<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 of the Exchange Act of 1934
for the fiscal year ended DECEMBER 31, 1997
Commission File Number 0-16187
GRANDBANC, INC.
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(Exact name of small business issuer in its charter)
MARYLAND 52-1332050
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1800 ROCKVILLE PIKE, P.O. BOX 2022, ROCKVILLE, MARYLAND 20852
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (301) 770-1300
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
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Title of Class
Check whether the issuer: (1) filed all reports required to be filed by Sections
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 the past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in PART III of this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $8,753,066
The aggregate market value of the voting stock held by non-affiliates as of
March 6, 1998 was $7,035,637. For purposes of this calculation, it is assumed
that directors, officers and beneficial owners of more than 5% of the
registrant's outstanding voting stock are affiliates.
The number of shares of common stock outstanding as of March 6, 1998: 4,049,665
DOCUMENTS INCORPORATED BY REFERENCE:
The following lists the documents incorporated by reference and the Part of
the Form 10-KSB into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the fiscal year
ended December 31, 1997. (Parts I and II)
2. Portions of the Proxy Statement for 1998 Annual Meeting of Stockholders.
(Part III)
Transitional Small Business Disclosure Format (check one): YES NO X
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FORWARD-LOOKING STATEMENTS
Part I and Part II of this Annual Report on Form 10-KSB contain forward-
looking statements, including statements of goals, intentions, and expectations,
regarding or based upon general economic conditions, interest rates,
developments in national and local markets, and other matters, and which, by
their nature, are subject to significant uncertainties. Because of these
uncertainties and the assumptions on which statements in this report are based,
the actual future results may differ materially from those indicated in this
report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
GrandBanc, Inc. (the "Corporation"), headquartered in Rockville, Maryland
and incorporated in the State of Maryland in 1983, is a Maryland bank holding
company registered with and subject to the regulation and supervision of the
Board of Governors of the Federal Reserve System ("FRB") under the Bank Holding
Company Act of 1956, as amended (the "Act"). The Corporation's operations
primarily consist of managing the operations of GrandBank (the "Bank"), its
wholly-owned banking subsidiary. The Bank is a Maryland chartered commercial
bank formed in 1979, with offices now located in Montgomery County, Maryland and
the city of Alexandria, Virginia. The Bank is subject to the regulation and
supervision of the Maryland State Commissioner of Financial Regulation (the
"Maryland Commissioner"), the Virginia Commissioner of Financial Institutions
(the "Virginia Commissioner"), and the Federal Deposit Insurance Corporation
(the "FDIC"). As of December 31, 1997, the Bank had 41 employees, all of which
were full time. The executive offices of the Corporation and the Bank are
located at 1800 Rockville Pike, Rockville, Maryland 20852 and its telephone
number is (301) 770-1300.
BUSINESS OF THE BANK
The Bank, in addition to its headquarters in Rockville, has branch offices
in Bethesda and Germantown, Maryland and Alexandria, Virginia. The Bank is a
full-service community-oriented commercial bank serving small-to-medium sized
businesses, professionals, and individuals in the Washington, DC metropolitan
area.
The Bank established its Alexandria, Virginia office in connection with the
acquisition of a portfolio of loans, certain other assets, and certain deposits,
from First Commonwealth Financial Corp and its subsidiary, First Commonwealth
Federal Savings Bank FSB ("FSB"). This transaction, which was completed on
September 20, 1996, and a related private offering of common stock,
substantially increased the assets, liabilities and capital of the Corporation
and the Bank, and significantly altered their operations, as indicated in the
comparison provided elsewhere in this report.
The Bank offers a full range of commercial and retail banking services,
including commercial and consumer loan and deposit products suited to businesses
and professional and consumer customers. Commercial products include working
capital loans, letters of credit, lines of credit, and real estate loans, along
with deposit products to support the business needs of the customer. Consumer
products include home equity loans, automobile and other personal loans,
overdraft protection through "Chek-Gard", home improvement loans, mortgage loans
and deposit products including checking, savings, certificates of deposit, and
individual retirement accounts. The Bank operates three Automated Teller
Machines. The Bank is a member of the Internet shared automated teller system,
the HONOR system and the PLUS system, providing 24 hour access to funds.
The Bank's mission is to provide a high level of personal service to the
local community and also to participate in community service within the
Montgomery County, Alexandria, Virginia, and the Washington, D.C. metropolitan
area. The Bank competes with local and regional commercial banks, savings
associations, mutual
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savings banks, credit unions, money market brokers, and other financial
institutions that provide loan and deposit relationships. The Bank competes
with these other institutions for customers by offering competitive products and
services, interest rates, and delivery of quality service and expertise.
LENDING ACTIVITIES
The Bank's lending activities are broken into three broad types of loan
categories consisting of commercial, real estate and consumer loans. The
overall size and composition of the loan portfolio depends upon the market
demand for credit and management's requirements for liquidity, asset quality and
profitability. The composition of the Bank's loan portfolio is shown on the
following table.
A. LOANS OUTSTANDING BY TYPE AT DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
% of % of % of
1997 Portfolio 1996 Portfolio 1995 Portfolio
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Real Estate - Mortgage...... $47,017 61% $54,164 74% $17,107 57%
Real Estate - Construction.. 434 1 1,709 2 221 1
Commercial.................. 21,684 28 15,804 21 10,463 35
Consumer.................... 8,311 10 2,047 3 2,021 7
------- --- ------- --- ------- ---
Total.................. $77,446 100% $73,724 100% $29,812 100%
======= === ======= === ======= ===
</TABLE>
B. MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE IN ONE DUE AFTER DUE AFTER
AT DECEMBER 31, 1997 YEAR OR LESS ONE-FIVE YEARS FIVE YEARS
- ----------------------------------------------- ------------ -------------- ----------
<S> <C> <C> <C>
Real Estate - Mortgage $ 8,369 $16,616 $22,032
Real Estate - Construction 434 __ __
Commercial 10,835 10,066 783
Consumer 4,715 2,898 698
------- ------- -------
Total loans maturities $24,353 $29,580 $23,513
======= ======= =======
<CAPTION>
Variable
LOANS WITH MATURITIES OF ONE YEAR OR GREATER Fixed Rate Rate
------------ ----------
<S> <C> <C> <C>
Real Estate - Mortgage $ 7,915 $30,733
Real Estate - Construction -- --
Commercial 3,061 7,788
Consumer 2,725 871
------- -------
Total Loans $13,701 $39,392
======= =======
</TABLE>
REAL ESTATE MORTGAGE AND CONSTRUCTION LOANS
The Bank makes a wide variety of mortgage loan products available to
businesses and individuals. Residential mortgages are made through the Bank's
mortgage lending division, with numerous pricing, term and structuring options
available. The Bank makes home equity lines of credit available to homeowners
for a variety of purposes, with rates based upon the prime
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rate published in The Wall Street Journal, as well as fixed rate home equity
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term loans for a variety of purposes including home improvement. These loans
are typically secured by 1- to 4-family, owner occupied homes in the Washington,
D.C. metropolitan area. Commercial mortgages are made available to businesses
and individuals for the purchase or re-finance of commercial properties such as
office buildings, apartment buildings and industrial buildings located in the
Washington, D.C. metropolitan area. These commercial mortgages generally have
adjustable rates of interest based upon the prime rate as published in The Wall
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Street Journal, or tied to an index of U.S. Government securities, have
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maturities of five years or less and have amortizations of 15-30 years. The
Bank does not generally make fixed-rate loans with maturities greater than 15
years for its own portfolio.
On a limited basis, the Bank makes loans to businesses and individuals to
finance the acquisition, development and construction of real estate.
Generally, the loans are made to entities that are constructing the property for
their own use and have qualified for permanent financing prior to beginning
construction. The Bank's construction loans generally have adjustable rates of
interest based on the prime rate as published in The Wall Street Journal, with
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terms not generally exceeding one year.
COMMERCIAL LOANS
The Bank makes commercial loans primarily to small- to medium-sized
businesses, professionals, and other individuals who desire specialized and
personalized financial services. The Bank offers a variety of commercial
lending products, including revolving lines of credit, letters of credit,
working capital loans, and loans to finance accounts receivable, inventory, and
equipment. The Bank's commercial loans generally have adjustable rates of
interest based on either the Bank's base lending rate or the prime rate, with
terms not generally exceeding five years. Revolving lines of credit generally
do not exceed terms of one year. Commercial loans are generally secured by
accounts receivable, inventory, other business assets, or real estate.
CONSUMER LOANS
The Bank makes consumer (installment) loans to individuals for a variety of
personal and household purposes. Such loans generally are at fixed rates for
terms of up to five years. In December, 1996, the Company and the Bank entered
into an agreement that calls for the Bank to develop a credit card lending
program for participants in certain health care plans. Lending began under this
program during 1997. As of December 31, 1997, credit card receivables amounted
to $3,809,572.
DELINQUENCIES AND NON-ACCRUAL LOANS
All delinquencies over five days are reviewed by loan officers and
management on a weekly basis. Delinquencies greater than 30 days are reviewed
by the Board of Directors on a monthly basis. The Bank's loan policy states
that the transfer of a loan to non-accrual status will occur when there is a
deterioration in the financial condition of the borrower and/or of collateral
such that the collectability of principal and interest is in question or when a
loan becomes contractually 90 days past due, unless, based upon management's
judgment, the loan is well secured and in the process of collection. When a
loan is placed on non-accrual status, all accrued but unpaid interest is
reversed from income and future payments are treated as cash income when
received. Refer to the schedule of non-performing assets and past-due loans on
page 4.
Collection Policy. The loan officer who services a borrower's loan is
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responsible for monitoring the borrower's financial condition and reviewing the
file on a regular basis. If the loan becomes delinquent, the officer is
responsible for the collection of the loan. A past due notice is generally sent
when a loan becomes 15 days past due. Thereafter, the account officer makes
contact with the borrower on a regular basis as necessary. The officer is
responsible for keeping the Bank's management up to date on their collection
efforts and new developments regarding the loan's status. As stated above, the
Bank's past due reports are reviewed by management on a weekly basis. When a
loan becomes 90 days delinquent it is to be transferred to non-accrual status
based on the non-accrual guidelines stated above.
Classified Assets. The Bank reviews the loan portfolio on an ongoing basis
-----------------
to detect and identify loans that show a deterioration in the borrower's
financial condition or collateral values. Each loan is rated through a criteria
and classification system based on the quality of the loan. There are eight
ratings that can be assigned to a loan. These ratings are reviewed on an annual
basis. These ratings are intended to be identical to the ratings used by the
Bank's regulatory agencies. Of the eight ratings, the first four are generally
referred to as "pass" loans, the fifth as "special mention" loans and the sixth,
seventh, and eighth as "substandard," "doubtful," and "loss." When the Bank
classifies loans as either "substandard" or "doubtful," it is required to
establish a specific allowance for loss in an amount deemed prudent by
management. When the Bank classifies a loan as "loss" it is required to
establish a specific allowance equal to 100% of the amount or to charge-off the
amount against the allowance for credit losses. In addition to these specific
allowances, the Bank maintains a general allocation which represents loss
allowances which have been established to recognize the inherent risk associated
with lending activities but have not been allocated to particular loans. The
Bank's determination as to the classification of its assets and the amount of
its allowance for
3
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credit losses is subject to review by the FDIC and the Commissioner which can
require the establishment of additional general or specific loss allowances.
The Bank maintains a Watch List of all loans rated special mention or
worse. The Watch List includes, among other things, basic information on the
loan, its risk rating, allowance percentage allocated to the loan and the dollar
amount of the allowance specifically reserved against the loan. All changes in
risk rating assignments must be approved by the chief lending officer. Changes
also are made on a monthly basis upon the recommendation of the loan officer
responsible for the loan. The Watch List is reviewed by the Board of Directors
on a monthly basis.
OTHER REAL ESTATE OWNED
Other real estate owned represents assets acquired in satisfaction of loans
either by foreclosure or deeds taken in lieu of foreclosure.
Properties acquired are recorded at the lower of cost or fair value minus
estimated selling costs at the time of acquisition with any deficiency charged
to the allowance for credit losses. Thereafter, costs incurred to operate or
carry the properties are charged to operating expense. Gains and losses
resulting from the final disposition of the properties are included in non-
interest expense. Any reductions in value as determined by periodic re-
appraisal of the property, or other means, is either charged to operations or
reserved against the property by an allowance which is funded by a charge to
operations.
Generally, the Bank obtains appraisals annually by state licensed or
certified appraisers for each property owned at acquisition, and evaluates each
property's value regularly thereafter.
4
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C. NON-PERFORMING ASSETS AND PAST DUE LOANS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Non-Performing Assets:
Loans accounted for on a non-accrual basis....................... $2,772 $ 742 $ 77
Restructured loans............................................... -- 361 388
------ ------ ------
Total non-performing loans.................................... 2,772 1,103 465
Other real estate owned net of allowance......................... 1,435 975 1,052
Other non-performing assets...................................... 13 184 100
------ ------ ------
Total non-performing assets..................................... $4,220 $2,262 $1,617
====== ====== ======
Total non-performing assets to total assets................... 4.06% 2.24% 3.98%
Total non-performing loans to total loans..................... 3.58% 1.50% 1.56%
Past Due Loans:
Loans contractually past due 90 days or more as to
interest or principal payments, still accruing................ $ 13 $ 184 $ --
Loans contractually past due 30 days or more through
90 days as to interest or principal payments, still accruing.. 350 1,641 954
------ ------ ------
Total Past Due Loans.......................................... $ 363 $1,825 $ 954
====== ====== ======
</TABLE>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established through a provision for
credit losses based on management's evaluation of the risk inherent in the loan
portfolio and the general economy. This evaluation, which includes a review of
the loan portfolio, considers, among other things, the estimated net realizable
value of the underlying collateral, economic conditions, historical loan loss
experience, and other factors. The adequacy of this allowance is reviewed by
management on a quarterly basis and subsequently reviewed by the Board of
Directors. Although the Bank attempts to maintain an allowance adequate to
cover potential losses, there can be no assurance that future losses will not
exceed the Bank's allowance.
