== ============
</TABLE>
At December 31, 1999 and 1998, securities with a cost basis of $31,047,389
(market value of $29,696,333), and $14,909,829 (market value of $14,928,176)
were pledged as collateral for government deposits and for securities sold under
repurchase agreements.
In 1999, 1998, and 1997, the Company realized gains on sales of securities of
$478,820, $2,407,223, and $193,580, respectively, and losses of $239,151,
$2,875, and $18,203. Income taxes on net security gains were $92,560, $928,556,
and $67,731 in 1999, 1998, and 1997, respectively.
The company transferred securities from held to maturity classification to
available for sale on its balance sheet as permitted by Financial Accounting
Standards No. 133 in the fourth quarter of 1999. The amount of the assets
reclassified as available for sale was $6,657,271.
36
<PAGE>
4. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Real estate
Residential $176,291,571 $137,646,465
Commercial 40,925,099 37,227,415
Construction and land development 1,741,078 227,800
Demand and time 28,514,699 20,957,194
Lease financing 3,150,917 3,233,883
Installment and credit card 6,823,971 8,014,130
------------ ------------
257,447,335 207,306,887
Allowance for loan losses 2,836,291 2,387,732
------------ ------------
Loans, net $254,611,044 $204,919,155
============ ============
</TABLE>
The Bank makes loans to customers located in Maryland, Virginia, Pennsylvania
and Delaware. 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 $ 93,137,165 $ 77,447,888
Maturing over one to five years 57,180,739 47,262,745
Maturing over five years 107,129,431 82,596,254
------------ ------------
$257,447,335 $207,306,887
============ ============
</TABLE>
Loan balances have been adjusted by the following deferred amounts:
<TABLE>
<S> <C> <C>
Deferred origination costs and premiums $ 2,469,320 $ 1,997,384
Deferred origination fees and unearned discounts (532,629) (972,936)
------------ ------------
Net deferred (fees) costs $ 1,936,691 $ 1,024,448
============ ============
</TABLE>
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 2,387,732 $ 2,302,981 $ 2,241,148
Provision charged to operations 597,840 615,000 240,000
Recoveries 153,544 143,434 79,602
------------ ------------ ------------
3,139,116 3,061,415 2,560,750
Loans charged off 302,825 673,683 257,769
------------ ------------ ------------
Ending balance $ 2,836,291 $ 2,387,732 $ 2,302,981
============ ============ ============
</TABLE>
At December 31, 1999, 1998, and 1997, the accrual of interest has been
discontinued on loans of $240,569, $205,074, and $84,312, respectively. The
amount of interest income that would have been recorded in 1999, 1998 and 1997
on non-accrual loans if those loans had been handled in accordance with their
contractual terms totaled $12,880, $29,395 and $10,339 respectively. The amount
of interest income actually recorded on non-accrual loans totaled $5,549,
$16,841 and $6,880 for 1999, 1998 and 1997, respectively.
At December 31, 1999, 1998 and 1997, the Company had impaired loans amounting
to $330,987, $408,565 and $408,565 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 $369,776, $408,565,
and $412,915 in 1999, 1998, and 1997, respectively. The Company has not provided
for a specific allowance for impaired loans. During 1999, 1998 and 1997, the
Company received total payments on impaired loans of $100,837, $7,612, and
$53,947, respectively. Of these amounts, $23,259, $7,612, and $49,698 were
recorded as interest income for 1999, 1998 and 1997, respectively. The remainder
was applied to reduce principal.
37
<PAGE>
4. LOANS (CONTINUED)
Amounts past due 90 days or more, excluding nonaccrual loans are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Mortgage $ 306,394 $ 1,293,078 $ 263,059
Demand and time 530,804 232,167 -
Installment and credit card - 11,557 5,872
----------- ----------- -----------
$ 837,198 $ 1,536,802 $ 268,931
=========== =========== ===========
</TABLE>
5. CREDIT COMMITMENTS
Outstanding loan commitments, unused lines and letters of credit were as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
LOAN COMMITMENTS
Mortgage loans $17,367,687 $16,589,977
Construction and land development - 2,375,000
Commercial loans 1,390,000 300,000
Installment loans 10,100 43,186
----------- -----------
$18,767,787 $19,308,163
=========== ===========
UNUSED LINES OF CREDIT
Home equity lines $60,306,310 $49,051,584
Commercial lines 13,102,535 13,753,319
Unsecured consumer lines - 2,259,443
----------- -----------
$73,408,845 $65,064,346
=========== ===========
LETTERS OF CREDIT $ 1,488,000 $ 1,487,000
=========== ===========
</TABLE>
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, 1999, 1998 and 1997,
the amounts of such loans outstanding were $2,138,974, $2,533,672, and
$2,776,990, respectively. During 1999, 1998 and 1997 additions to loans
outstanding were $1,200,000, $1,619,154, and $1,194,850, respectively, and
repayments of loans were $325,645, $1,862,472, and $4,449,827.
38
<PAGE>
7. PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and improvements $ 864,474 $ 464,474
Buildings 3,599,698 2,791,241
Leasehold improvements 2,962,716 2,916,925
Equipment and fixtures 9,719,869 8,295,848
----------- -----------
17,146,757 14,468,488
Accumulated depreciation and amortization 8,690,500 7,573,775
----------- -----------
$ 8,456,257 $ 6,894,713
=========== ===========
</TABLE>
Depreciation and amortization of premises and equipment was $1,128,263,
$1,025,796, and $841,833 for 1999, 1998, and 1997, respectively. Amortization of
intangible assets, excluding amortization of deposit premiums, was $110,110,
$53,787 and $33,617, for 1999, 1998, and 1997, respectively.
At December 31, 1999, the Company has a commitment to purchase additional ATM
machines amounting to $256,000.
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. The Company uses a 10 year life currently for all ATM machines.
