<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, 1998
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. $8,847,134
The aggregate market value of the voting stock held by non-affiliates as of
March 20, 1999 was $4,076,276. 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 20, 1999:
4,049,590
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, 1998. (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 include statements of
management's goals and expectations that are based on assumptions about the
future, including future economic conditions, interest rates, and the financial
condition of the Bank's borrowers, and statements by suppliers of data
processing equipment and services, government agencies, and other their parties
as to Year 2000 compliance and compliance costs. 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 "ChekGuard", 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 savings banks, credit unions, money market brokers, and other financial
institutions that provide loan and deposit relationships. The Bank
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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
1998 Portfolio 1997 Portfolio 1996 Portfolio
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate - Mortgage...... $37,659 61% $47,017 61% $54,164 74%
Real Estate - Construction.. 210 1 434 1 1,709 2
Commercial.................. 17,477 28 21,684 28 15,804 21
Consumer.................... 5,954 10 8,311 10 2,047 3
------- --- ------- --- ------- ---
Total.................. $61,300 100% $77,446 100% $73,724 100%
======= === ======= === ======= ===
</TABLE>
B. Maturities and Sensitivity to Changes in Interest Rates
(in thousands)
Due In One Due After Due After
At December 31, 1997 Year or Less One-Five Years Five Years
- ------------------------------------------------------------------------------
Real Estate - Mortgage $19,767 $13,412 $4,480
Real Estate - Construction 85 125 --
Commercial 13,030 3,364 1,083
Consumer 3,997 1,793 164
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Total loans maturities $36,879 $18,694 $5,727
======= ======= ======
Variable
Loans with Maturities of One Year or Greater Fixed Rate Rate
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Real Estate - Mortgage $14,570 $5,539
Real Estate - Construction 125 --
Commercial 3,446 --
Consumer 741 --
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Total Loans $18,882 $5,539
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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 rate published in The
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Wall Street Journal, as well as fixed rate home equity 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 Street Journal,
-----------------------
or tied to an index of U.S. Government securities, have 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
-----------------------
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. Credit card receivables amounted to $3,064,911 and
$3,809,572 at December 31, 1998 and December 31, 1997, respectively.
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
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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 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.
C. Non-Performing Assets and Past Due Loans
(In thousands)
1997 1997 1996
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Non-Performing Assets:
Loans accounted for on a
non-accrual basis........... $ 535 $2,772 $ 742
Restructured loans........... -- -- 361
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Total non-performing loans 535 2,272 1,103
Other real estate owned net
of allowance................ 374 1,435 975
Other non-performing
assets...................... 0 13 184
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Total non-performing
assets..................... $ 909 $4,220 $2,262
====== ====== ======
Total non-performing
assets to total assets...... 0.83% 4.06% 2.24%
Total non-performing
loans to total loans...... 0.87% 3.58% 1.50%
Past Due Loans:
Loans contractually past
due 90 days or more as
to interest or principal
payments, still accruing.... $ 127 $ 13 $ 184
Loans contractually past
due 30 days or more
through 90 days as to
interest or principal
payments, still accruing.... 1,113 350 1,641
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Total Past Due Loans...... $1,240 $ 363 $1,825
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4
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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.
SUMMARY OF LOAN LOSS EXPERIENCE AND
ALLOWANCE FOR CREDIT LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Balance January 1 $ 1,702 $ 1,016 $ 748
------- ------- -------
Provision (recovery) charged to operating expense 10 1,209 (35)
------- ------- -------
Recoveries:
Commercial 430 53 51
Real Estate - Construction -- -- 172
Real Estate - Mortgage 78 -- --
Consumer and other 6 10 3
------- ------- -------
Total recoveries 514 63 226
------- ------- -------
Charge-offs:
Commercial 260 322 112
Real Estate - Construction -- -- --
Real Estate - Mortgage 621 234 --
Consumer and other 418 30 32
------- ------- -------
Total charge-offs 1,299 586 144
Net (charge-offs) recoveries (785) (523) 82
Allowance acquired -- -- 221
------ ------ ------
Balance December 31 $ 927 $ 1,702 $ 1,016
======= ======= =======
Average amount of total loans outstanding, net $73,176 $74,822 $42,891
Total loans outstanding at December 31, gross 61,300 77,446 73,724
Loan loss ratios:
Net charge-offs (recoveries) to average loans outstanding, net 1.07% .70% (.19%)
Allowance for possible loan losses to total
loans outstanding December 31 1.51% 2.20% 1.38%
</TABLE>
<TABLE>
<CAPTION>
Allocation of allowance for loan
losses among loan type and % of % of % of % of
loan type to total loan portfolio 1998 Portfolio 1996 Portfolio 1996 Portfolio
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial.................. $114 28% $ 560 28% $ 115 21%
Real Estate - Construction.. 1 1 5 1 111 2
Real Estate - Mortgage...... 450 61 745 61 25 74
Consumer.................... 281 10 25 10 -- 3
Unallocated................. 81 N/A 367 N/A 765 N/A
---- ------ ------
</TABLE>
5
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total.................. $927 $1,702 $1,016
==== ====== ======
</TABLE>
Investment Portfolio
The Corporation's investment policy is implemented by the Investment
Committee, which is comprised of selected Board members and management.