5
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SUMMARY OF LOAN LOSS EXPERIENCE AND
ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- --------- -----------
<S> <C> <C> <C>
Balance January 1 $ 1,016 $ 748 $ 704
------- ------- ---------
Provision (recovery) charged to operating expense 1,209 (35) (30)
------- ------- ---------
Recoveries:
Commercial 53 51 13
Real Estate - Construction -- 172 83
Real Estate - Mortgage -- -- --
Consumer and other 10 3 12
------- ------- ---------
Total recoveries 63 226 108
------- ------- ---------
Charge-offs:
Commercial 322 112 --
Real Estate - Construction -- -- --
Real Estate - Mortgage 234 -- 5
Consumer and other 30 32 30
------- ------- ---------
Total charge-offs 586 144 35
Net (charge-offs) recoveries (523) 82 74
------- ------- ---------
Allowance acquired -- 221 --
------- ------- ---------
Balance December 31 $ 1,702 $ 1,016 $ 748
======= ======= =========
Average amount of total loans outstanding, net $74,822 $42,891 $ 29,524
Total loans outstanding at December 31, gross 77,446 $73,724 $ 29,812
Loan loss ratios:
Net charge-offs (recoveries) to average loans outstanding, net 0.70% (.19%) (.25%)
Allowance for possible loan losses to total
loans outstanding December 31 2.20% 1.38% 2.51%
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN
LOSSES AMONG LOAN TYPE AND % OF % OF % OF % OF
LOAN TYPE TO TOTAL LOAN PORTFOLIO 1997 PORTFOLIO 1996 PORTFOLIO 1995 PORTFOLIO
- ------------------------------------------------------------------ ------- --------- ------ --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial........................................................ $ 560 28% $ 115 21% $ 1 35%
Real Estate - Construction........................................ 5 1 111 2 96 1
Real Estate - Mortgage............................................ 745 61 25 74 117 57
Consumer.......................................................... 25 10 -- 3 -- 7
Unallocated....................................................... 367 N/A 765 N/A 534 N/A
------- ------ -----
Total........................................................ $ 1,702 $1,016 $ 748
======= ====== =====
</TABLE>
INVESTMENT ACTIVITY
The Corporation's investment policy is implemented by the Investment
Committee, which is comprised of selected Board members and management. The
investments are chosen primarily to provide and maintain adequate
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liquidity and to generate a positive return on investments without undue
interest or credit risk. Investments are generally made with the intent to hold
them until maturity. The Corporation invests in various types of liquid assets,
including United States Treasury obligations and securities of Federal
Government agencies and sponsored entities, certain certificates of deposit,
Federal funds, and other qualifying liquid investments. At December 31, 1997,
the Corporation had $13,973,840 outstanding in the investment portfolio and
$390,900 in other investments. Refer to Note 4 of the Notes to the Consolidated
Financial Statements contained in Item 7 hereof for the carrying and fair values
of the investment securities portfolio. The investment portfolio is accounted
for in accordance with FAS 115 which was implemented as of December 31, 1994.
Refer to Management's Discussion and Analysis in Item 6 hereof for a discussion
of certain investments.
DEPOSIT ACTIVITIES
The Bank offers a wide range of deposit products with varying rates and
terms to meet the banking needs of both individuals and business customers in
the community. The Bank offers checking, interest checking, money market
accounts, savings, and individual retirement accounts ("IRAs"). The Bank also
offers a variety of certificates of deposit with maturities of three months to
five years.
The average balance of deposits and average interest paid during the years
1997, 1996 and 1995 can be found in the Three Year Average Consolidated Balance
Sheet contained in Item 6 hereof.
A. CERTIFICATE OF DEPOSIT OF OVER $100,000 BY MATURITY AT DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Three months or less.................. $ 5,592 $2,881 $1,191
Over three months through six months.. 5,110 2,426 100
Over six months through one year...... 1,760 1,972 436
Over one year......................... 2,808 1,821 106
------- ------ ------
Total............................ $15,269 $9,100 $1,833
======= ====== ======
</TABLE>
BORROWINGS
The average amounts of borrowings outstanding during 1997, 1996 and 1995
and the approximate weighted average interest rate thereon is contained in the
Three-Year Average Consolidated Balance Sheet in Item 6 hereof.
SUPERVISION AND REGULATION
The Corporation is a bank holding company within the meaning of the Act and
is registered as such with the FRB. The Corporation is required to file with
the FRB an annual report and such other information as the FRB may require
pursuant to the Act. The Corporation is subject to regulation and examination
by the FRB, which may also examine any of the Corporation's subsidiaries.
The Act generally restricts activities of all bank holding companies and
their subsidiaries to banking, and the business of managing and controlling
banks, and to other activities which are determined by the FRB to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The Act generally requires prior approval by the FRB of the
acquisition by a bank holding company of more than five percent of the voting
shares of any bank. With certain exceptions, the Act prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than five
percent of the voting shares of any company which is not a bank or bank holding
company, unless the FRB determines by order or regulation that the activities of
the company whose shares are to be acquired are so closely related to banking or
managing or controlling banks as to be a proper
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incident thereto. Some of the principal activities that the FRB has determined
by regulation to be so closely related to banking are: (i) making or servicing
loans; (ii) performing certain data processing services; (iii) providing
securities brokerage services; (iv) acting as fiduciary, investment or financial
advisor; (v) leasing personal or real property where the lease serves as the
functional equivalent of a loan; (vi) making investments in corporations or
projects designed primarily to promote community welfare; and (vii) acquiring a
savings and loan association.
Subsidiary banks of a bank holding company are subject to certain
quantitative restrictions imposed by the Federal Reserve Act on any extension of
credit to, or purchase of assets from, or guarantee or letter of credit on
behalf of the bank holding company or its subsidiaries, and on the investment in
or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors, and principal shareholders of the Holding Company
and its subsidiaries, and related interests of such persons.
As a state-chartered commercial bank, the Bank is subject to regulation and
examination primarily by the Commissioner but also by the FDIC. The operations
of the Bank in Virginia also are subject to the oversight of the Virginia
Commissioner and laws of the Commonwealth of Virginia. These agencies, as well
as Federal and State law, extensively regulate various aspects of the Bank's
business including permissible types and amounts of loans, investments and other
activities, capital adequacy (by requiring minimum capital ratios), branching,
and the safety and soundness of banking practices. Both the Commissioner and
the FDIC have substantial authority to regulate unsafe or unsound practices and
violations of law including cease and desist orders, removal of directors and
officers, civil money penalties and, ultimately, appointment of a receiver or
conservator. Banking regulations restrict transactions by banks owned by a bank
holding company, including: (1) loans to and certain purchases from the parent
holding company, principal shareholders, officers, directors, and their
affiliates; (2) investments by the subsidiary bank in the shares or securities
of the parent bank holding company (or any other nonbank affiliates); and (3)
acceptance of such shares or securities as collateral for loans to any borrower.
The Bank's regulators also may review other transactions, such as payments of
management fees by subsidiary banks to affiliated companies. The Bank is
subject to legal limitations on the frequency and amount of dividends that can
be paid to the Corporation. Under Maryland banking regulations, the Bank may
not declare a cash dividend except out of undivided profits, or from its surplus
in excess of 100% of its required capital stock with the prior approval of the
Commissioner, both after providing for due and accrued expenses, losses,
interest and taxes. In addition, the FDIC may restrict the ability of the Bank
to pay dividends if such payments would constitute an unsafe or unsound banking
practice. Also, State and Federal laws regulate the amount of voting stock of a
bank or bank holding company that a person may acquire without prior approval.
Under Federal Reserve Board regulations, the Bank is required to maintain
noninterest-earning reserves against its transaction accounts (primarily
interest checking and regular checking accounts). The Federal Reserve Board
regulations generally require that, for 1997, reserves of 3% must be maintained
against aggregate transaction accounts of $54.0 million or less (subject to
adjustment by the Federal Reserve Board) and an initial reserve of $1.62 million
plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%
and was reduced to 10% effective April 1, 1992) against that portion of total
transaction accounts in excess of $54.0 million. The first $4.2 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. Since the amount of the
Bank's transaction accounts are below the $54.0 million, the Bank is currently
subject to the 3% reserve requirement for maintaining reserves. Because
required reserves must be maintained in the form of either vault cash, a
noninterest-bearing account at a Federal Reserve Bank, or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce the
Bank's interest-earning assets.
EFFECT OF GOVERNMENTAL ACTION
Operating results of the Corporation and the Bank are affected by the
policies of various regulatory, fiscal and monetary authorities including the
FRB. Major functions of the FRB, in addition to those set out under Supervision
and Regulation above, are to regulate the supply of bank credit and to deal
generally with economic conditions within the United States, including efforts
to combat recessionary economic conditions and to curb inflationary pressures.
The instruments of monetary policy employed by the FRB for these purposes
influence in
8
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various ways the overall levels of bank loans and extensions of credit,
investments and deposits as well as the interest rate paid on liabilities and
received on earning assets. The implementation of these policies has had a
significant effect on the operating results of bank holding companies and banks
in the past and will continue to do so in the future. In view of changing
conditions within the national economy as well as the uncertain effects of
actions by regulatory, fiscal, and monetary authorities, no prediction can be
made as to possible future changes in interest rates, deposit levels or loan
demand, or their effect on the business and earnings of the Corporation and the
Bank. Also, it cannot be predicted whether or in what manner the operation of
the Corporation and the Bank may be effected by any pending or future Federal or
state legislative actions.
NEW LAW.
The operations of the Corporation and the Bank are affected by new federal
and state laws. The federal Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (the "New Act"), enacted in September 1996, includes provisions that
affect banks, bank holding companies, and savings institutions. The New Act
had, and is expected to have in the future, its most significant effect upon
bank and savings institutions that hold deposits assessed at Savings Deposit
Insurance Fund ("SAIF") rates. Among other things, the New Act recapitalized
the SAIF through a special assessment on savings association deposits and bank
deposits that had been acquired from savings associations. As described further
below, a portion of the Bank's deposits is subject to assessment at "SAIF"
rates, but the Bank was not subject to any special SAIF assessment on such
deposits, and the direct impact of the New Act on the Bank was not material in
1996. The New Act may increase competition from savings associations by
equalizing, over time, the amount of federal insurance premiums paid on savings
association and bank deposits. The New Act also provides that, beginning in
1997, institutions with deposits insured by the Bank Insurance Fund, as well as
those with SAIF insured deposits, will be responsible for payment of certain
bonds issued in connection with the resolution of failed savings associations.
The result of these provisions will be somewhat higher federal deposit insurance
premiums for the Bank. These higher insurance premiums are not expected to have
a material adverse effect on the Bank or the Corporation.
The New Act also simplifies the regulatory approval process for new
activities of banks and bank holding companies, and reduces a number of other
regulatory burdens. None of these changes is expected to have a significant
effect on the Corporation or the Bank.
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, a financial institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of a bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution. The CRA rating system
identifies four levels of performance that may describe an institution's record
of meeting community needs: outstanding, satisfactory, needs to improve and
substantial noncompliance. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA
rating in its most recent examination.
CAPITAL MAINTENANCE
The FDIC has issued regulations that require banks with deposits insured by
the Bank Insurance Fund ("BIF"), such as the Bank, to maintain minimum levels
of capital. The regulations establish a minimum leverage capital requirement of
not less than 3% core capital to total average assets for banks in the strongest
financial and managerial condition, with a CAMEL Rating of 1 (the highest
examination rating of the FDIC for banks). For all other banks, the minimum
leverage capital requirement is 3% plus an additional cushion of at least 100 to
200 basis
9
<PAGE>
points. Core capital is comprised of the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than qualifying mortgage servicing rights and purchased credit card
relationships). At December 31, 1997, the Bank's ratio of core capital to total
average assets equalled 7.29% which exceeded the minimum leverage requirement.
The FDIC also requires that banks meet a risk-based capital standard. The
risk-based capital standard requires the maintenance of total capital (which is
defined as core capital and supplementary capital) to risk-weighted assets of 8
% and core capital to risk-weighted assets of 4%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet items are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes
are inherent in the type of asset or item. The components of core capital are
equivalent to those discussed earlier under the 3% leverage requirement. The
components of supplementary capital currently include cumulative perpetual
preferred stock, certain other preferred stock, mandatory convertible debt
securities, subordinated debt and intermediate term preferred stock, and
allowance for loan and lease losses. Allowance for loan and lease losses
included in supplementary capital is limited to a maximum of 1.25% of risk-
weighted assets. Overall, the amount of capital counted toward supplementary
capital cannot exceed 100% of core capital. Federal law also prohibits a bank
from paying a dividend if it will not meet applicable capital requirements after
the payment.
In July 1996, the federal bank regulatory agencies, including the FDIC,
issued a joint policy statement regarding the evaluation of commercial banks'
capital adequacy for interest rate risk. Under the policy, the FDIC's
assessment of a bank's capital adequacy includes an assessment of the bank's
exposure to adverse changes in interest rates. The FDIC has determined to rely
on its examination process for such evaluations rather than on standardized
measurement systems or formulas. The FDIC may require banks that are found to
have a high level of interest rate risk exposure or weak interest rate risk
management systems to take corrective actions. Management believes its interest
rate risk management systems and its capital relative to its interest rate risk
are adequate.