8. DEPOSITS
Major classifications of interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NOW and SuperNOW $ 30,124,529 $ 33,191,119
Money market 49,125,185 51,714,305
Savings 46,011,819 44,592,752
Certificates of deposit of $100,000 or more 21,635,453 10,072,456
Other time deposits 73,595,205 59,590,656
------------ ------------
$220,492,191 $199,161,288
============ ============
Certificates of deposit of $100,000 or more mature as follows:
Three months or less $ 8,177,178 $ 7,479,658
Over three through twelve months 6,573,672 1,874,337
Over one to five years 6,884,603 718,461
------------ ------------
$ 21,635,453 $ 10,072,456
============ ============
</TABLE>
Interest expense associated with certificates of deposit of $100,000 or more
was $795,285, $531,200, and $453,459 for the years ended December 31, 1999,
1998, and 1997, respectively.
Other time deposits mature as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Maturing within one year $57,912,109 $47,606,008
Maturing over one to five years 15,435,569 11,967,224
Maturing over five years 247,527 17,424
----------- -----------
$73,595,205 $59,590,656
=========== ===========
</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 1999, 1998 and 1997, respectively. The
remaining unamortized balance at December 31, 1999 was $1,293,353. This amount
is included in other assets in the Consolidated Balance Sheets.
39
<PAGE>
10. BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
represent 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total outstanding
at period end $13,650,176 $12,816,453 $11,024,441
Average amount
outstanding during
period 14,584,035 11,138,269 7,098,332
Maximum amount
outstanding at any
month end 18,912,001 15,425,304 11,024,441
Weighted average
interest rate at
period end 4.80% 4.07% 4.82%
Weighted average
interest rate for
the period 4.42% 5.18% 4.56%
</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
$66,000,000 and $35,000,000 at December 31, 1999 and 1998, respectively.
Advances averaged $42,916,040 and $18,733,330 for 1999 and 1998, respectively,
with weighted average costs of 5.34% for 1999 and 5.68% for 1998. At
December 31, 1999, the advances carried a weighted average interest rate of
4.81%, and matured at dates ranging from September 5, 2000 through August 6,
2009. At December 31, 1998, the advances carried a weighted average interest
rate of 5.25% and matured at various dates from September 2, 1999 through
March 26, 2008. The Bank has a total secured line of $90 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 $4 million and secured lines of credit of $20 million with
other institutions. The balance outstanding under these lines was $0 and
$1,075,000 at December 31, 1999 and 1998, respectively. These lines bear
interest at the then current federal funds rate of the correspondent bank.
11. OTHER OPERATING EXPENSES
Other operating expenses include the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
ATM services $2,088,009 $1,366,754 $1,272,969
Merchant credit card services 1,465,476 1,234,137 577,500
Data processing services 684,306 677,113 551,878
Marketing 661,751 730,554 280,733
Printing, stationery, and supplies 275,829 315,911 260,121
Professional services 274,178 257,644 189,563
Telephone 247,679 212,148 128,871
Postage and freight 180,630 187,508 167,828
Directors' fees 132,025 116,750 116,126
Deposit premium amortization 123,180 123,180 123,180
Software amortization 110,110 53,787 33,617
Liability insurance 90,319 76,123 91,357
FDIC assessment 27,412 27,565 27,893
Other 1,531,676 1,077,215 1,060,798
---------- ---------- ----------
$7,892,580 $6,456,389 $4,882,434
========== ========== ==========
</TABLE>
40
<PAGE>
12. STOCK OPTIONS
The Company adopted a stock option incentive plan in 1998, which provides for
the granting of common stock options to directors and key employees. These stock
option awards contain a serial feature whereby one third of the options granted
vest and can be exercised after each year. Option prices are equal to the
estimated fair market value of the common stock at the date of the grant.
Options expire ten years after the date of grant if not exercised.
Information with respect to options outstanding is as follows for the year
ended December 31:
<TABLE>
<CAPTION>
1999 1998
Shares Option Price Range Shares Option Price Range
----- ------------------ ------ ------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 70,400 -
Granted 59,400 $16.13 to $16.25 70,400 $17.54 to $19.00
Exercised - -
Expired/Canceled 25,200 -
------- ------
Outstanding at end of year 104,600 $16.13 to $19.00 70,400 $17.54 to $19.00
------- ------
Exercisable at December 31 17,067 -
------- ------
</TABLE>
The value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1999 and 1998:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Dividend yield 1.97% to 1.98% 1.53% to 1.65%
Expected volatility 25.47% 30%
Risk free rate 5.68 to 6.42% 5.50%
Expected lives 10 years 10 years
</TABLE>
The Company uses the intrinsic value method to account for stock based
compensation plans. Because the option price of stock options granted was equal
to the market price of the common stock at the date of grant for all options
granted, no compensation expense related to the options was recognized. If the
Company had applied a fair value based method to recognize compensation cost for
the options granted, net income and net income per share would have been changed
to the following pro forma amounts for the years ended December 31, 1999 and
1998:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Income:
As Reported $ 2,846,047 $ 2,974,349
Pro forma $ 2,763,829 $ 2,769,375
Basic Earnings Per Share:
As Reported $ 1.01 $ 1.04
Pro forma $ 0.99 $ 0.96
Diluted Earnings Per Share:
As reported $ 1.01 $ 1.04
Pro forma $ 0.99 $ 0.96
</TABLE>
13. NET INCOME PER SHARE
The calculation of net income per common share is as follows for the years
ended December 31:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
BASIC:
Net income (applicable to common stock) $2,846,047 $2,974,349 $2,139,492
Average common shares outstanding 2,817,458 2,878,212 2,926,018
Basic net income per share $ 1.01 $ 1.04 $ 0.73
DILUTED:
Net income (applicable to common stock) $2,846,047 $2,139,492 $2,028,423
Average common shares outstanding 2,817,458 2,878,212 2,926,018
Stock option adjustment - - -
---------- ---------- ----------
Average common shares outstanding-diluted 2,817,458 2,878,212 2,926,018
Diluted net income per share $ 1.01 $ 1.04 $ 0.73
</TABLE>
41
<PAGE>
14. COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of nonowner changes in equity. For the Company,
nonowner equity changes are comprised of unrealized gains or losses on available
for sale classified securities that will be accumulated with net income in