Securities in the investment portfolio is classified into two categories, held
to maturity ("HTM") and available for sale ("AFS"). The available for sale
("AFS") investment portfolio is managed from an interest income and total return
perspective. As such, securities will at times be sold out of the AFS portfolio
when management deems that a greater return can be earned in another type of
security (including cash) or that the interest rate risk in the balance sheet is
not appropriate for the prevailing micro and macro-economic climate. The AFS
portfolio is marked-to-market on a monthly basis. Changes in the fair value of
the AFS portfolio are excluded from earnings and reported as a separate
component of equity, net of income taxes. The investment portfolio is
primarily comprised of three basis types of securities: U.S. Treasury and U.S.
Government agencies, mortgage-backed obligations ("MBSs"), and collateralized
mortgage obligations ("CMOs"). The investments are chosen primarily to provide
and maintain adequate liquidity and to generate a positive return on investments
without undue interest or credit risk. The Corporation utilizes the Federal
Funds market to invest available short term funding. At December 31, 1998, the
Corporation's investments portfolio totaled $34,080,428. 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
1998, 1997, and 1996 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)
1998 1997 1996
--------------------------
Three months or less.................. $ 4,960 $ 5,591 $2,881
Over three months through six months.. 3,404 5,110 2,426
Over six months through one year...... 4,749 1,760 1,972
Over one year......................... 4,138 2,808 1,821
------- ------- ------
Total............................ $17,251 $15,269 $9,100
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Borrowings
The average amounts of borrowings outstanding during 1998, 1997 and 1996 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
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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 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 1998, reserves of 3% must be maintained
against aggregate transaction accounts of $46.5 million or less (subject to
adjustment by the Federal Reserve Board) and an initial reserve of $1.395
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 $46.5 million. 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
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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 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.
8
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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 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, 1998, the capital ratios of core capital to
total average assets of GrandBank, the Corporation's banking subsidiary, equaled
7.56% 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, 1998, the Bank's total capital to risk-weighted assets was
12.02% and the Bank's core capital to risk-weighted assets was 10.73%, 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
9
<PAGE>
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 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;
10
<PAGE>
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 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.
11
<PAGE>
Year 2000
Many computer programs now in use have not been designed to properly recognize
years after 1999. If not corrected, these programs could fail or create
erroneous results. The year 2000 ("Y2K") issue affects the entire banking
industry because of its reliance on computers and other equipment that use
computer chips, and may have significant adverse effects on banking customers,
bank regulators, and the general economy.
The Corporation initiated the process of preparing its computer systems and
applications for the Year 2000 in 1997. The process involves modifying or
replacing certain hardware and software maintained by the Corporation as well as
communicating with external service providers to ensure that they are taking the
appropriate action to remedy their Y2K issues. Specific goals of the Y2K Plan
include identifying risks, testing data processing and other systems and
equipment used by the Company, informing customers of Y2K issues and risks,
establishing a contingency plan for operating if Y2K issues cause important
systems or equipment failure, implementing changes necessary to achieve Y2K
compliance, and verifying that these changes are effective. The Company's Board
of Directors reviews progress under the plan on a monthly basis.
Management designed the Y2K Plan to comply with the requirements for Y2K efforts
established by the Federal Deposit Insurance Corporation, the primary federal
regulator of the Bank.
As of December 31, 1998, the Corporation had met its Y2K goals and will continue
to meet the goals of the overall Y2K Plan. By December 31, 1998, the
Corporation had performed risk assessments, had assessed the Y2K preparedness of
suppliers of data processing services to the Corporation, had implemented its
customer awareness program, had developed its Y2K contingency Plan, and had
tested and implemented necessary changes in hardware and software. Elements of
the Y2K Plan, such as risk assessments, customer communications, and the
continuing testing and evaluation of systems and equipment, are processes that
will continue into the year 2000. The Y2K contingency plan calls for the
company to manually process bank transactions and to use other data processing
methods, in the event that Y2K efforts of the Corporation and its data services
providers are not successful.