At December 31, 1997, the Bank's total capital to risk-weighted assets was
9.98% and the Bank's core capital to risk-weighted assets was 8.72%, both
exceeding the FDIC risk-based capital requirement.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Act establishes a system of prompt corrective
action to resolve the problems of undercapitalized institutions. The FDIC's
Prompt Corrective Action rules require the FDIC to take certain supervisory
actions against undercapitalized institutions for which it is the primary
federal regulator, the severity of which depends upon the categories consisting
of "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Regulatory
action taken will depend on the level of capitalization of the institution and
may range from restrictions on capital distributions and dividends to seizure of
the institution. Generally, subject to narrow exceptions, FDICIA authorizes the
banking regulators to specify the ratio of tangible capital to assets at which
an institution becomes critically undercapitalized and requires that ratio to be
no less than 2% of assets. The Federal Deposit Insurance Act also allows the
regulator to downgrade an institution if the institution is determined to be in
an unsafe or unsound condition or to be engaging in unsafe or unsound practices.
Such a downgrading may result in an otherwise "adequately capitalized"
institution with other problems being subject to supervisory actions as if it
were classified as "undercapitalized." FDIC rules generally provide that an
insured institution that has total risk-based capital of less than 8%, core
capital of less than 4%, or a leverage ratio that is less than 4% would be
considered to be "undercapitalized," an insured institution that has total risk-
based capital less than 6%, core capital of less than 3%, or a leverage ratio
that is less than 3% would be considered to be "significantly undercapitalized,"
and an insured institution that is "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" becomes immediately subject
to certain regulatory restrictions, including, but not limited to, restrictions
on growth, investment activities, capital distributions and affiliate
transactions. The filing of a capital restoration plan, which must be
guaranteed by any parent holding company, is also required. In addition,
"critically undercapitalized" institutions must receive prior written approval
from the FDIC to engage in any material transaction other than the normal course
of business. Subject to a narrow exception, a
10
<PAGE>
receiver or conservator must be appointed for any critically undercapitalized
institution within 90 days after it becomes critically undercapitalized.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has established a risk-based deposit insurance premium assessment
system for insured depository institutions. Under the system, the assessment
rate for an insured depository institution depends on the assessment risk
classification assigned to the institution by the FDIC, which is determined by
the institution's capital level and supervisory evaluations. Institutions are
assigned to one of three capital groups -- well-capitalized, adequately
capitalized or undercapitalized -- based on the data reported to regulators for
the date closest to the last day of the seventh month preceding the semi-annual
assessment period. Well-capitalized institutions are institutions satisfying
the following capital ratio standards: (i) total risk-based capital ratio of
10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and
(iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized
institutions are institutions that do not meet the standards for well-
capitalized institutions but that satisfy the following capital ratio standards:
(i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based
capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or
greater. Undercapitalized institutions consist of institutions that do not
qualify as either well-capitalized or adequately capitalized institutions.
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses that, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken. The
portion of the Bank's deposits attributable to deposits acquired from FSB on
September 20, 1996, is subject to assessment at SAIF rates, which currently are
higher than BIF rates. The Bank was not subject to the special assessment on
SAIF-insured deposits imposed by the New Act.
Supervision, regulation and examination of the Bank and the Corporation by
the bank regulatory agencies are intended primarily for the protection of
depositors rather than for holders of Bank or Corporation stock.
Under the Federal Deposit Insurance Act, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. The management of the Bank does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.
COMPETITION
In order to compete effectively, the Bank relies substantially on local
commercial and consumer activity; personal contacts by its directors, officers,
other employees and shareholders; personalized services; and its reputation in
the communities it serves.
The Bank presently competes within its market area with numerous bank
subsidiaries of larger bank holding companies, including the subsidiaries of
regional bank holding companies with principal operations in states other than
Maryland. It also competes with numerous independent banks, thrift
institutions, credit unions, and various other nonbank financial companies.
The banking business in Maryland and Virginia generally, and the Bank's
primary service areas specifically, are highly competitive with respect to both
loans and deposits. As noted above, the Bank competes with many larger banking
organizations that have offices over a wide geographic area. These larger
institutions have certain inherent advantages, such as the ability to finance
wide ranging advertising campaigns and promotions and to allocate their
investment assets to regions offering the highest yield and demand. They also
offer services such as international
11
<PAGE>
banking, which are not offered directly by the Bank (but could be offered
indirectly through correspondent institutions); and by virtue of their larger
total capitalization (legal lending limits to an individual consumer or
corporation are limited to a percentage of the Bank's total capital accounts),
such banks have substantially higher lending limits than does the Bank. Other
entities, both governmental and in private industry, raise capital through the
issuance and sale of debt and equity securities and thereby indirectly compete
with the Bank in the acquisition of deposits.
In addition to competing with other commercial banks and thrift
institutions, commercial banks such as the Bank compete with nonbank financial
institutions for funds. For instance, yields on corporate and government debt
and equity securities affect the ability of commercial banks to attract and hold
deposits. Commercial banks also compete for available funds with money market
instruments, which are not subject to interest rate ceilings. Such money market
funds have provided substantial competition to banks for deposits, and it is
anticipated they may continue to do so in the future.
The FRB may approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The FRB may not approve the acquisition of
a bank that has not been in existence for the minimum time period (not exceeding
five years) specified by the statutory law of the host state. The FRB may not
approve an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. Federal banking
agencies, effective June 1, 1997, also may approve interstate merger
transactions without regard to whether such transaction is prohibited by the law
of any state, unless the home state of one of the banks expressly prohibits
merger transactions involving out-of-state banks.
The States of Maryland and Virginia each had previously enacted reciprocal
interstate banking statutes that authorized banks and thrift institutions, and
their holding companies, in those states to be acquired by regional banks and
thrift institutions, or their holding companies, in designated states, and
permitted Maryland and Virginia banks and thrift institutions, and their holding
companies, to acquire banks and thrift institutions in designated states, if
such jurisdictions have enacted reciprocal statutes. In 1996, the States of
Maryland and Virginia each adopted legislation allowing out of state financial
institutions to merge with their banks and to establish branches in Maryland and
Virginia, respectively, subject to certain limitations. The Bank's establishment
of a branch in Alexandria Virginia was made possible by these laws. The effect
of the federal and state legislation, however, may be to increase competition
within the States of Maryland and Virginia among banking and thrift
institutions.
ITEM 2. DESCRIPTION OF PROPERTY
The main office of the Corporation and the Bank is located at Twinbrook
Square, 1800 Rockville Pike, Rockville, Maryland. The premises are leased under
an agreement which expires in 1999. The Bank leases three branches; the
Germantown location is operating under a lease which expires in 2005, the
Bethesda locations operate under leases which expire in 2002 and 2006. The
Company also owns a 6,000 square foot office building in Alexandria, Virginia
which it leases to the Bank. The Bank considers these properties suitable and
adequate for current operations. During 1997, the Bank incurred rental expenses
for properties totaling $581,044. Refer to Note 6--"Bank Premises and Equipment"
on page 18 of the Annual Report, which is hereby incorporated by reference.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Note 15 --"Litigation" on page 22 of the Annual Report is hereby
incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Corporation's security holders
during the quarter ended December 31, 1997, through solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section entitled "Market for the Common Equity and Related Stockholder
Matters" on page 6 of the Annual Report is hereby incorporated by reference.
For information regarding regulatory restrictions on the Bank's, and, therefore,
the Corporation's payment of dividends, see Note 14 -- "Regulatory Matters" on
pages 21 and 22 of the Annual Report, which hereby is incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The section entitled "Selected Financial Data" on page 1 of the Annual
Report and the section entitled "Management's Discussion and Analysis" on pages
2 through 7 in the Annual Report are hereby incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Independent Auditors' Report on pages 8 through 25 in the Annual
Report, which are listed under Item 13 herein, are incorporated herein by
reference. The remaining information appearing in the Annual Report is not
deemed to be filed as part of this Report, except as expressly provided herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
The information relating to the Directors and Executive Officers of the
Corporation on pages 3 and 4 of the Corporation's definitive proxy statement for
the Corporation's 1997 Annual Meeting of Stockholders (the "Proxy Statement") is
hereby incorporated by reference.
13
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation and Other Benefits" on pages 5
and 6 of the Proxy Statement are hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Page 2 of the Proxy Statement relating to security ownership of certain
beneficial owners and management is hereby incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" on page 7 of the Proxy
Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Corporation included in the
Annual Report to stockholders for the year end December 31, 1997 are
incorporated by reference in Item 7 of this Report. The remaining
information appearing in the Annual Report to stockholders is not
deemed to be filed as part of this Report except as expressly provided
herein. The following financial statements are filed as part of this
Report:
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
All financial statement schedules are omitted as the required
information is inapplicable or the information is presented in the
consolidated financial statements or related notes which are
incorporated by reference in item 7 hereof.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GRANDBANC, INC.
/s/ Steven K. Colliatie
-------------------------------------
Steven K. Colliatie
Date: March 24, 1998 President and Chief Executive Officer
In accordance with the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
March 24, 1998
- --------------
/s/ Steven K. Colliatie
- -------------------------------
Steven K. Colliatie
President, Chief Executive Officer and Director
/s/ David L. Erickson
- -------------------------------
David L. Erickson
Chief Financial Officer and Secretary
A majority of the directors of the Corporation executed a power of attorney
appointing Steven K. Colliatie as their attorney-in-fact, empowering him to sign
this report on their behalf. This power of attorney has been filed with the
Securities and Exchange Commission under Part IV, Exhibit 24 of this Form 10-K
for the year ended December 31, 1997. This report has been signed below by such
attorney-in-fact as of March 23, 1998.
By: /s/ Steven K. Colliatie
-------------------------------------
Steven K. Colliatie
Attorney-in-Fact for Majority of the
Directors of the Corporation
15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Incorporated
by
Exhibit No. Description Reference to
----------- --------------------------------------------- ------------
<S> <C> <C>
3.1 (a) Articles of Incorporation, April 4, 1983 *
(b) Articles of Share Exchange, August 9, 1983 *
(c) Articles of Amendment, June 7, 1984 *
(d) Articles of Amendment, May 7, 1987 *
(e) Articles of Amendment, September 14, 1988 *
(f) Articles of Amendment, April 22, 1993 *
3.2 GrandBanc, Inc. Bylaws *
4 Form of Common Stock Certificate *
** 10.1 FWB Corporation 1994 Incentive Stock Option Plan *
** 10.2 GrandBanc, Inc. 1994 Stock Option Plan for Outside
Directors *
** 10.3 Employment Agreement Dated as of February 27, 1996, Exhibit 10
by and between GrandBanc, Inc., GrandBank, and to Report on
Steven K. Colliatie Form 10-QSB
the Quarter
Ended June
30, 1996
(File No.
0-16187)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
- --------------------
* Incorporated herein by reference from the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1995 (File No. 0-16187).
** Compensatory plan or arrangement
(b) The Corporation did not file a report on Form 8-K during the last
quarter of the period covered by this report.
<PAGE>
1997
ANNUAL REPORT
[LOGO OF GRAND BANC, INC. APPEARS HERE]
GrandBanc, INC.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Selected Financial Data.......................................... i
President's Message.............................................. 1
Management's Discussion and Analysis of Results
of Operations and Financial Condition...................... 2
Independent Auditor's Report..................................... 8
Consolidated Financial Statements:
Balance Sheets............................................. 9
Statements of Income....................................... 10
Statements of Changes in Stockholders' Equity.............. 11
Statements of Cash Flow.................................... 12
Notes to Consolidated Financial Statements....................... 14
Report of Management............................................. 26
Directors and Officers........................................... 27
Locations and General Information................................ 28
Directory of Products and Services............................... 29
- --------------------------------------------------------------------------------
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
At or For Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Results:
Net interest income $ 3,977 $ 2,743 $ 2,381 $ 2,155 $ 1,427
Provision for loan losses 1,209 (35) (30) (114) -
Noninterest income 645 520 442 400 505
Noninterest expense 4,620 3,085 2,577 2,597 2,673
Net income (loss) before income taxes (1,207) 213 276 72 (742)
Income taxes (benefit) (2,057) 5 - - -
Net income (loss) 850 208 276 72 (742)
Per Share Data:
Net income (loss) $ 0.21 $ 0.06 $ 0.09 $ 0.03 $ (0.39)
Book value 1.85 1.53 1.15 0.98 0.90
Financial Condition:
Total assets $103,872 $ 101,125 $ 40,678 $ 41,413 $ 39,405
Investment securities 14,365 16,478 8,027 7,110 10,908
Loans - net 75,744 72,707 29,064 26,298 22,588
Deposits 88,698 91,283 36,671 36,842 36,863
Stockholders' equity 7,485 6,021 3,740 3,105 2,471
Selected Ratios:
Return on average assets 0.84 % 0.34 % 0.65 % 0.18 % NA (1)
Return on average equity capital 14.74 4.30 7.88 3.51 NA (1)
Average equity to average assets 5.68 7.99 8.28 5.13 5.68
Non-performing loans to total loans 3.60 1.75 1.56 1.47 1.88
Non-performing assets to total assets 4.06 2.24 3.98 4.90 8.51
</TABLE>
(1) The corporation had a loss in this year.
FORWARD-LOOKING STATEMENTS
The following letter to our shareholders, management's discussion, and other
portions of this Annual Report include statements of management's goals and
expectations that are based upon assumptions about the future, including future
economic conditions, interest rates, and the financial condition of the Bank's
borrowers. Because these forward-looking statements are based upon assumptions
about the future, they are subject to significant uncertainties, so that actual
future results may differ from those stated.