determining comprehensive income. Presented below is a reconcilement of net
income to comprehensive income for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Income $ 2,846,047 $ 2,974,349 $ 2,139,492
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) during the period (3,589,866) 2,987,333 1,211,340
Less: Adjustment for security gains (239,669) (2,404,348) (175,377)
----------- ----------- -----------
Other comprehensive income before tax (3,350,197) 582,985 1,035,963
Income taxes on comprehensive income 1,293,846 (225,149) (400,089)
----------- ----------- -----------
Other comprehensive income after tax (2,056,351) 357,836 635,874
----------- ----------- -----------
Comprehensive income $ 789,696 $ 3,332,185 $ 2,775,366
=========== =========== ===========
</TABLE>
15. 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, 1999 and 1998, the capital ratios and minimum capital
requirements are as follows.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Minimum
Capital To be well
Actual Adequacy Capitalized
(in thousands) Amount Ratio Amount Ratio Amount Ratio
-------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Total Capital
(to risk-weighted assets)
Consolidated $30,097,294 12.38% $19,448,427 8.0% $24,310,533 10.0%
Carrollton Bank $28,093,224 11.74% $19,138,051 8.0% $23,922,564 10.0%
Tier 1 Capital
(to risk-weighted assets)
Consolidated $26,710,969 10.99% $ 9,724,213 4.0% $14,586,320 6.0%
Carrollton Bank $25,256,933 10.56% $ 9,569,026 4.0% $14,353,538 6.0%
Tier 1 Capital
(to average assets)
Consolidated $26,710,969 7.30% $14,627,602 4.0% $18,284,503 5.0%
Carrollton Bank $25,256,933 7.02% $14,387,894 4.0% $17,984,867 5.0%
DECEMBER 31, 1998
Total Capital (to risk-weighted
assets)
Consolidated $31,523,051 16.75% $15,051,740 8.0% $18,814,675 10.0%
Carrollton Bank $26,321,708 14.64% $14,379,727 8.0% $17,974,659 10.0%
Tier 1 Capital
(to risk-weighted assets)
Consolidated $28,254,337 15.02% $ 7,525,870 4.0% $11,288,805 6.0%
Carrollton Bank $23,933,976 13.32% $ 7,189,864 4.0% $10,784,795 6.0%
Tier 1 Capital
(to average assets)
Consolidated $28,254,337 9.39% $12,029,943 4.0% $15,037,429 5.0%
Carrollton Bank $23,933,976 8.09% $11,832,024 4.0% $14,790,030 5.0%
</TABLE>
42
<PAGE>
15. CAPITAL STANDARDS (CONTINUED)
Tier 1 capital consists of capital stock, surplus, and undivided profits. Total
capital includes a limited amount of the allowance for loan 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.
As of December 31, 1999, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk based, Tier 1 risk based, and Tier 1 leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the Bank's category.
16. 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 61% of the trust assets are invested in an immediate participation
guarantee fund, and the balance is invested in equity funds.
The following table sets forth the financial status of the plan:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $6,215,846 $5,707,644 $4,888,812
Service cost 411,073 313,141 262,076
Interest cost 431,592 402,508 372,592
Actuarial gain (656,826) 40,515 445,744
Benefits paid (296,668) (247,962) (261,580)
---------- ---------- ----------
Benefit obligation at end of year $6,105,017 $6,215,846 $5,707,644
========== ========== ==========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $5,961,647 $5,021,786 $4,288,052
Actual return on plan assets 1,001,027 858,086 615,025
Employer contribution - 329,737 380,289
Benefits paid (296,668) (247,962) (261,580)
---------- ---------- ----------
Fair value of plan assets at end of year $6,666,006 $5,961,647 $5,021,786
========== ========== ==========
Funded status $ 560,989 $ (254,199) $ (685,858)
Unrecognized net actuarial loss (915,047) 218,677 595,081
Unrecognized prior service cost 251,755 302,820 353,885
Unrecognized net transition (asset) (6,504) (52,983) (99,462)
---------- ---------- ----------
Prepaid (accrued) benefit cost ($ 108,807) $ 214,315 $ 163,646
========== ========== ==========
ASSUMPTIONS USED IN MEASURING THE PROJECTED BENEFIT
OBLIGATION WERE AS FOLLOWS:
Discount rates 7.75% 7.00% 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 $ 411,073 $ 313,141 $ 262,076
Interest cost 431,592 402,508 372,592
Actual return on assets (524,129) (441,167) (375,427)
Net amortization and deferral 4,586 4,586 4,586
---------- ---------- ----------
Net pension expense $ 323,122 $ 279,068 $ 263,827
========== ========== ==========
</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 $83,872, $85,518 and $72,205, for 1999, 1998, and 1997,
respectively.
17. 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.
43
<PAGE>
18. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CURRENT
Federal $801,771 $ 823,249 $407,013
State 116,589 170,841 54,080
-------- ---------- --------
918,360 994,090 461,093
DEFERRED (13,111) 109,693 216,457
-------- ---------- --------
$905,249 $1,103,783 $677,550
======== ========== ========
The components of the deferred tax charge (benefits) were as follows:
Provision for loan losses $(173,234) $(32,731) $(71,113)
Deferred origination costs 208,052 75,896 139,393
Deferred compensation plan (9,689) (8,805) (8,139)
Depreciation 81,732 45,523 94,002
Discount accretion (1,539) (2,096) 1,449
Retirement benefits (118,433) 31,848 60,247
Ground rent losses - 58 618
--------- -------- --------
$ (13,111) $109,693 $216,457
========= ======== ========
The components of the net deferred tax asset (liability) were as follows:
DEFERRED TAX ASSETS
Allowance for loan losses $ 860,241 $ 687,007 $654,276
Accrued retirement benefits 41,461 - -
Deferred compensation plan 194,264 184,575 175,770
Unrealized losses on available for sale investment
securities 537,768 - -
Allowance for ground rent losses 53,443 53,443 53,501
---------- ---------- --------
1,687,177 925,025 883,547
---------- ---------- --------
DEFERRED TAX LIABILITIES
Accrued retirement benefits - 76,972 45,124
Deferred origination costs 473,252 265,200 189,304
Unrealized gains on available for sale investment securities - 756,078 530,929
Depreciation 320,641 238,909 193,386
Discount accretion 11,255 12,794 14,890
FHLB Stock dividends 2,019 2,019 2,019
---------- ---------- --------
807,167 1,351,972 975,652
---------- ---------- --------
NET DEFERRED TAX ASSET (LIABILITY) $ 880,010 $ (426,947) $(92,105)
========== ========== ========
</TABLE>
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate % 34.0 % 34.0 % 34.0
INCREASE (DECREASE) RESULTING FROM:
Tax-exempt income (12.4) (10.5) (12.8)
State income taxes, net of federal income tax benefit 2.0 2.9 2.2
Other .5 .7 .7
----- ----- -----
24.1% 27.1% 24.1%
===== ===== =====
</TABLE>
44
<PAGE>
19. 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
4 months to 15 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 $570,502, $716,525, and $666,851 for 1999, 1998, and 1997,
respectively.
Lease obligations will require rent payments as follows:
<TABLE>
<CAPTION>
Period Minimum Rentals
- ------ ---------------
<S> <C>
2000 $ 510,448
2001 441,289
2002 416,737
2003 421,150
2004 402,094
Remaining years 1,796,039
----------
$3,987,757
==========
</TABLE>
20. PARENT COMPANY FINANCIAL INFORMATION
The balance sheets for 1999 and 1998 and statements of income and cash flows
for Carrollton Bancorp (Parent Only) for 1999, 1998, and 1997, are presented
below:
BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash $ 13,867 $ 6,341
Interest-bearing deposits in subsidiary 113,299 423,711
Investment in subsidiary 25,207,100 25,826,162
Investment securities available for sale 4,869,467 4,997,626
Other assets 3,474 5,130
----------- -----------
$30,207,207 $31,258,970
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 322,630 $ 386,442
----------- -----------
SHAREHOLDERS' EQUITY
Common Stock 2,776,904 14,147,440
Surplus 18,016,419 7,559,137
Retained earnings 9,945,947 7,964,293
Accumulated other comprehensive income (854,693) 1,201,658
----------- -----------
29,884,577 30,872,528
----------- -----------
$30,207,207 $31,258,970
=========== ===========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from subsidiary $1,511,862 $1,617,751 $1,370,657
Interest and dividends 126,255 129,491 126,014
Security gains 227,593 2,308,818 142,363
---------- ---------- ----------
1,865,710 4,056,060 1,639,034
EXPENSES 133,466 116,517 83,464
---------- ---------- ----------
Income before income taxes and equity in undistributed net
income of subsidiary 1,732,244 3,939,543 1,555,570
Income tax expense 61,538 870,763 40,381
---------- ---------- ----------
1,670,706 3,068,780 1,515,189
Equity in undistributed net income of subsidiary 1,175,341 (94,431) 624,303
---------- ---------- ----------
NET INCOME $2,846,047 $2,974,349 $2,139,492
========== ========== ==========
</TABLE>
45
<PAGE>
20. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash dividends from subsidiary $ 1,511,862 $ 1,617,751 $ 1,370,657
Interest and dividends received 127,912 143,268 107,107
Cash paid to suppliers (136,241) (112,818) (83,909)
Income taxes paid 42,240 (889,950) (90,974)
----------- ----------- -----------
1,545,773 758,251 1,302,881
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits 524,917 (429,852) 290,652
Proceeds from sales of securities available for sale 1,885,184 2,630,807 492,636
Purchases of securities available for sale (2,170,701) (727,072) (1,006,764)
----------- ----------- -----------
239,400 1,473,883 (223,476)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (864,393) (821,917) (750,350)
Common stock repurchase and retirement (913,254) (1,429,974) (303,232)
----------- ----------- -----------
(1,777,647) (2,251,891) (1,053,582)
----------- ----------- -----------
Net (decrease) increase in cash 7,526 (19,757) 25,823
Cash at beginning of year 6,341 26,098 275
----------- ----------- -----------
Cash at end of year $ 13,867 $ 6,341 $ 26,098
=========== =========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income $ 2,846,047 $ 2,974,349 $ 2,139,492
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Equity in undistributed income of subsidiary (1,175,341) 94,431 (624,303)
Security gains (227,593) (2,308,818) (142,363)
Decrease (increase) in accounts receivable 1,656 14,739 (19,386)
Increase (decrease) in accounts payable 101,004 (16,450) (50,559)
----------- ----------- -----------
$ 1,545,773 $ 758,251 $ 1,302,881
=========== =========== ===========
</TABLE>
46
<PAGE>
21. 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, 1999 December 31, 1998
Carrying Carrying
amount Fair value amount Fair value
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 24,795,534 $ 24,795,534 $ 32,524,320 $ 32,524,320
Federal funds sold 2,840,365 2,840,365 22,145 22,145
Investment securities (total) 75,797,478 75,797,478 65,132,658 65,482,873
Loans held for sale 2,557,922 2,557,922 3,493,960 3,493,960
Loans, net 254,611,044 247,304,439 204,919,155 209,945,276
Accrued interest receivable 2,381,008 2,381,008 2,060,746 2,060,746
FINANCIAL LIABILITIES
Noninterest-bearing deposits $ 41,957,674 $ 41,957,674 $ 37,817,737 $ 37,817,737
Interest-bearing deposits 220,492,191 222,194,798 199,161,288 200,230,465
Federal funds purchased 1,115,923 1,115,923 2,545,640 2,545,640
Notes payable-U.S. Treasury 1,830,856 1,830,856 414,906 414,906
Securities sold under agreements to repurchase 12,534,253 12,534,253 10,270,813 10,270,813
Advances from the Federal Home Loan Bank 66,000,000 62,076,053 35,000,000 35,276,070
Accrued interest payable 491,728 491,728 235,696 235,696
</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.
It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.
22. SEGMENT INFORMATION
The Company has reportable segments that are strategic business units offering
complimentary products and services to the core business of banking. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company provides the accounting
for all segments and charges a management fee for this service to the other
segments. The Company has also lent money to various segments with terms similar
to those offered third parties.