<PAGE>
March 6, 1998
To Our Shareholders:
The past year has been a year filled with unprecedented improvements and
changes to your company and its wholly-owned subsidiary, GrandBank (the Bank).
Early in the year, the Company and the Bank, changed their names. At about the
same time, the Bank went through a major operating systems conversion and
completed the full assimilation of the assets and liabilities acquired from
First Commonwealth Federal Savings Bank. Each of these activities, while
monumental in and of themselves, when viewed in total ensure the Company's
continued growth and success.
The name change to GrandBank has had a positive impact in the community.
While we remain proud of our history and maintain our minority status, the name
change to GrandBank has proved very beneficial. The Bank has experienced
increased name recognition throughout the metropolitan area and expects to use
this new found notoriety and enhanced image to establish new business
relationships.
As a result of our system conversion, several new products and product
enhancements were introduced; visit us on the internet at
www.GrandBank-Online.com, bank when it is most convenient for you with GrandBank
Online PC Banking for both home and business use, apply today for your GrandBank
Debit Card and never worry again about having to carry your checkbook along. A
new cash management service has been introduced and is being used successfully
by many of our commercial customers and our GrandBank credit card program is off
to an encouraging start. Start-up costs related to these programs negatively
impacted 1997 results, but we believe these investments will provide the
catalyst for future growth and earnings and allow us to compete successfully in
this marketplace.
In late 1996, the Bank acquired certain assets and liabilities and the
Alexandria, Virginia branch of First Commonwealth Federal Savings Bank. This
acquisition has proved a strong entry into the Northern Virginia marketplace. We
continue to look for acquisition and new branch opportunities to assist in our
efforts to provide premier banking services to the communities we serve.
Sincerely,
/s/ Steven K. Colliatie
Steven K. Colliatie
President & CEO
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Business of the Company and Bank
GrandBanc, Inc. (the "Corporation") is a bank holding company doing
business through its subsidiary bank, GrandBank (the "Bank"). As a community
bank operating four branches in Montgomery County, Maryland and one branch in
Alexandria, Virginia, the Bank offers deposit accounts and associated services
to businesses and individuals and makes loans and invests in qualified
securities. In addition, the Bank's income includes fees on deposit accounts and
loans.
Financial Condition
Total assets of GrandBanc, Inc. and the Bank were $103.9 million at
December 31, 1997. This was a 3% increase from total assets of $101.1 million at
December 31, 1996.
Total loans increased by $3.7 million (5%) to $77.4 million and total
deposits decreased $2.6 million (3%) to $88.7 million. Deferred income tax
benefits amounting to $2.06 million that are expected to be realized through
future taxable income were established in 1997.
Capital Adequacy. Stockholders' equity of $7.5 million at December 31, 1997
increased $1.5 million from December 31, 1996. This increase includes earnings
of $850 thousand, an improvement in net unrealized holding losses on investment
securities of $80 thousand in 1997 and proceeds from the sale of common stock
amounting to $535 thousand.
At December 31, 1997, the Bank's ratio of Tier I capital to total average
assets equaled 7.29% which exceeded the minimum leverage capital ratio of 4% by
3.29% . At December 31, 1997, the Bank's Tier I capital to risk-weighted assets
ratio was 8.72% which exceeded the minimum required ratio of 4% by 4.72%. The
Bank's total capital to risk weighted assets ratio at December 31, 1997 was
9.98% which exceeded the minimum required ratio of 8% by 1.98%.
Investment Activity. During 1997, the Corporation's investment securities
portfolio decreased by $2.1 million primarily resulting from maturities and
calls in the Bank's held to maturity portfolio. Proceeds were reinvested in new
loans rather than securities.
Asset/Liability Management. The Bank's profitability, like that of most
financial institutions, is dependent to a large extent upon its net interest
income, which is the difference between its interest income on interest-earning
assets, such as loans and investments, and its interest expense on
interest-bearing liabilities, such as deposits. Interest rate risk arises due to
fluctuations in the general level of interest rates. The Bank seeks to manage
its interest rate risk through its Asset/Liability Management Committee (ALCO)
established by the Board of Directors and consisting of the full Board and the
Chief Executive Officer, Chief Financial Officer, Chief Lending Officer and the
Senior Retail Banking Officer. The ALCO establishes and monitors the volume and
mix of the Bank's assets and funding sources to produce results which are
consistent with liquidity, capital adequacy, growth, risk, and profitability
goals.
Liquidity management enables the Bank to maintain sufficient cash flow to
fund operations and to meet financial obligations to depositors and borrowers.
The Bank's liquidity is enhanced by its ability to attract and retain deposits
and by principal and interest payments on loans and maturing securities in the
investment portfolio. The Bank's core deposit base, consisting of demand
deposits, money market, and savings accounts supplemented by other deposits of
varying maturities and rates contributes to the Corporation's liquidity. The
Bank's liquidity position, those assets invested in cash, federal funds, and
obligations of the U.S. Government, its agencies and sponsored entities
available for sale, of $8.7 million at December 31, 1997, reflected a decrease
of $1.3 million from December 31, 1996. Funds available through short-term
borrowings and asset maturities are considered adequate to meet all current
needs. At December 31, 1997, the Corporation has the ability to borrow against
collateral consisting of securities in its investment portfolio. Although this
liquidity position remains adequate, the Bank continues to experience increased
loan demand which could have an adverse impact on liquidity. The Bank also has a
$5 million borrowing line with the Federal Home Loan Bank of Atlanta. This line
may be utilized as a supplementary source of funding growth of the Bank.
Management continues to evaluate the asset and liability mix to ensure that
liquidity needs are met.
The loan to deposit ratio at December 31, 1997 was 87.3% which is up from
80.8% at December 31, 1996. In managing interest rate sensitivity, the Bank
seeks to produce a profitable net interest margin through all phases of interest
rate cycles. Management attempts to make the necessary adjustments to limit
adverse fluctua-
2
<PAGE>
tions in net interest income resulting from interest rate movements through
analysis of repricing frequencies and income simulation modeling techniques.
The amounts of interest-earning assets and interest-bearing liabilities
outstanding at December 31, 1997 which are anticipated by the Bank based on
certain assumptions, to reprice or mature in future time periods, are set forth
in the Sensitivity Analysis below.
INTEREST SENSITIVITY ANALYSIS
December 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
3 mos. Over 3 mos. to Over 1 year to Over
or less 1 year to 5 years 5 years Total
--------- ---------------- --------------- --------- -------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 2,837 $ -- $ -- $ -- $ 2,837
Investments 5,298 644 3,268 4,764 13,974
Loans 40,720 14,216 18,422 4,088 77,446
-------- ---------------- --------------- --------- --------
Total Interest-Earning Assets $ 48,855 $ 14,860 $ 21,690 $ 8,852 $ 94,257
======== ================ =============== ========= ========
Interest-Bearing Liabilities:
Savings & interest checking $ 12,712 $ -- $ -- $ -- $ 12,712
Money market checking 12,217 -- -- -- 12,217
Time deposits 12,971 27,597 13,268 -- 53,836
Short-term borrowings 3,698 -- -- -- 3,698
-------- ---------------- --------------- --------- --------
Total Interest Bearing Liabilities $ 41,598 $ 27,597 $ 13,268 $ -- $ 82,463
======== ================ =============== ========= ========
CUMULATIVE GAP $ 7,257 $ (5,480) $ 2,942 $ 11,794 $ 11,794
CUMULATIVE GAP TO TOTAL ASSETS 6.99% (5.28)% 2.83% 11.35% 11.35%
</TABLE>
Note: The table represents the earlier of the maturity or repricing dates
for various assets and liabilities at December 31, 1997.
The amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual terms of the asset or liability. The Bank has
assumed that its savings, interest checking, and money market accounts reprice
daily. At December 31, 1997, the Bank's one-year interest sensitivity gap (the
difference between the amount of interest-earning assets anticipated by the
Bank, based on certain assumptions, to mature or reprice within one year) as a
percentage to total assets was negative 5.28%. This negative gap position means
the Bank had $5.5 million more liabilities than assets repricing within one
year. This generally indicates that in a period of declining interest rates, the
Bank's net interest income may improve. Conversely, in a rising interest rate
environment, the Bank's net interest income may be adversely affected.
Allowance for Loan Losses. At December 31, 1997, the allowance for loan
losses was $1.7 million or 2.20% of loans outstanding compared to $1.02 million
or 1.38% of loans outstanding as of December 31, 1996, an increase of $685
thousand. At December 31, 1997, the allowance for loan loss was 61% of
non-performing loans compared to 79% of non-performing loans at December 31,
1996.
The increase in the allowance for loan losses in 1997 results from an
increase in non-performing loans during the year. For additional information,
please see notes 1 and 5 to the consolidated financial statements. In
management's opinion, the allowance for loan losses as of December 31, 1997 is
adequate to cover potential losses that can be anticipated at this time based on
current risks and knowledge of the portfolio.
Non-Performing Loans and Assets. The Bank's non-performing assets totaling
$4.2 million consist of loans delinquent 90 days or more, non-accrual loans and
other real estate owned ("OREO"). The percentage of non-performing assets to
total assets increased to 4.06% at December 31, 1997 from 2.24% at December 31,
1996. Non-performing loans totaled $2.8 million at December 31, 1997, compared
to $1.3 million at December 31, 1996. Non-performing loans at December 31, 1997
consist of loans in non-accrual status in the amount of $2.8
3
<PAGE>
million. The increase in non-performing loans is primarily the result of one
loan in the amount of $1.1 million being added to non-accrual during the fourth
quarter of 1997. The loan is secured by commercial real estate and management
believes an adequate specific reserve has been established.
At December 31, 1997, OREO net of valuation reserves, was $1.4 million,
which is an increase of $460 thousand compared to OREO at December 31, 1996.
Generally, the Bank evaluates the fair value of each property owned annually.
These evaluations may be appraisals or other market studies. Several properties
are under contract-for-sale that are expected to close in 1998. At December 31,
1997, management believes the carrying amounts for OREO properties approximate
fair value.
Results of Operations
Net Income. The corporation had net income of $850 thousand for the year
ended December 31, 1997, an increase of $641 thousand or 308% compared to net
income in 1996. Earnings per share were $0.21 in 1997 compared to $0.06 in 1996.
The increase is attributable to recognition of deferred tax benefits in the
amount of $2.06 million.
Earnings were positively impacted by the accounting requirements of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This standard requires the recognition of income tax benefits of loss
carryforwards and temporary differences when it is "more likely than not" that
they will be realized from the company's future earnings. These tax benefits
totalled $2.06 million, and were recorded as an income tax benefit in 1997.
Net Interest Income. Net interest income is the difference between interest
income on earning assets and interest expense on deposits and other borrowed
funds. Net interest income for the year ended December 31, 1997 of $3.98 million
reflected an increase of $1.23 million or 45% compared to 1996. Total interest
income of $8.1 million in 1997 was an increase of $3.3 million or 69% over 1996.
This increase was primarily the result of increases of $2.9 million in interest
and fees on loans and $388 thousand in interest on investment securities. The
increase in earnings on loans and investments was due to increases in average
outstanding balances of $31.9 million and $6.9 million, respectively. Likewise,
interest paid on deposits increased by $1.9 million or 103% in 1997 due to an
increase in the average balance outstanding during the year of $36.7 million and
an increase in the average cost of funds of 0.59%. Increases in average
outstanding balances were primarily the result of the acquisition of certain
assets and liabilities of First Commonwealth Savings Bank, F.S.B. of Alexandria,
Virginia ("FSB") in the third quarter of 1996.
The average yield on earning assets for the year ended December 31, 1997,
was 8.57% compared to 8.49% in 1996. The average interest rate paid on interest
bearing deposits in 1997 was 4.68% compared to 4.20% in 1996. Net interest
margin is the ratio of net interest income to average earning assets. For the
year ended 1997, net interest margin was 4.21% compared to 4.85% for the year
ended December 31, 1996. The following tables illustrate the Corporation's
analysis of average balances, yields and changes in net interest income for the
fiscal years indicated.
4
<PAGE>
THREE YEAR AVERAGE CONSOLIDATED BALANCE SHEETS AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
Average Balance (1) Yield/Cost (2) Income/Expense (2)
--------------------------- ----------------------- ----------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
------- ------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $74,822 $42,891 $29,524 9.30% 9.44% 10.03% $6,960 $4,051 $2,961
Investment securities 17,170 10,297 7,889 5.89 6.05 5.51 1,011 623 435
Other interest-earning assets 2,582 3,386 1,555 5.27 3.84 5.92 136 130 92
------- ------- ------- ----- ----- ----- ------ ------ ------
Total interest-earning assets 94,574 56,574 38,968 8.57 8.49 8.95 8,107 4,804 3,488
Noninterest-earning assets 6,984 3,899 3,299
------- ------- -------
Total assets $101,558 $60,473 $42,267
======= ======= =======
Interest-bearing liabilities:
Savings & interest checking $12,853 $10,141 $ 9,314 2.26% 2.32% 2.57% $291 $235 $239
Money market accounts 13,893 11,187 10,210 3.34 3.33 3.37 464 373 344
Time deposits 54,681 23,398 10,129 5.59 5.44 5.02 3,056 1,272 508
------- ------- ------- ----- ----- ----- ------ ------ ------
Total interest-bearing deposits 81,427 44,726 29,653 4.68 4.20 3.68 3,811 1,880 1,091
Other interest-bearing liabilities 3,835 1,745 266 8.32 10.37 6.02 319 181 16
------- ------- ------- ----- ----- ----- ------ ------ ------
Total interest-bearing liabilities 85,262 46,471 29,919 4.84 4.43 3.70 4,130 2,061 1,107
Noninterest-bearing liabilities:
Demand deposits 10,304 8,973 8,825
Other noninterest-bearing liabilities 224 195 202
Stockholders' equity 5,768 4,834 3,321
------- ------- -------
Total Liabilities and Stockholder's Equity $101,558 $60,473 $42,267
======= ======= =======
Interest Rate Spread 3.73% 4.06% 5.25%
Net Interest Margin/Income 4.21% 4.85% 6.11% $3,977 $2,743 $2,381
</TABLE>
1. Nonaccrual loans are included in the average loan balances and income on such
loans is recognized on a cash basis.
2. Yields/costs are derived by dividing income or expense by the average balance
of assets or liabilities, respectively, for the periods presented.
NET INTEREST INCOME/CHANGES DUE TO VOLUME AND RATE
(In Dollars)
<TABLE>
<CAPTION>
1997 versus 1996 1996 versus 1995
------------------------------------------------ ----------------------------------
Change due to Change due to
Increase ----------------------------------- Increase ----------------------
(Decrease) Rate Volume Rate/Volume (Decrease) Rate Volume
---------- --------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $2,909,160 $ (30,024) $2,961,535 $ (22,351) $1,090,056 $(174,194) $1,343,112
Investment securities 388,114 (16,475) 415,586 (10,997) 187,610 42,600 132,009
Other interest-earning assets 6,017 48,081 (30,647) (11,417) 38,657 (32,340) 109,078
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets $3,303,291 $ 1,582 $3,346,474 $ (44,765) $1,316,323 $(163,934) $1,584,199
========== ========== ========== ========== ========== ========== ==========
Interest Expense:
Savings & interest checking $ 56,142 $ (6,085) $ 63,854 $ (1,627) $ (3,816) $ (23,283) $ 21,535
Money market accounts 90,511 1,119 89,121 271 29,155 (4,083) 33,628
Time deposits 1,784,789 35,097 1,702,767 46,925 763,277 42,539 665,003
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits 1,931,442 30,131 1,855,742 45,569 788,616 15,173 720,166
Other interest-bearing liabilities 137,896 (42,845) 216,514 (35,773) 165,364 (1,222) 173,390
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $2,069,338 $ (12,714) $2,072,256 $ 9,796 $ 953,980 $ 13,951 $ 893,556
========== ========== ========== ========== ========== ========== ==========
Net Interest Income $1,233,953 $ 14,296 $1,274,218 $ (54,561) $362,343 $(177,885) $690,643
</TABLE>
<TABLE>
<CAPTION>
1996 versus 1995
----------------
Change due to
-------------
Rate/Volume
-----------
<S> <C>
Interest Income:
Loans $ (78,862)
Investment securities 13,001
Other interest-earning assets (38,081)
----------
Total interest-earning assets $(103,942)
==========
Interest Expense:
Savings & interest checking $ (2,068)
Money market accounts (390)
55,735
----------
Time deposits
Total interest-bearing deposits 53,277
Other interest-bearing liabilities (6,804)
----------
Total interest-bearing liabilities $ 46,473
==========
Net Interest Income $(150,415)
</TABLE>
5
<PAGE>
Provision for Loan Losses. The provision for loan losses added $1.02
million to the allowance for loan losses in 1997. This amount replaced loans
charged-off (net of recoveries) during the year amounting to $524 thousand and
increased the allowance to reflect an increase in non-performing loans as
previously described.
Noninterest Income. Noninterest income for the year ended December 31, 1997
was $645 thousand compared to $520 thousand in 1996, an increase of $125
thousand or 24%. The increase is primarily due to fees of $150 thousand,
included in other income, from the Bank's new credit card program that began in
1997, less a decline in service charges on deposit accounts amounting to $52
thousand.
Noninterest expense. Total noninterest expense for the year ended December
31, 1997 of $4.6 million was an increase of $1.5 million or 50% primarily as a
result of the acquisition of FSB previously described. The increase in salaries
and benefits expense of $608 thousand or 44% resulted from having the former
employees of FSB for the entire year of 1997. Occupancy and equipment expense of
$988 thousand increased by $301 thousand or 44% due to adding two new branch
locations and the related equipment late in 1996. Also, during 1997, significant
upgrades were made to the Bank's computer equipment. The cost of data processing
services increased by $222 thousand or 84% as a result of a significant increase
in transaction volume due to the FSB acquisition and the addition of new
customer products and services during 1997. As expected, the cost of FDIC
insurance increased by $32 thousand or 296% since the deposits acquired from FSB
were insured at rates higher than the Bank's existing deposits. Legal fees
declined by $105 thousand or 66% due to the favorable conclusion of certain
litigation. Other expenses of $903 thousand in 1997 represented an increase of
$448 thousand or 99%. Expenses incurred relating the Bank's new credit card
program accounted for $135 thousand of this increase and the remainder was
primarily due to the FSB transaction previously described.
Taxes on Income. The Corporation recorded a deferred income tax benefit of
$2.06 million in 1997. Of this amount, $1.3 million reflected recognition of
$3.3 million in tax loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized.
Impact of Inflation and Changing Prices. The Consolidated Financial
Statements and Notes thereto have been prepared in accordance with Generally
Accepted Accounting Principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Corporation's operations. Unlike most industrial companies, nearly all assets
and liabilities of the Corporation are monetary in nature. As a result, interest
rates have a greater impact on the Corporation's performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the price of goods or services.
Market for the Common Equity and Related Stockholder Matters
There is limited public trading in the Corporation's common stock. Other
than options for 121,500 shares of common stock under the Corporation's option
plans, there are presently no other outstanding securities convertible into
common equity of the Corporation. Bid prices for the common stock in the
over-the-counter market for each quarterly period within the two most recent
fiscal years are as follows:
Quarter Ended Bid Price Quarter Ended Bid Price
1997 1996
March 31 $2.50 March 31 $2.00
June 30 2.50 June 30 2.50
September 30 2.50 September 30 2.25
December 31 3.37 December 31 2.50
The quotations were obtained from the Washington Post at each time period
shown and reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not represent actual transactions.
At December 31, 1997 there were 420 holders of record. There have been no
dividends paid in the past two years.
6
<PAGE>
Year 2000 Compliance
GrandBank has a year 2000 plan to identify and solve problems relating to
the inability of some computer software programs to correctly recognize the year
2000. In the past, many computer programs were written to record only the last
two digits of the year. As a result, many programs will be unable to properly
recognize the year 2000. The scope of the problem involves not only computers
but other devices that depend on computer chips, and not only the Bank's own
systems but also those of outside vendors and customers. The Bank's primary
suppliers of data processing services have adopted year 2000 plans and
timetables. The Bank is currently monitoring their progress in resolving year
2000 issues and preparing its own systems for the appropriate testing. The Bank
will evaluate its loan customers to ensure they are adequately dealing with the
problem. The Bank is currently implementing its plan and expects to solve year
2000 issues without material impact to the Bank's business, operations,
liquidity, capital resources or financial condition.
7
<PAGE>
[LETTERHEAD OF STEGMAN & COMPANY APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
GrandBanc, Inc.
We have audited the accompanying consolidated balance sheets of GrandBanc,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of income, changes in stockholders' equity, and cash flows for each of three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
GrandBanc, Inc. as of December 31, 1997 and 1996, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Stigman & Company
Baltimore, Maryland
January 24, 1998
8
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
Assets
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash and due from banks $ 2,460,222 $ 2,455,622
Federal funds sold 2,837,000 624,000
Time deposits with banks - 3,300,000
Investment securities:
Available for sale - at fair value 3,395,125 3,657,047
Held to maturity - at amortized cost -fair value of
$11,033,305 (1997) and $12,861,416 (1996) 10,969,615 12,820,977
Loans 77,445,689 73,723,529
Less allowance for loan losses (1,701,702) (1,016,478)
------------ ------------
Loans - net 75,743,987 72,707,051
Bank premises and equipment 1,971,573 1,822,804
Foreclosed real estate 1,434,739 975,223
Accrued interest receivable 602,770 617,592
Intangible assets 1,337,886 1,479,280
Deferred income taxes 2,056,713 -
Other assets 1,061,948 665,568
------------ ------------
TOTAL ASSETS $103,871,578 $101,125,164
============ ============
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Liabilities:
Noninterest-bearing deposits $ 9,933,030 $ 9,806,176
Interest-bearing deposits 78,764,994 81,476,660
------------ ------------
Total deposits 88,698,024 91,282,836
Short-term borrowings 5,698,037 2,000,000
Long-term debt 1,500,000 1,500,000
Accrued expenses and other liabilities 490,474 321,340
------------ ------------
Total liabilities 96,386,535 95,104,176
------------ ------------
Stockholders' Equity:
Common stock - $.10 par value; 20,000,000 shares (1997)
and 7,500,000 (1996) authorized; 4,040,915 and
3,925,499 shares outstanding in 1997 and 1996, respectively 404,091 392,550
Additional paid-in capital 10,928,460 10,405,003
Accumulated deficit (3,747,332) (4,596,842)
Net unrealized holding loss on investment securities (100,176) (179,723)
------------ ------------
Total stockholders' equity 7,485,043 6,020,988
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,871,578 $101,125,164
============ ============
</TABLE>
See accompanying notes.
9
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $6,960,287 $4,051,127 $2,961,070
Interest on investment securities - U.S. Government,
its agencies, and sponsored entities 903,867 548,095 429,067
Interest on other investment securities 107,362 75,020 5,965
Interest on time deposits with banks - - 475
Interest on federal funds sold 136,082 130,065 91,408
---------- ---------- ----------
Total interest income 8,107,598 4,804,307 3,487,985
---------- ---------- ----------
Interest Expense:
Interest on certificates of deposit of $100,000 or more 766,752 250,063 109,939
Interest on other deposits 3,044,216 1,629,463 980,970
---------- ---------- ----------
Total interest on deposits 3,810,968 1,879,526 1,090,909
Interest on short-term borrowings 162,778 144,972 16,087
Interest on long-term debt 156,569 36,479 -
---------- ---------- ----------
Total interest expense 4,130,315 2,060,977 1,106,996
---------- ---------- ----------
Net Interest Income 3,977,283 2,743,330 2,380,989
Provision (Recovery) for Loan Losses 1,209,000 (35,000) (30,000)
---------- ---------- ----------
Net Interest Income After Provision for Loan Losses 2,768,283 2,778,330 2,410,989
---------- ---------- ----------
Noninterest Income:
Service charges on deposit accounts 315,778 367,614 246,047
Net realized gain on sales of securities 1,274 7,050 -
Gain on sales of loans - - 63,383
Other income 328,416 144,988 133,143
---------- ---------- ----------
Total noninterest income 645,468 519,652 442,573
---------- ---------- ----------
Noninterest Expense:
Salaries and employee benefits 1,993,005 1,384,515 1,272,555
Occupancy and equipment expense 987,545 686,750 477,461
Data processing services 487,403 264,921 206,683
FDIC insurance 43,430 10,961 52,982
Insurance 70,817 62,804 51,533
Legal fees 54,068 159,485 171,328
Foreclosed real estate expenses 81,449 60,708 56,605
Other expenses 903,237 454,803 288,282
---------- ---------- ----------
Total noninterest expense 4,620,954 3,084,947 2,577,429
---------- ---------- ----------
(Loss) Income Before Income Taxes (1,207,203) 213,035 276,133
Income Tax (Benefit) Expense (2,056,713) 5,000 -
---------- ---------- ----------
Net Income $ 849,510 $ 208,035 $ 276,133
========== ========== ==========
Net Income Per Common Share
Basic $.21 $.06 $.09
Diluted $.21 $.06 $.09
</TABLE>
See accompanying notes.
10
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Additional Holding Total Stock-
Common Paid-In Accumulated (Loss) on holders'
Stock Capital (Deficit) Securities Equity
-------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $317,883 $ 8,331,259 $(5,081,010) $(463,112) $3,105,020
Net income - - 276,133 - 276,133
Issuance of common stock
at $2.00 per share 8,000 144,358 - - 152,358
Net change in unrealized loss
on investment securities - - - 205,995 205,995
-------- ----------- ----------- ---------- ----------
Balance at December 31, 1995 325,883 8,475,617 (4,804,877) (257,117) 3,739,506
Net income - - 208,035 - 208,035
Issuance of common stock
at $3.00 per share 66,667 1,929,386 - - 1,996,053
Net change in unrealized loss
on investment securities - - - 77,394 77,394
-------- ----------- ----------- ---------- ----------
Balance at December 31, 1996 392,550 10,405,003 (4,596,842) (179,723) 6,020,988
Net income - - 849,510 - 849,510
Issuance of common stock 875 34,123 - - 34,998
at $4.00 per share
Issuance of common stock 10,666 489,334 - - 500,000
at $4.69 per share
Net change in unrealized loss
on investment securities - - - 79,547 79,547
-------- ----------- ----------- ---------- ----------
Balance at December 31, 1997 $404,091 $10,928,460 $(3,747,332) $(100,176) $7,485,043
======== =========== =========== ========== ==========
</TABLE>
See accompanying notes.