47
<PAGE>
22. SEGMENT INFORMATION (CONTINUED)
Segment information for the Company for 1999 is as follows:
<TABLE>
<CAPTION>
Commercial/ Electronic Mortgage Segment
Retail Bank Banking Brokerage Unit Totals Eliminations Consolidated
----------- ------- --------- ---- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 22,017,371 $ 9,595 $ 5,088 $ 3,518,639 $ 25,550,693 $(3,294,797) $ 22,255,896
Interest expense (10,919,058) (519,375) - (2,810,013) (14,248,446) 3,294,797 (10,953,649)
------------ ----------- ---------- ----------- ------------ ------------ ------------
Net interest income 11,098,313 (509,780) 5,088 708,626 11,302,247 - 11,302,247
Provision for loan
losses (501,240) - - (96,600) (597,840) - (597,840)
Other income 2,330,386 7,417,913 1,013,251 149,893 10,911,443 - 10,911,443
Intersegment income 65,985 - - - 65,985 (65,985) -
Operating expenses (11,566,639) (5,297,546) (696,778) (369,576) (17,930,539) 65,985 (17,864,554)
------------ ----------- ---------- ----------- ------------ ------------ ------------
Income before tax 1,426,805 1,610,587 321,561 392,343 3,751,296 - 3,751,296
Tax provision (295,761) (333,821) (124,187) (151,480) (905,249) - (905,249)
------------ ----------- ---------- ----------- ------------ ------------ ------------
Net income (loss) $ 1,131,044 $ 1,276,766 $ 197,374 $ 240,863 $ 2,846,047 $ - $ 2,846,047
============ =========== ========== =========== ============ ============ ============
Segment assets $363,418,659 $12,466,038 $ 302,127 $69,737,134 $445,923,958 $(70,304,757) $375,619,201
Expenditures for
segment purchases of
premises, equipment
and software $ 1,759,022 $ 1,088,819 $ 2,719 $ 9,378 $ 2,859,938 $ 2,859,938
</TABLE>
Other income for the commercial/retail bank includes $239,669 in gains on
security sales.
Other income for electronic banking includes $1,554,526 in gain on sale of
merchant services unit.
A reconciliation of total segment assets to consolidated total assets follows:
<TABLE>
<S> <C>
Total segment assets $445,923,958
Elimination of intersegment loans (69,892,058)
Elimination of intersegment deposit accounts (412,699)
------------
$375,619,201
============
</TABLE>
48
<PAGE>
22. SEGMENT INFORMATION (CONTINUED)
Segment information for the Company for 1998 is as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Commercial/ Electronic Mortgage Segment
Retail Bank Banking Brokerage Unit Totals Eliminations Consolidated
----------- ------- --------- ---- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 20,336,274 $ - $ 5,112 $ 1,837,418 $ 22,178,804 $ (1,819,602) $ 20,359,202
Interest expense (9,626,450) (333,925) - (1,455,949) (11,416,324) 1,819,602 (9,596,722)
------------ ----------- --------- ----------- ------------ ------------ ------------
Net interest income 10,709,824 (333,925) 5,112 381,469 10,762,480 - 10,762,480
Provision for loan
losses (570,000) - - (45,000) (615,000) - (615,000)
Other income 4,502,718 4,141,367 921,048 192,255 9,757,388 - 9,757,388
Intersegment income 49,694 - - - 49,694 (49,694) -
Operating expenses (11,144,772) (3,826,799) (614,860) (289,999) (15,876,430) 49,694 (15,826,736)
------------ ----------- --------- ----------- ------------ ------------ ------------
Income before tax 3,547,464 (19,357) 311,300 238,725 4,078,132 - 4,078,132
Tax provision (898,836) 7,476 (120,226) (92,197) (1,103,783) - (1,103,783)
------------ ----------- --------- ----------- ------------ ------------ ------------
Net income (loss) $ 2,648,628 $ (11,881) $191,074 $ 146,528 $ 2,974,349 $ - $ 2,974,349
============ =========== ========= =========== ============ ============ ============
Segment assets $304,271,843 $13,804,997 $288,326 $42,958,314 $361,323,480 $(43,469,491) $317,853,989
Expenditures for
segment purchases of
premises, equipment
and software $ 1,732,065 $ 341,198 $ 17,685 $ 60,534 $ 2,151,482 $ 2,151,482
</TABLE>
Other income for the commercial/retail bank includes $2,404,348 in gains on
security sales.