11
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 849,510 $ 208,035 $ 276,133
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 230,175 119,571 106,144
Accretion and amortization of securities 87,719 (11,661) (13,222)
Amortization of intangibles 160,818 46,522 -
Provision for loan losses 1,209,000 (35,000) (30,000)
Net realized (gain) loss from sales of assets (1,274) 26,206 (63,383)
Other real estate owned - write downs 57,000 - 30,000
Deferred Income taxes (2,056,713) - -
Net changes in:
Accrued interest receivable (14,822) (110,100) 113,808
Accounts receivable - - 20,934
Other assets (415,804) (448,480) 399,257
Accrued expenses and other liabilities 204,132 (425,832) 95,320
Other - net 62,714 226,771 108,777
----------- ----------- -----------
Net cash provided (used) by operating activities 402,099 (403,968) 1,043,768
----------- ----------- -----------
Cash Flows From Investing Activities:
Investment in time deposits with banks 3,300,000 (3,205,000) (95,000)
Net increase in federal funds sold (2,213,000) (624,000) -
Purchases of available for sale securities (3,188,050) (3,787,000) (1,247,656)
Proceeds from maturities/principal payments
on available for sale securities 2,890,465 1,595,816 550,000
Proceeds from sale of available for sale securities 550,516 1,704,908 4,000,000
Purchases of held to maturity securities (5,099,766) (8,868,870) -
Proceeds from maturities/principal payments
on held to maturity securities 6,953,222 1,000,000 -
Net increase in loans (5,121,165) (9,030,750) (6,104,168)
Proceeds from sale of participation loans 1,490,000 3,752,411 3,327,035
Purchases of loans (1,273,652) (2,031,887) (3,675)
Purchase of property and equipment (378,944) (295,212) (167,718)
Proceeds from sale of foreclosed real estate and other assets 79,650 45,744 -
Net funds received in acquisition - 20,756,587 -
----------- ----------- -----------
Net cash (used) provided by investing activities (2,010,724) 1,012,747 258,818
----------- ----------- -----------
Cash Flows from Financing Activities:
Net decrease in deposits (2,584,812) (5,147,663) (171,862)
Net increase (decrease) in short-term borrowings 3,698,037 1,941,000 (1,293,000)
Proceeds from long-term debt - 1,500,000 -
Proceeds from issuance of common stock 500,000 1,996,053 152,358
----------- ----------- -----------
Net cash provided (used) by financing activities 1,613,225 289,390 (1,312,504)
----------- ----------- -----------
Net Increase (Decrease) in Cash 4,600 898,169 (9,918)
Cash at Beginning of Year 2,455,622 1,557,453 1,567,371
----------- ----------- -----------
Cash at End of Year $ 2,460,222 $ 2,455,622 $ 1,557,453
=========== =========== ===========
12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended December 31, 1997, 1996 and 1995
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental disclosures:
Interest payments $4,089,718 $1,998,225 $1,067,408
Income tax payments - 5,000 -
Noncash investing and financing activities:
Unrealized gain on investment securities
available for sale $79,547 $77,394 $205,995
Stock issued in consideration
of professional services $34,998 $ - $ -
</TABLE>
See accompanying notes.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of GrandBanc, Inc. (the Corporation),
including its wholly owned subsidiary, GrandBank, (the Bank), conform to
generally accepted accounting principles and to prevailing practices within the
banking industry. Certain reclassifications have been made to amounts previously
reported to conform with the classifications made in 1997.
Consolidation Policy
The consolidated financial statements include the accounts of the
Corporation and the Bank with all significant intercompany transactions
eliminated. The financial statements of the Corporation include the Bank under
the equity method of accounting.
Nature of Operations
The Corporation provides commercial banking services from its four
locations in Montgomery County, Maryland and one branch in Alexandria, Virginia.
Its primary source of revenue is from providing commercial and real estate loans
to customers who are predominately small businesses, professionals and middle
income individuals located in Montgomery County, suburban Washington, D.C. and
northern Virginia.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Securities Available for Sale
Investment securities available for sale are stated at estimated fair value
based on quoted market prices. They represent those securities which management
may sell as part of its asset/liability strategy or which may be sold in
response to changing interest rates, changes in prepayment risk or other similar
factors. The cost of securities sold is determined by the specific
identification method. Net unrealized holding gains and losses on these
securities are reported as a separate component of stockholders' equity, net of
related income taxes.
Investment Securities Held to Maturity
Investment securities held to maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. The Corporation intends and
has the ability to hold such securities until maturity. When securities are
transferred into the held to maturity category from available for sale, they are
accounted for at estimated fair value with any unrealized holding gain or loss
at the date of the transfer reported as a separate component of stockholders'
equity and amortized over the remaining life of the security as an adjustment of
yield.
Loans
Loans are stated at their principal amount outstanding net of any deferred
fees and costs. Interest income is accrued and credited to income at the
contractual rate based on the principal amount outstanding. Loans are placed on
nonaccrual when a loan is specifically determined to be impaired or when
principal or interest is delinquent for 90 days or more. Any unpaid interest
previously accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received.
Loans are considered impaired when, based on current information, it is
probable that the Bank will not collect all principal and interest payments
according to the loans' contractual terms. Generally, loans are considered
impaired once principal or interest payments become 90 days or more past due and
they are placed on nonaccrual. Management also considers the financial condition
of the borrower, cash flows of the loan and the value of the related collateral.
Impaired loans do not include large groups of smaller balance homogeneous loans
such as residential real estate and consumer installment loans which are
evaluated collectively for impairment. Loans specifically reviewed for
impairment are not considered impaired during periods of "minimum delay" in
payment (90 days or less) provided eventual collection of all amounts due is
expected. The impairment of the loan is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
the fair value of the collateral if repayment is expected to be provided by the
collateral. The
14
<PAGE>
majority of the Bank's impaired loans are measured by reference to the fair
value of the collateral. Interest income on impaired loans is recognized on the
cash basis.
Allowance for Loan Losses
The allowance for loan losses represents management's current estimate of
the amount which adequately provides for possible losses in the portfolio. The
adequacy of the allowance is determined by regular review of the loan portfolio
considering such factors as current economic conditions and their effect on the
creditworthiness of borrowers, changes in the character of the portfolio and
historical loan loss experience. The allowance is increased by provisions
charged to operating expense and reduced by loans charged-off, net of recoveries
of amounts previously charged-off and by reversals of previous years'
provisions. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows.
Long-Lived Assets
Bank premises and equipment are stated at cost and are being depreciated
principally on a straight-line basis over the estimated useful lives of the
assets. Repair and maintenance costs are charged against income while
betterments are capitalized as additions to the related assets. Upon retirement
or other disposition of properties, the carrying value and the related
accumulated depreciation are removed from the accounts.
Intangible assets consisting of goodwill and a premium on purchased
deposits are being amortized on the straight-line method over 12 years and 9
years, respectively.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and the
write-down would be material, an assessment of recoverability is performed prior
to any write-down of the asset.
Foreclosed Real Estate
Foreclosed real estate represents assets acquired in satisfaction of loans
either by foreclosure or deeds taken in lieu of foreclosure. Properties acquired
are recorded at the lower of cost or fair value less estimated selling costs at
the time of acquisition with any deficiency charged to the allowance for loan
losses. Thereafter, costs incurred to operate or carry the properties as well as
reductions in value as determined by periodic appraisals or other market studies
are charged to operating expense. Gains and losses resulting from the final
disposition of the properties are included in noninterest expense.
Income Taxes
Under the asset and liability method, deferred income taxes reflect the
future tax consequences of temporary differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year-end. Deferred
tax assets and liabilities are measured using tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect of deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are recognized for future deductible
temporary differences and tax loss carryforwards if their realization is "more
than likely".
2. NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Corporation adopted SFAS No. 121, Accounting
for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of.
This standard requires that long-lived assets be evaluated regularly for
other-than-temporary impairment. If circumstances suggest that their value may
be impaired, an assessment of recoverability is performed prior to any
write-down of the asset. Implementation of this standard did not have a
significant impact on the Corporation's financial condition or results of
operations.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (FASB 125), which
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets and extinguishments of
liabilities. FASB 125 is effective for transactions occurring after December 31,
1996, except for the provisions relating to repurchase agreements, securities
lending and other similar transactions and pledged collateral, which have been
delayed until after December 31, 1997 by FASB 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB 125."
Adoption of FASB 125 was not material; FASB 127 will be adopted
15
<PAGE>
as required in 1998 and is not expected to be material.
In February 1997, Statement of Financial Accounting Standards No. 128,
Earnings per Share (FASB 128), was issued and establishes new standards for
computing and presenting earnings per share. FASB 128 is effective for the
Corporation's December 31, 1997 financial statements, including restatement of
interim periods; earlier application was not permitted. The effect of the new
standard did not have an impact on previously reported earnings per share.
In June 1997, Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (FASB 130), was issued and establishes standards
for reporting and displaying comprehensive income and its components. FASB 130
requires comprehensive income and its components, as recognized under the
accounting standards, to be displayed in a financial statement with the same
prominence as other financial statements. The Corporation plans to adopt the
standard, as required, beginning in 1998; adoption will not have a material
impact on the Corporation.
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (FASB 131), also issued in
June 1997, establishes new standards for reporting information about operating
segments in annual and interim financial statements. The standard also requires
descriptive information about the way the operating segments are determined, the
products and services provided by the segments, and the nature of differences
between reportable segment measurements and those used for the consolidated
enterprise. This standard is effective for years beginning after December 15,
1997. Adoption in interim financial statements is not required until the year
after initial adoption, however, comparative prior period information is
required. The Corporation is evaluating the standard and plans adoption as
required in 1998; adoption of this disclosure requirement will not have a
material impact on the Corporation.
3. ACQUISITION
On September 20, 1996, the Corporation acquired, in a purchase and
assumption agreement, the Alexandria, Virginia branch of First Commonwealth
Savings Bank, FSB. Total deposits of approximately $60 million were assumed,
loans totaling approximately $36.7 million and premises and equipment of $1.3
million were purchased. The excess of the fair value of the liabilities over the
fair value of the assets acquired and cash received was classified as a deposit
intangible in the amount of $1,181,140 and goodwill in the amount of $364,086.
The deposit intangible is being amortized over 9 years and goodwill is being
amortized over 12 years.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at
December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale 1997
Obligations of U.S. Government, its agencies,
and sponsored entities $3,005,322 $6,875 $7,972 $3,004,225
Other investments 390,900 -- -- 390,900
---------- ---------- ---------- -----------
Total $3,396,222 $6,875 7,972 $3,395,125
========== ========== ========== ===========
Available for Sale 1996
Obligations of U.S. Government, its agencies,
and sponsored entities $3,428,546 $14,401 $ -- $3,442,947
Other investments 214,100 -- -- 214,100
---------- ---------- ---------- -----------
Total $3,642,646 $14,401 $ -- $3,657,047
========== ========== ========== ===========
Held to Maturity 1997
Obligations of U.S. Government, its agencies,
and sponsored entities $ 8,641,505 $27,700 $13,805 $ 8,655,400
Mortgage-backed securities 2,328,110 49,795 -- 2,377,905
----------- ---------- ---------- -----------
Total $10,969,615 $77,495 $13,805 $11,033,305
=========== ========== ========== ===========
Held to Maturity 1996
Obligations of U.S. Government, its agencies,
and sponsored entities $10,044,646 $48,760 $25,784 $10,067,622
Mortgage-backed securities 2,776,331 17,909 446 2,793,794
----------- ---------- ---------- -----------
Total $12,820,977 $66,669 $26,230 $12,861,416
=========== ========== ========== ===========
</TABLE>
16
<PAGE>
The amortized cost and estimated fair value of investment securities at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $2,714,755 $2,725,230
Due after one year through five years 2,000,000 2,006,095 3,926,750 3,932,980
Due after five years through ten years -- -- 2,000,000 1,997,190
Due after ten years 1,005,322 998,130 -- --
----------- ----------- ----------- -----------
3,005,322 3,004,225 8,641,505 8,655,400
Mortgage-backed securities -- -- 2,328,110 2,377,905
Equity investments 390,900 390,900 -- --
----------- ----------- ----------- -----------
Total $3,396,222 $3,395,125 $10,969,615 $11,033,305
=========== =========== =========== ===========
</TABLE>
At December 31, securities pledged as collateral for public deposits and
for other purposes as required or permitted by law were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available for Sale $ 3,005,322 $ 3,004,225 $ 548,546 $ 552,576
Held to Maturity 10,969,615 11,033,305 4,545,167 4,553,208
----------- ----------- ---------- -----------
Total $13,974,937 $14,037,530 $5,093,713 $5,105,784
=========== =========== ========== ==========
</TABLE>
Proceeds from sales together with gross gains and losses realized on sales
of securities were as follows:
1997 1996
---------- -----------
Proceeds from sale $550,516 $1,500,000
Gross realized gains 1,274 7,050
Gross realized losses - -
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio at December 31 was as follows:
1997 1996
---------------- ----------------
Real estate - mortgage $47,016,711 $54,163,698
Real estate - construction 433,826 1,709,007
Commercial 21,684,319 15,804,240
Consumer 4,501,261 2,046,584
Credit card receivable 3,809,572 -
-------------- --------------
Total loans $77,445,689 $73,723,529
============== ==============
Certain senior officers, directors and companies in which officers and
directors are partners and principal stockholders have had loan transactions
with the Bank. Such extensions of credit have been made in the ordinary course
of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
outsiders and at the time did not involve more than the normal risk of
collectibility or present other unfavorable circumstances. The following
summarizes changes in amounts outstanding, both direct and indirect, to such
persons during 1997 and 1996:
1997 1996
-------------- --------------
Balance at January 1 $ 769,000 $ 639,000
Amounts borrowed 2,702,000 1,460,000
Amounts paid (1,211,000) (1,705,000)
Participation purchased (sold) - 375,000
-------------- --------------
Balance at December 31 $2,260,000 $ 769,000
============== ==============
Activity in the allowance for loan losses for the three years ended
December 31 is as follows:
1997 1996 1995
------------ ------------ ------------
Balance at January 1 $1,016,478 $ 748,480 $704,256
Provision (recovery) for loan losses 1,209,000 (35,000) (30,000)
Allowance acquired - 220,470 -
Loans charged-off (586,491) (143,773) (34,553)
Recoveries 62,715 226,301 108,777
------------ ------------ ------------
Balance at December 31 $1,701,702 $1,016,478 $748,480
============ ============ ============
At December 31, 1997, 1996 and 1995, the total recorded investment in impaired
loans amounted to $2,772,052, $742,033 and $77,406, respectively. The average
balances of these loans were $326,268, $220,487 and $77,542 for the years ended
December 1997, 1996 and 1995, respectively. Following is a summary of cash
receipts on impaired loans and how they were applied:
1997 1996 1995
------------ ------------ ------------
Cash receipts applied
to principal balance $ - $ - $1,575
Cash receipts recognized
as interest income - 2,900 4,202
------------ ------------ ------------
Total cash receipts $ - $2,900 $5,777
============ ============ ============
The allowance for loan losses related to impaired loans amounted to
approximately $639,000, $111,000 and $22,000 at December 31, 1997, 1996 and
1995,
17
<PAGE>
respectively. If interest had been recognized on impaired loans at the original
interest rate, interest income would have increased approximately $133,000,
$70,000 and $3,400 for the years ended December 31, 1997, 1996 and 1995,
respectively.
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following at December 31:
1997 1996
----------- ------------
Land $ 360,000 $ 360,000
Building 840,000 840,000
Leasehold improvements 751,848 729,013
Equipment 1,045,297 732,545
Furniture and fixtures 192,434 148,390
------------ -----------
3,189,579 2,809,948
Less accumulated depreciation (1,218,006) (987,144)
------------ -----------
$1,971,573 $1,822,804
============ ===========
The Bank leases office space under various lease agreements. Rental expense
for 1997, 1996 and 1995 totaled $581,044, $428,049, and $244,244, respectively.
Future minimum annual lease payments for operating leases are as follows:
1998 $476,459
1999 449,970
2000 297,860
2001 303,216
2002 308,688
Thereafter 787,880
7. INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated
amortization, included in the consolidated balance sheets:
Premium on
Purchased
Goodwill Deposits Total
-------------- ---------- -------------
Balance, January 1, 1996 $ - $ - $ -
Acquisitions 344,662 1,181,140 1,525,802
Amortization (16,451) (30,071) (46,522)
-------------- ---------- -------------
Balance, December 31, 1996 328,211 1,151,069 1,479,280
Addition 19,424 - 19,424
Amortization (29,559) (131,259) (160,818)
-------------- ---------- -------------
Balance, December 31, 1997 $318,076 $1,019,810 $1,337,886
============== ========== =============
8. DEPOSITS
Deposits at December 31 are summarized as follows:
1997 1996
------------- -------------
Noninterest-bearing $9,933,030 $9,806,176
------------- -------------
Interest-bearing:
Savings and interest checking 12,712,234 12,831,974
Money market 11,966,323 13,456,005
Certificates of deposit of $100,000 or more 15,268,806 9,099,612
Other 38,817,631 46,089,069
------------- -------------
Total interest-bearing 78,764,994 81,476,660
------------- -------------
Total $88,698,024 $91,282,836
============= =============
9. SHORT-TERM BORROWINGS
At December 31, 1997, the Corporation is indebted to an unaffiliated bank
in the amount of $2,000,000. The note bears interest at the prime rate (as
defined) plus 1/4% and is adjusted annually. Interest is payable monthly and the
principal is due October 1, 1998. The common stock of the Corporation's wholly
owned subsidiary bank is pledged as collateral for this debt.
Short-term borrowings at December 31, 1997 also consisted of securities
sold under agreement to repurchase as follows:
Average amount outstanding during the year $ 331,210
Weighted average interest rate during the year 3.90%
Amount outstanding at year end $3,698,037
Weighted average interest rate at year end 4.76%
Maximum amount at any month end $3,698,037
10. LONG-TERM DEBT
At December 31, 1997, the Corporation is also indebted to the same
unaffiliated bank in the amount of $1,500,000. The note bears interest at the
prime rate (as defined) plus 1/4% and is adjusted annually. Interest is payable
monthly and the principal is due October 1, 1999. The common stock of the
Corporation's wholly owned subsidiary bank is pledged as collateral for this
debt. Also securing this loan is the real property owned by the Corporation,
located in Alexandria, Virginia.
18
<PAGE>
11. STOCK OPTION PLAN
The Corporation maintains a stock option plan for outside directors and an
incentive stock option plan for key employees. The plans provide that 100,000
and 200,000 shares of common stock of the Corporation be reserved for each Plan,
respectively. The option price shall be the fair market value of the common
stock on the date the option is granted, and the option must be exercised within
ten years and five years from the date granted for director and incentive stock
option plans, respectively.
The following is a summary of changes in shares under option for each of
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
------------- ------------------ ------------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 133,500 $2.31 103,500 $1.89 89,500 $1.75
Granted 12,500 2.88 30,000 3.75 15,000 2.75
Exercised - - - - - -
Expired (24,500) 2.17 - - (1,000) 1.75
------------- ------------- -------------
Outstanding at end of year 121,500 $2.40 133,500 $2.31 103,500 $1.89
============= ============= =============
Weighted average fair value
of options granted during
the year $1.68 $1.79 $1.56
======== ======== ========
</TABLE>
The following summarizes information about options outstanding at December
31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------- ------------------------------------
Weighted Average
Range of Exercise Remaining Weighted Average Weighted Average
Prices Number Contractual Life Exercise Price Number Exercise Price
- ----------------- ---------------- ------------------ ------------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
$1.75 - $3.75 121,500 4.06 years $2.40 111,500 $2.36
</TABLE>
The fair value of each option grant 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 three years ended December 31:
1997 1996 1995
---------- ---------- ----------
Dividend yield - - -
Expected volatility 30.0% 30.0% 30.0%
Risk-free interest rate 6.82% 6.29% 6.29%
Expected lives 10 years 5-10 years 10 years
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), but applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plans. No compensation expense related to
the Plans was recorded during the three years ended December 31, 1997. If the
Corporation had elected to recognize compensation cost based on the fair value
at the grant dates for awards under the Plans consistent with the method of
prescribed by SFAS 123, net income and earnings per share would have been
changed to the pro forma amounts as follows:
Year ended December 31,
1997 1996
-------- --------
Net income $861,510 $154,485
Net income per share:
Basic $.21 $.04
Diluted $.21 $.04
12. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which became effective for the Company for
19
<PAGE>
reporting periods ending after December 15, 1997. Under the provisions of SFAS
No. 128, primary and fully-diluted earnings per share were replaced with basic
and diluted earnings per share in an effort to simplify the computation of these
measures and align them more closely with the methodology used internationally.
Basic earnings per share is arrived at by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
and does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation method is arrived at by
dividing net income by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options and warrants. For
purposes of comparability, all prior-period earnings per share data has been
restated.
The calculation of net income per common share follows:
For the Year Ended December 31,
1997 1996 1995
--------- --------- ---------
Basic:
- -----
Net income (applicable
to common stock) $ 849,510 $ 208,035 $ 276,133
Average common shares
outstanding 4,026,293 3,446,961 3,242,665
Basic net income
per share $.21 $.06 $.09
Diluted:
- -------
Net income (applicable
to common stock) $ 849,510 $ 208,035 $ 276,133
Average common
shares outstanding 4,026,293 3,446,961 3,242,665
Stock option adjustment 31,855 43,154 19,667
Average common shares
outstanding - diluted 4,058,148 3,490,115 3,262,332
Diluted net income per share $.21 $.06 $.09
13. INCOME TAXES
Federal and state income tax (benefit) expense consists of the following:
For the Year Ended December 31,
1997 1996 1995
----------- ---------- ----------
Current federal income
tax expense $ - $5,000 $ -
Current state income tax
(benefit) - - -
Deferred federal income tax (benefit) (1,669,336) - -
Deferred state income tax (benefit) (387,377) - -
----------- ---------- ----------
$(2,056,713) $5,000 $ -
=========== =========- ==========
A reconciliation of the differences between the maximum federal statutory
income tax rate and the Corporation's effective tax rate for the years ended
December 31 is as follows:
Percent
of Pretax
Amount Income
--------- ----------
1997
Tax (benefit) at statutory rate $(410,449) (34.0)%
State income taxes net of
federal income tax benefit (60,360) (5.0)
Nondeductible expenses 11,735 1.0
Elimination of valuation allowance
on deferred tax assets (1,597,639) (132.3)
Net operating loss carryforward
(utilization) - -
----------- ---------
$(2,056,713) (170.3)%
=========== =========
1996
Tax (benefit) at statutory rate $72,432 34.0%
State income taxes net of
federal income tax benefit 7,826 3.6
Nondeductible expenses 5,641 2.6
Elimination of valuation allowance
on deferred tax assets - -
Net operating loss carryforward
(utilization) (80,899) (37.9)
----------- ---------
$5,000 2.3%
=========== =========
1995
Tax (benefit) at statutory rate $93,885 34.0%
State income taxes net of
federal income tax benefit 15,705 5.7
Nondeductible expenses - -
Elimination of valuation allowance
on deferred tax assets - -
Net operating loss carryforward
(utilization) (109,590) (39.7)
----------- ---------
$ - -
=========== =========
20
<PAGE>
At December 31 net deferred tax assets consisted of the following:
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss carryforward $ 1,343,255 $ 1,241,941
Allowance for loan losses 578,904 307,418
Foreclosed real estate -
valuation allowance 57,158 35,145
Depreciation 10,056 29,396
Intangible assets 25,239 7,392
Loan fees and costs 2,608 -
Unrealized holding gains on investment
securities available for sale 423 -
Unrealized holding losses on investment
securities transfers from available for
sale to held to maturity 38,265 74,971
Other 805 1,081
----------- -----------
2,056,713 1,697,344
Valuation allowance for deferred tax assets - (1,682,548)
----------- -----------
Total deferred tax assets 2,056,713 14,796
----------- -----------
Deferred tax liabilities:
Loan fees and costs - (9,234)
Unrealized holding gains on investment
securities available for sale - (5,562)
----------- -----------
Total deferred tax liabilities - (14,796)
----------- -----------
Net deferred tax assets $ 2,056,713 $ -
=========== ===========
The Company has recorded a deferred tax asset of $1,343,255 reflecting the
benefit of $3,385,219 in tax loss carryforwards, which expire in varying amounts
between 2007 and 2012. Realization depends on generating sufficient taxable
income before the expiration of the loss carryforwards. Although realization is
not assured, management believes it is more likely than not that all of the
deferred tax asset will be realized. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. The amount
of loss carryforward available for any one year may be limited if the Company is
subject to the alternative minimum tax.
14. REGULATORY MATTERS
Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitive measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitive measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets (as
defined).
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action. To be categorized
as adequately capitalized the Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes changed
the Bank's category.
The Bank's actual capital amounts and ratios are presented in the table on
the next page.
Dividends
Dividends payable by the Corporation are unrestricted, although the ability
of the Corporation to pay dividends depends upon dividends received by it from
the Bank. The Board of Directors adopted a resolution specifying that no
dividends will be paid by the Bank to the Corporation except from the undivided
profits of the Bank or with the prior approval of the Bank Commissioner of the
State of Maryland and the Regional Director of the FDIC from the Bank's surplus
in excess of 100% of its required capital stock. In addition, restrictions are
also imposed upon the ability of the Bank to make loans to the Corporation,
purchase stock in the Corporation, or use the Corporation's securities as
collateral for indebtedness of the Bank.
Cash and Due From Banks
The Federal Reserve System requires that banks maintain reserve balances
based on the type and amount of deposits. At December 31, 1997 and 1996,
21
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Actual For Capital Adequacy Purposes Action Provisions
------------------------ ------------------------------- ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------- ------------ ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets) $8,140,000 9.98% $6,525,000 8.00% $8,156,000 10.00%
Tier I Capital (to Risk
Weighted Assets) $7,112,000 8.72% $3,263,000 4.00% $4,894,000 6.00%
Tier I Capital (to Average
Assets) $7,112,000 7.29% $3,902,000 4.00% $4,878,000 5.00%
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets) $7,886,000 10.25% $6,155,000 8.00% $7,694,000 10.00%
Tier I Capital (to Risk
Weighted Assets) $6,923,000 9.00% $3,078,000 4.00% $4,617,000 6.00%
Tier I Capital (to Average
Assets) $6,923,000 6.80% $4,073,000 4.00% $5,091,000 5.00%
</TABLE>
the Bank was required to maintain reserves of $384,000 and $344,000,
respectively.
15. LITIGATION
At December 31, 1997, the Corporation was involved in litigation arising
from normal banking, financial, and other activities of the Bank. Management,
after consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect on
the Corporation's financial condition.
16. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statement of
financial position. The contract amounts of those instruments reflect the extent
of involvement the Bank has in particular classes of financial instruments as
well as its exposure to credit loss in the event of nonperformance by the other
party. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. At December 31, 1997 and 1996, the Bank's
total unfunded commitments to extend credit were $3,160,671 and $4,493,048,
respectively. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by the
Bank upon extension of credit is based on management's credit evaluation of the
counterparty. Collateral held varies but may include loans, property, equipment,
commercial properties, and other business assets as may be deemed appropriate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party and totaled $234,171
and $340,762 at December 31, 1997 and 1996, respectively. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held varies but may
include accounts receivable, inventory, equipment, marketable
22
<PAGE>
securities, property, and other business assets as may be deemed appropriate.
Since most of the letters of credit are expected to expire without being drawn
upon, they do not necessarily represent future cash requirements.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosure About Fair
Value of Financial Instruments, requires the disclosure of estimated fair values
of financial instruments. Quoted market prices, where available, are shown as
estimates of fair market values. Because no quoted market prices are available
for a significant part of the Corporation's financial instruments, the fair
values of such instruments have been derived based on the amount and timing of
future cash flows and estimated discount rates.