A reconciliation of total segment assets to consolidated total assets follows:
<TABLE>
<S> <C>
Total segment assets $361,323,480
Elimination of intersegment loans (42,025,412)
Elimination of intersegment deposit accounts (1,444,079)
------------
$317,853,989
============
</TABLE>
49
<PAGE>
23. CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1999
Fisrt Second First Second
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 4,861,233 $ 5,312,781 $ 5,848,495 $ 6,233,387
Interest expense (2,258,178) (2,445,523) (2,941,912) (3,308,036)
----------- ----------- ----------- -----------
Net interest income 2,603,055 2,867,258 2,906,583 2,925,351
Provision for loan losses (144,900) (144,900) (149,450) (158,590)
Security gains (losses) 41,780 35,950 7,995 153,944
Gains on loan sales 249,940 - - -
Gains on sale of merchant services - - 1,554,526 -
Other income 2,056,530 2,368,532 2,326,404 2,115,842
Operating expenses (4,174,950) (4,447,843) (4,658,417) (4,583,344)
----------- ----------- ----------- -----------
Income before taxes 631,455 678,997 1,987,641 453,203
Tax provision (124,038) (108,107) (622,150) (50,954)
----------- ----------- ----------- -----------
Net income $ 507,417 $ 570,890 $ 1,365,491 $ 402,249
=========== =========== =========== ===========
Earnings per share $0.18 $0.19 $0.50 $0.14
=========== =========== =========== ===========
Cash dividends per share $0.0725 $0.0725 $0.08 $0.0825
=========== =========== =========== ===========
Market prices: high $18.00 $18.00 $19.25 $18.00
=========== =========== =========== ===========
low $16.25 $16.13 $17.25 $14.25
=========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Fisrt Second First Second
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 4,959,960 $ 5,129,817 $ 5,294,807 $ 4,974,618
Interest expense (2,330,595) (2,465,265) (2,514,257) (2,286,605)
----------- ----------- ----------- -----------
Net interest income 2,629,365 2,664,552 2,780,550 2,688,013
Provision for loan losses (75,000) (90,000) (315,000) (135,000)
Security gains (losses) 88,514 195,995 2,063,947 55,892
Gains on loan sales - - 253,630 195,201
Other income 1,461,790 1,668,305 1,812,040 1,962,074
Operating expenses (3,509,586) (3,864,671) (4,093,229) (4,359,250)
----------- ----------- ----------- -----------
Income before taxes 595,083 574,181 2,501,938 406,930
Tax provision (115,576) (110,691) (844,130) (33,386)
----------- ----------- ----------- -----------
Net income $ 479,507 $ 463,490 $ 1,657,808 $ 373,544
=========== =========== =========== ===========
Earnings per share $0.17 $0.16 $0.58 $0.13
=========== =========== =========== ===========
Cash dividends per share $0.07 $0.07 $0.07 $0.08
=========== =========== =========== ===========
Market prices: high $18.75 $19.50 $19.13 $17.16
=========== =========== =========== ===========
low $16.67 $17.63 $16.25 $16.25
=========== =========== =========== ===========
</TABLE>
All earnings per share amounts have been adjusted to reflect the 2 for 1 stock
split in July, 1999 and the 5% stock dividend declared in January, 1998.
50
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS
At no time whatsoever during the Company's two most recent fiscal years or any
subsequent interim period, has 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, resigned, declined to stand for reelection or been dismissed.
PART III
- -------------------
ITEM 10: 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 2000
ALBERT R. COUNSELMAN - Mr. Counselman, age 51, 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)(2)
JOHN P. HAUSWALD - Mr. Hauswald, age 77, 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. (1) (2)
DAVID P. HESSLER - Mr. Hessler, age 43, has served as a director of the Bank
since March 1999, and the Company since May 1999. He has been President and CEO
of Eastern Sales & Engineering, an electrical contracting and service
maintenance firm, since 1987 and was Vice president from 1986 to 1987.
Mr. Hessler has been Vice President of Advanced Petroleum Equipment, a
distributorship, since its inception in 1998.
WILLIAM C. ROGERS, JR. - Mr. Rogers, age 73, 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
- --------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
since 1953. He is also President of Moreland Memorial Park Cemetery, Inc. where
he has been a director since 1959. He is the brother of John Paul Rogers, a
director of the Bank and the Company.
Directors whose terms expire in 2001
DALLAS R. ARTHUR - Mr. Arthur, age 55, has served as a director of Carrollton
Bank, and the Company since October 1991. He has been President of both the
Company and the Bank since October 1993, and Chief Executive Officer of both the
Company and the Bank since February 1994. Mr. Arthur was Executive Vice
President of the Bank from October 1991 until October 1993, and had served as
First Senior Vice President of the Bank from December 1990 until October 1991.
Mr. Arthur has been with the Bank since 1964.
C. EDWARD HOERICHS - Mr. Hoerichs, age 88, 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 80, 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. (1)
JOHN PAUL ROGERS - Mr. Rogers, age 64, 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 2002
STEVEN K. BREEDEN - Mr. Breeden, age 41, has served as a director of the Bank,
since June 1994, and of the Company since October 1995. Mr. Breeden is currently
Vice President and Secretary of Security Development Corporation, a real estate
development company, a position he has held for the past five years(2).
THELMA T. DALEY - Dr. Daley, age 68, has served as a director of the Bank since
November 1995, and of the Company since May 1998. Dr. Daley retired as the
Coordinator of Counseling and Guidance for The Baltimore County Board of
Education.
51
<PAGE>
HOWARD S. KLEIN - Mr. Klein, age 40, has served as a director of the Bank since
March 1999 and of the Company since April 1999. Mr. Klein has been Vice
President and General Counsel for a family-operated chain of five full serve
supermarkets and related development and operating companies since 1987.
LEO A. O'DEA - Mr. O'Dea, age 69, 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)
THE BOARD OF DIRECTORS OF THE COMPANY MET 9 TIMES AND THE BOARD OF DIRECTORS OF
THE BANK 18 TIMES DURING THE YEAR ENDED DECEMBER 31, 1999. THE BOARD OF
DIRECTORS OF THE BANK MEETS 18 TIMES EACH YEAR. 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, 1999.
AS OF THE DATE OF THIS PROXY STATEMENT, THE BOARD OF DIRECTORS DOES NOT HAVE A
STANDING NOMINATING COMMITTEE.
THE AUDIT COMMITTEE HELD 5 MEETINGS DURING 1999. ITS CURRENT MEMBERS ARE
MESSRS. COUNSELMAN, HAUSWALD AND QUILLE. ONLY NONEMPLOYEE DIRECTORS ARE ELIGIBLE
TO SERVE ON THE AUDIT COMMITTEE. THE DUTIES OF THE AUDIT COMMITTEE INCLUDE
REVIEWING THE ANNUAL FINANCIAL STATEMENTS OF THE COMPANY AND THE SCOPE OF THE
INDEPENDENT ANNUAL AUDIT AND INTERNAL AUDITS. IT ALSO REVIEWS THE INDEPENDENT
ACCOUNTANT'S LETTER TO MANAGEMENT CONCERNING THE EFFECTIVENESS OF THE COMPANY'S
INTERNAL FINANCIAL AND ACCOUNTING CONTROLS AND MANAGEMENT'S RESPONSE TO THAT
LETTER. IN ADDITION, THE COMMITTEE REVIEWS AND RECOMMENDS TO THE BOARD THE FIRM
TO BE ENGAGED AS THE COMPANY'S INDEPENDENT ACCOUNTANTS. THE COMMITTEE MAY ALSO
EXAMINE AND CONSIDER OTHER MATTERS RELATING TO THE FINANCIAL AFFAIRS OF THE
COMPANY AS IT DETERMINES APPROPRIATE.