Present value techniques used in estimating the fair value of many of the
Corporation's financial instruments are significantly affected by the
assumptions used. The fair values derived from using present value techniques
are not substantiated by comparisons to independent markets, and in many cases,
could not be realized in immediate settlement of the instruments. Statement No.
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ---------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from
banks $2,460,222 $2,460,222 $2,455,622 $2,455,622
Federal funds sold 2,837,000 2,837,000 624,000 624,000
Time deposits with
banks - - 3,300,000 3,300,000
Investment securities:
Available for sale 3,395,125 3,395,125 3,657,047 3,657,047
Held to maturity 10,969,615 11,033,305 12,820,977 12,861,416
Loans, net of
allowance 75,743,987 76,996,069 72,707,051 72,477,143
Accrued interest
receivable 602,770 602,770 617,592 617,592
Financial liabilities:
Deposits 88,698,024 89,296,349 91,282,836 91,525,666
Federal funds
purchased and
other short-term
borrowings 5,698,037 5,698,037 2,000,000 2,000,000
Long-term debt 1,500,000 1,500,000 1,500,000 1,500,000
Accrued interest
payable 170,668 170,668 104,453 104,453
Off-balance sheet
items:
Commitments to
extend credit $3,160,671 $3,160,671 $4,493,048 $4,493,048
Standby letters of
credit $234,171 $234,171 $340,762 $340,762
</TABLE>
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
. Cash and due from banks, federal funds sold and time deposits: The carrying
amounts reported in the balance sheet for these assets are considered to
approximate their fair values.
. Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
. Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate real
estate, consumer and commercial and industrial loans) are estimated using
discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgments regarding future
<PAGE>
expected loss experience and risk characteristics. The carrying amount of
accrued interest receivable approximates its fair value.
. Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking and savings accounts) are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts.) The fair values for certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
contractual maturities on such time deposits. The carrying amount of
accrued interest payable approximates fair value.
. Federal funds purchased and other short-term borrowings: The carrying
amounts approximate their fair values.
. Long-term borrowings: The fair value is estimated based on interest rates
currently available for borrowings with similar terms and remaining
maturities.
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed balance sheets, statements of income and statements of cash flows
for GrandBanc, Inc. (parent only) are presented below:
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------- -------------
<S> <C> <C>
ASSETS:
Cash $ 304,946 $ 68,386
Investments in subsidiary 9,069,631 8,025,288
Bank premises and equipment - net 1,247,962 1,291,924
Intangible assets 198,447 197,455
Other assets 1,494 36,445
Deferred income taxes 197,563 -
-------------- -------------
TOTAL ASSETS $11,020,043 $9,619,498
============== =============
LIABILITIES:
Notes payable $3,500,000 $3,500,000
Accrued expenses and other liabilities 35,000 98,510
-------------- -------------
Total liabilities 3,535,000 3,598,510
-------------- -------------
STOCKHOLDERS' EQUITY:
Common stock 404,091 392,550
Additional paid-in capital 10,928,460 10,405,003
Accumulated deficit (3,747,332) (4,596,842)
Net unrealized holding loss on
investment securities (100,176) (179,723)
-------------- -------------
Total stockholders' equity 7,485,043 6,020,988
-------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $11,020,043 $9,619,498
============== =============
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
1997 1996 1995
----------- ---------- -------------
<S> <C> <C> <C>
INCOME:
Rental income $120,000 $30,000 $ -
Interest income 11,096 - -
Fee income - 34,034 49,944
Other income 193 2,500 -
----------- ---------- -------------
Total income 131,289 66,534 49,944
----------- ---------- -------------
EXPENSES:
Salaries and employee benefits - 51,170 48,641
Interest expense 306,250 84,764 -
Professional fees 62,758 69,745 57,342
Other expenses 75,130 11,718 7,777
----------- ---------- -------------
Total expenses 444,138 217,397 113,760
----------- ---------- -------------
LOSS BEFORE INCOME
TAXES AND EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARY (312,849) (150,863) (63,816)
INCOME TAX BENEFIT (197,563) - -
----------- ---------- -------------
LOSS BEFORE EQUITY IN UNDIS-
TRIBUTED INCOME OF
SUBSIDIARY (115,286) (150,863) (63,816)
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 964,796 358,898 339,949
----------- ---------- -------------
NET INCOME $849,510 $208,035 $276,133
=========== ========== =============
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
1997 1996 1995
----------- ---------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $849,510 $208,035 $276,133
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed income
of subsidiary (964,796) (358,898) (339,949)
Depreciation and amortization 60,995 8,621 -
Deferred income taxes (197,563) - -
Net realized gains from
sales of assets - (2,500) -
Net changes in:
Other assets 16,926 (36,029) (416)
Accrued expenses and
other liabilities (28,512) 96,615 1,697
---------- ------------ ------------
Net cash used in operating
activities (263,440) (84,156) (62,535)
---------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital contributed to subsidiary - (4,000,000) -
Proceeds from sale of fixed assets - 4,500 -
Net funds disbursed in acquisition - (1,500,000) -
---------- ------------ ------------
Net cash used in
investing activities - (5,495,500) -
---------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from borrowings - 3,500,000 -
Proceeds from issuance of
common stock 500,000 1,996,053 152,358
---------- ------------ ------------
Net cash provided by
financing activities 500,000 5,496,053 152,358
---------- ------------ ------------
NET INCREASE (DECREASE) IN CASH 236,560 (83,603) 89,823
CASH AT BEGINNING OF YEAR 68,386 151,989 62,166
---------- ------------ ------------
CASH AT END OF YEAR $304,946 $68,386 $151,989
========== ============ ============
Supplemental disclosures:
Interest payments $331,868 $59,146 $ -
========== ============ ============
</TABLE>
25
<PAGE>
REPORT OF MANAGEMENT
Management is responsible for the financial statements which have been
prepared in accordance with generally accepted accounting principles. In
Management's opinion the financial statements present fairly the financial
condition of the Corporation and its subsidiary at December 31, 1996 and
December 31, 1997, and the three year period ending at December 31, 1997. The
financial data included amounts that are based on the best estimates and
judgments of Management.
The Corporation and its subsidiary maintain a system of internal accounting
control designed to provide reasonable assurance that transactions are executed
in accordance with Management's general or specific authorization, and are
recorded as necessary to maintain accountability for assets to present the
financial statements in accordance with generally accepted accounting
principles. This system includes written policies and procedures and an Audit
Committee of the Board of Directors which meets with Management periodically to
evaluate the effectiveness of the system of internal accounting control.
Stegman and Company, independent auditors, have been engaged to examine the
consolidated financial statements of the Corporation. Their examination is
conducted in accordance with generally accepted auditing standards, and their
report on the consolidated financial statements is included elsewhere herein.
The financial statements of the Corporation have not been reviewed, or
confirmed for accuracy or relevance, by the Federal Deposit Insurance
Corporation.
26
<PAGE>
Board of Directors of
GrandBanc, Inc. and GrandBank
Abbey J. Butler
Co-Chairman and Co-Chief Executive Officer
Avatex Corporation
Steven K. Colliatie
President and CEO
GrandBanc, Inc. and
GrandBank
Melvyn J. Estrin
Co-Chairman and Co-Chief Executive Officer
Avatex Corporation
Chairman of the Board
GrandBanc, Inc. and GrandBank
Avis Y. Pointer
President, The Quantum Leap, Inc.
Joan H. Schonholtz
Retired
Officers of GrandBanc, Inc.
Steven K. Colliatie
President and CEO
David L. Erickson
Executive Vice President
Secretary
Officers of GrandBank
Steven K. Colliatie
President and CEO
David L. Erickson
Executive Vice President
Chief Financial Officer
Secretary
Tracy A. Berriman
Senior Vice President
Information Systems
Barbara L. Martinez
Senior Vice President
Controller
Elizabeth W. Radcliffe
Senior Vice President
Retail Banking
Frank J. Merendino, Jr.
Vice President
Lending
Larry A. Singer
Vice President
Lending
27
<PAGE>
Corporate Headquarters
and Main Banking Office
1800 Rockville Pike
Rockville, MD 20852
(301) 770-1300
Mailing Address
P.O. Box 2022
Rockville, MD 20852
Services: ATM Vestibule, Drive Through,
Night Depository, Safe Deposit Boxes
Branch Offices
Bethesda, MD
5272 River Road
Bethesda, MD 20816
Services: ATM, Walk-Up Window,
Night Depository, Safe Deposit Boxes
7535 Old Georgetown Road
Bethesda, MD 20814
Services: ATM, Drive Through
Germantown, MD
19701 Frederick Avenue
Germantown, MD 20876
Services: ATM Vestibule, Drive Through,
Night Depository, Safe Deposit Boxes
Alexandria, VA
301 S. Washington Street
Alexandria, VA 22314
Shareholder Information
There is a limited public trading market for the common stock. Shareholders,
analysts and others seeking financial information are requested to contact the
Chief Financial Officer.
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Independent Auditors
Stegman & Company
Suite 200
405 East Joppa Road
Towson, MD 21286
Counsel
Kennedy, Baris & Lundy, L.L.P.
1225 Nineteenth Street, N.W.
Washington, D.C. 20036
Annual Meeting
The 1998 Annual Meeting of Shareholders will be held on May 7, 1998, at 10:00
A.M. at Corporate Headquarters, 1800 Rockville Pike, Rockville, MD.
10-K
A copy of the Company's Form 10-K may be obtained free-of-charge by writing the
Secretary, GrandBanc, Inc. at P.O. Box 2022, Rockville, MD 28052.
28
<PAGE>
Directory of Products and Services
As a full service community bank, GrandBank offers a variety of consumer and
commercial deposit and loan products.
Deposit Products
Checking/Interest Checking
Savings
Money Market
IRA's
Certificates of Deposit
Escrow Manager
Cash Management Services
Loan Products
Personal
Auto
Home Improvement
Home Equity
Overdraft Protection
Home Mortgage
Commercial/Business Purpose
Electronic Banking Services
ATM - 24-Hour Automated Teller Machines
Member of Honor Network
PC Banking for Businesses and Individuals
Account Information, Bill Payor and Transaction Requests by Telephone
Wire Transfers, Preauthorized Transfers
Debit Cards
29
<PAGE>
[LOGO OF GRANDBANC, INC. APPEARS HERE]
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary Percentage Owned State of Incorporation
- ------------------------- ----------------- ----------------------
<S> <C> <C>
GrandBank 100% Maryland
Facility Holdings, Inc. 100% Virginia
</TABLE>
<PAGE>
EXHIBIT 23
Stegman & Company
Certified Public Accountants
Suite 200
400 East Joppa Road
Towson, Maryland 21286
(410) 823-4815
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
GrandBanc, Inc.
We hereby consent to the incorporation by reference in the Annual Report on
Form 10-KSB of GrandBanc, Inc. for the year ended December 31, 1997, of our
report dated January 24, 1998, relating to the consolidated financial statements
of GrandBanc, Inc. and Subsidiary.
/s/ Stegman & Company
STEGMAN & COMPANY
Towson, Maryland
March 23, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned directors of the Registrant, hereby severally
constitute and appoint Steven K. Colliatie our true and lawful attorney and
agent, to do any and all things in our names in the capacities indicated below
which said person may deem necessary or advisable to enable the Registrant to
comply with the Securities Exchange Act of 1934, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with the annual report on Form 10-KSB for the year ended December 31,
1997, including specifically, but not limited to, power and authority to sign
for us in our names in the capacities indicated below the annual report and any
amendments thereto; and we hereby approve, ratify and confirm all that said
person shall do or cause to be done by virtue thereof.
<TABLE>
<S> <C>
- ---------------------------------
Joan H. Schonholtz
- ---------------------------------
Abbey J. Butler
Director
/s/ Melvin J. Estrin March 19, 1998
- ---------------------------------
Melvyn J. Estrin
Chairman of the Board, Director
- ---------------------------------
Nella C. Manes
Director
/s/ Avis Y. Pointer March 19, 1998
- ---------------------------------
Avis Y. Pointer
Director
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000719488
<NAME> GRANDBANC, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,460
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,837
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,395
<INVESTMENTS-CARRYING> 10,970
<INVESTMENTS-MARKET> 0<F1>
<LOANS> 77,446
<ALLOWANCE> 1,702
<TOTAL-ASSETS> 103,872
<DEPOSITS> 88,698
<SHORT-TERM> 5,698
<LIABILITIES-OTHER> 490
<LONG-TERM> 1,500
404
0
<COMMON> 0
<OTHER-SE> 7,081
<TOTAL-LIABILITIES-AND-EQUITY> 103,872
<INTEREST-LOAN> 6,960
<INTEREST-INVEST> 904
<INTEREST-OTHER> 244
<INTEREST-TOTAL> 8,108
<INTEREST-DEPOSIT> 3,811
<INTEREST-EXPENSE> 4,130
<INTEREST-INCOME-NET> 3,977
<LOAN-LOSSES> 1,209
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 4,621
<INCOME-PRETAX> (1,207)
<INCOME-PRE-EXTRAORDINARY> (1,207)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 850
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<YIELD-ACTUAL> 4.21
<LOANS-NON> 2,772
<LOANS-PAST> 13
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,016
<CHARGE-OFFS> 586
<RECOVERIES> 63
<ALLOWANCE-CLOSE> 1,702
<ALLOWANCE-DOMESTIC> 1,335
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 367<F2>
<FN>
<F1>NOT BROKEN OUT IN KSB
<F2>ALL UNALLOCATED IS FOR DOMESTIC LOANS.
</FN>
</TABLE>