THE COMPENSATION COMMITTEE MET 2 TIMES DURING 1999. ITS CURRENT MEMBERS ARE
MESSRS. BREEDEN, COUNSELMAN, 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, SENIOR VICE PRESIDENT AND
ABOVE, OF THE BANK.
DIRECTORS WHO ARE NOT EMPLOYEES OF THE BANK RECEIVE A MONTHLY FEE OF $900 FOR
BOARD MEETINGS, AND BETWEEN $75 AND $150 PER COMMITTEE MEETING ATTENDED. THE
CHAIRMAN OF THE BOARD OF THE BANK RECEIVES A MONTHLY FEE OF $1,100. DIRECTORS DO
NOT RECEIVE ADDITIONAL FEES FOR THEIR SERVICE AS DIRECTORS OF THE COMPANY.
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 38, has been Senior Vice
President--Lending of the Bank since June 1994 and previously was Vice
President--Commercial Lending since September 1991.
EDWARD R. BOOTEY - Mr. Bootey, age 53, 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 served as Vice President--Operations from January 1991. He served as
Assistant Vice President--Operations from December 1987 until January 1991.
RANDALL M. ROBEY - Mr. Robey, age 42, has been Senior Vice President, Chief
Financial Officer and Treasurer of the Bank since October 1999. Prior to joining
Carrollton Bank, Mr. Robey was Vice President of Financial Services of
Mercantile Bank & Trust in Baltimore, Maryland from June 1998 to October 1999,
and prior to that Senior Vice President and Chief Financial Officer of Annapolis
Bank & Trust from March 1989 to June 1998.
GARY M. JEWELL - Mr. Jewell, age 53, has been Senior Vice President and Retail
Delivery Group Manager since July 1998. He was previously Senior Vice President
Electronic Banking from March 1996 to July 1998. Prior to joining Carrollton
Bank, Mr. Jewell was Director of Product Management and Point of Sale Services
for the MOST EFT network in Reston, Virginia from March 1995 to March 1996 and
prior to that Director/Manager of Merchant Services for the Farmers and
Mechanics National Bank from 1993 to March 1995.
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 11: 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,
1997, 1998 and 1999 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
52
<PAGE>
compensation of each of such individuals does not exceed $100,000.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Long-Term Incentive Plan
Stock Option Grants
Name and Principal Position Year Salary ($) (Shares) Bonus ($)
- --------------------------- ---- ---------- ------------------------ ---------
<S> <C> <C> <C> <C>
Dallas R. Arthur, President and Chief 1999 $132,912 16,000 7,500
Executive Officer 1998 $126,757 8,000 -
1997 $119,911 - -
</TABLE>
The Company has no employment agreements, termination of employment, or
change-in-control agreements or understandings with any of its directors,
executive officers or any other party whatsoever, except that the President of
Carrollton Mortgage Services, Inc., a new subsidiary of the Bank, has an
employment contract that provides for a termination settlement of $50,000 if
terminated by the Bank.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1999, 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>
Name and Address of Amount and Nature of Percent of
Beneficial Owner (12) Beneficial Ownership Class
- --------------------- -------------------- ----------
<S> <C> <C>
Directors:
Dallas R. Arthur 3,024(2) *
Steven K. Breeden 5,820(3) *
Albert R. Counselman 30,602(4) *
Thelma T. Daley 110 *
John P. Hauswald 11,802(5) *
David P. Hessler 400 *
C. Edward Hoerichs 4,466 *
Howard S. Klein 3,400(6) *
Leo A. O'Dea 11,216(7) *
Allen Quille 3,890 *
John Paul Rogers 193,412(8) 6.91%
William C. Rogers, Jr. 257,372(8)(9)(10) 9.24%
All Directors and Executive Officers of the Company as A
Group (17 persons) 529,350 19.07%
Other Significant Shareholder:
Patricia A. Rogers 224,782(11) 8.07%
</TABLE>
- ------------------------------
* Less than 1%
(1) Unless otherwise indicated, the named person has sole voting and investment
power with respect to all shares.
(2) Includes 1,678 shares owned jointly by Mr. Arthur and his wife. Excludes 976
shares owned by Mr. Arthur's wife.
(3) Includes 2,698 shares owned jointly by Mr. Breeden and his wife.
(4) Excludes 1,000 shares owned by Mr. Counselman's wife.
(5) Includes 11,490 shares owned jointly by Mr. Hauswald and his wife. Excludes
10,538 shares owned by Mr. Hauswald's wife.
(6) Includes 400 shares owned jointly by Mr. Klein and his wife. Also includes
1,600 shares owned by Colgate Investments, LLP, of which Mr. Klein is a
shareholder and 600 shares Mr. Klein holds as trustee for minor children
under the Maryland Uniform Gift to Minors Act.
(7) Excludes 15,754 shares owned by Mr. O'Dea's wife.
(8) Includes 63,904 shares owned by The Security Title Guarantee Corporation of
Baltimore and
53
<PAGE>
9,506 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 6,494 shares owned by the Moreland Memorial Park Cemetery Bronze
Perpetual Care Trust Agreement, Inc. 11,750 shares owned by the
Moreland Memorial Park Cemetery, Inc. Perpetual Care Trust Agreement, 3,226
shares owned by the Moreland Memorial Park, Inc. Bronze Marker Perpetual
Care Trust Fund, and 32,414 shares owned by the Moreland Memorial Park
Cemetery, Inc. Perpetual Care Trust Agreement for which William C. Rogers,
Jr. serves as a trustee.
(10) Includes 128,598 shares owned jointly by Mr. Rogers and his wife. Excludes
11,548 shares owned by Mr. Roger's wife.
(11) Includes 151,372 shares owned by Mrs. Rogers. Also includes 63,904 shares
owned by The Security Title Guarantee Corporation of Baltimore and 9,506
shares owned by Maryland Mortgage Company, of which Mrs. Rogers is a
principal shareholder.
(12) All directors, executive officers and other significant shareholders may be
contacted at the Company's corporate offices by addressing correspondence to
the appropriate person, care of Carrollton Bancorp, 344 North Charles
Street, Suite 300, Baltimore, Maryland 21201.
ITEM 13: 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, 1999, 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 $2,699,906, which represented
approximately 9.0% 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 1999 of $126,252. Management
believes that the terms of these transactions were at least as favorable to the
Company as could have been obtained elsewhere.
PART IV
- -------------------
ITEM 14: EXHIBITS LIST AND REPORTS
ON FORM 8-K
a) List of Exhibits:
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT
NUMBER DESCRIPTION
3(i) Articles of Incorporation of Carrollton
Bancorp *
3(ii) By-Laws of Carrollton Bancorp *
10.1 Lease dated January 24, 1989 by and
between Hill Management Services, Inc.
and The Carrollton Bank of Baltimore. *
10.2 Lease dated July 21, 1989 by and between
Hill Management Services, Inc. and The
Carrollton Bank of Baltimore. *
10.3 Lease dated October 30, 1959 between
Arbutus Shopping Plaza, Inc. and The
Carrollton Bank of Baltimore, as amended.*
10.4 Lease dated August 3, 1976 between
Arbutus Shopping Plaza, Inc. and The
Carrollton Bank of Baltimore. *
10.5 Lease dated March 28, 1968 by and between
Charles Towers Partnership and The
Carrollton Bank of Baltimore. *
10.6 Lease dated November 18, 1983 by and
between Charles Towers Partnership and
The Carrollton Bank of Baltimore. *
10.7 Lease dated May 20, 1971 by and between
Home Mutual Life Insurance Company and
The Carrollton Bank of Baltimore. *
10.8 Lease dated April 17, 1974 by and between
Liberty Plaza Enterprises, Inc. and The
Carrollton Bank of Baltimore. *
10.9 Lease dated July 19, 1988 by and between
Northway Limited Partnership and The
Carrollton Bank of Baltimore. *
10.10 Lease dated August 11, 1994 by and
between Kensington Associates Limited
Partnership and Carrollton Bank. **
10.11 Lease dated October 11, 1994 by and
between Ridgeview Associates Limited
Partnership and Carrollton Bank. **
</TABLE>
54
<PAGE>
<TABLE>
<S> <C>
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.
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 23, 2000 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 23, 2000 By: /s/ DALLAS R. ARTHUR
-----------------------------
Dallas R. Arthur
President and Chief Executive
Officer
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
March 23, 2000 By: /s/ RANDALL M. ROBEY
-----------------------------
Randall M. Robey
Treasurer
Board of Directors
March 23, 2000 /s/ DALLAS R. ARTHUR
------------------------------
Dallas R. Arthur
Director
March 23, 2000 /s/ STEVEN K. BREEDEN
------------------------------
Steven K. Breeden
Director
March 23, 2000 /s/ ALBERT R. COUNSELMAN
------------------------------
Albert R. Counselman
Director
March 23, 2000 /s/ THELMA T. DALEY
------------------------------
Thelma T. Daley
Director
March 23, 2000 /s/ JOHN P. HAUSWALD
------------------------------
John P. Hauswald
Director
March 23, 2000 /s/ DAVID P. HESSLER
------------------------------
David P. Hessler
Director
March 23, 2000 /s/ C. EDWARD HOERICHS
------------------------------
C. Edward Hoerichs
Director
March 23, 2000 /s/ HOWARD S. KLEIN
------------------------------
Howard S. Klein
Director
March 23, 2000 /s/ LEO A. O'DEA
------------------------------
Leo A. O'Dea
Director
March 23, 2000 /s/ ALLEN QUILLE
------------------------------
Allen Quille
Director
March 23, 2000 /s/ JOHN PAUL ROGERS
------------------------------
John Paul Rogers
Director
March 23, 2000 /s/ WILLIAM C. ROGERS, JR.
------------------------------
William C. Rogers, Jr.
Director
55
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description 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).
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.
56
<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 March 3, 2000, on the consolidated financial statements of
Carrollton Bancorp and Subsidiary appearing in the annual report.
/s/ ROWLES & COMPANY, LLP
Baltimore, Maryland
March 23, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARROLLTON
BANCORP'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000859222
<NAME> CARROLLTON BANCORP
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,795,534
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,840,365
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75,747,478
<INVESTMENTS-CARRYING> 50,000
<INVESTMENTS-MARKET> 50,000
<LOANS> 257,447,335
<ALLOWANCE> 2,836,291
<TOTAL-ASSETS> 375,619,201
<DEPOSITS> 262,449,865
<SHORT-TERM> 81,481,032
<LIABILITIES-OTHER> 1,803,727
<LONG-TERM> 0
0
0
<COMMON> 2,776,904
<OTHER-SE> 27,107,673
<TOTAL-LIABILITIES-AND-EQUITY> 375,619,201
<INTEREST-LOAN> 17,909,278
<INTEREST-INVEST> 4,060,935
<INTEREST-OTHER> 285,683
<INTEREST-TOTAL> 22,255,896
<INTEREST-DEPOSIT> 7,984,401
<INTEREST-EXPENSE> 10,953,649
<INTEREST-INCOME-NET> 11,302,247
<LOAN-LOSSES> 597,840
<SECURITIES-GAINS> 239,669
<EXPENSE-OTHER> 17,864,554
<INCOME-PRETAX> 3,751,296
<INCOME-PRE-EXTRAORDINARY> 3,751,296
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,751,296
<EPS-BASIC> 1.01
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 4.01
<LOANS-NON> 240,569
<LOANS-PAST> 837,198
<LOANS-TROUBLED> 330,987
<LOANS-PROBLEM> 693,992
<ALLOWANCE-OPEN> 2,387,732
<CHARGE-OFFS> 302,825
<RECOVERIES> 153,544
<ALLOWANCE-CLOSE> 2,836,291
<ALLOWANCE-DOMESTIC> 2,836,291
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,138,416
</TABLE>