The Corporation's primary supplier of data processing services also has adopted
a Y2K plan and time table to make changes necessary for it to provide services
in the year 2000, and has provided written assurances to the Corporation of its
progress. The suppliers and the Corporation have successfully tested the
software changes that have been made to date. The Corporation is also
monitoring the progress of its other suppliers of data processing services.
Purchases of hardware and software have been and, if applicable, will continue
to be capitalized in accordance with normal policy. Internal personnel and all
other costs related to the project are being expensed and will continue to be
expensed as incurred. Because of the high level of dependency on outside data
service providers, the cost of resolving Y2K issues has not been significant to
the Corporation. Management believes that any additional cost related to Y2K
issues both internal and external will not be material to the Corporation's
business, operations, liquidity, capital resources, or financial condition,
based on the information developed to date and communications from data
processing suppliers. The Corporation is funding its Y2K expenditures through
continuing operations as part of the overall data processing budget. The 1999
budget for this category is $475,000.
12
<PAGE>
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 1998, the Bank incurred rental expenses
for properties totaling $563,128 Refer to Note 5 -- "Bank Premises and
Equipment" on pages 18 and 19 of the Annual Report, which is hereby incorporated
by reference.
13
<PAGE>
Item 3. LEGAL PROCEEDINGS
Note 14 -- "Litigation" on page 24 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, 1998, 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 13 -- "Regulatory
Matters" on pages 23 and 24 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 i 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 28 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 1999 Annual Meeting of Stockholders (the "Proxy Statement") is
hereby incorporated by reference.
14
<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, 1998 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, 1998 and 1997
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
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.
15
<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
President and Chief Executive
Date: April 8, 1999 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:
April 8, 1999
/s/ Steven K. Colliatie
- --------------------------------
Steven K. Colliatie
President, Chief Executive Officer and Director
/s/ Domingo Rodriguez
- --------------------------------
Domingo Rodriguez
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, 1998. This report has been signed below by such
attorney-in-fact as of April 8, 1999.
By: /s/ Steven K. Colliatie
--------------------------------
Steven K. Colliatie
Attorney-in-Fact for Majority of the
Directors of the Corporation
16
<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, Exhibit 10
1996, by and between GrandBanc, Inc., to Report on
GrandBank, and 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>
EXHIBIT 13
<PAGE>
EXHIBIT 13
GRANDBANC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Period ended December 31, 1998
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
Statement of Changes in Stockholders' Equity... .........................11
Statement of Cash Flows..................................................12
Notes to Consolidated Financial Statements.................................14-28
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At or for Year Ended December 31
===========================================================================
1998 1997 1996 1995 1994
-------------- -------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Net interest income $ 4,192 $ 3,977 $ 2,743 $ 2,381 $ 2,155
Provision for loan losses 10 1,209 (35) (30) (114)
Non-interest income 638 645 520 442 400
Non-interest expense 4,567 4,620 3,085 2,577 2,597
Net income (loss) before income taxes 252 (1,207) 213 276 72
Income Taxes (benefit) 153 (2,057) 5 - -
Net income 99 850 208 276 72
Per Share Data:
Net income $ 0.02 $ 0.21 $ 0.06 $ 0.09 $ 0.03
Book value 1.90 1.85 1.53 1.15 0.98
Financial Condition:
Total assets $109,673 $103,872 $101,125 $40,678 $41,413
Investment securities 34,080 14,365 16,478 8,027 7,110
Loans - net 60,374 75,744 72,707 29,064 26,298
Deposits 96,725 88,698 91,283 36,671 36,842
Stockholders' equity 7,687 7,485 6,021 3,740 3,105
Selected Ratios:
Return on average assets 0.10% 0.84% 0.34% 0.65% 0.18%
Return on average equity capital 1.28% 14.74% 4.30% 7.88% 3.51%
Average equity to average assets 7.54% 5.68% 7.99% 8.28% 5.13%
Non-performing loans to total loans 0.87% 3.60% 1.75% 1.56% 1.47%
Non-performing assets to total assets 0.83% 4.06% 2.24% 3.98% 4.90%
</TABLE>
FORWARD-LOOKING STATEMENTS
The following letter to our stockholders, management's discussion, and other
portions of this Annual Report include statements of management's goals and
expectations that are based on assumptions about the future, including future
economic conditions, interest rates, and the financial condition of the Bank's
borrowers, and statements by suppliers of data processing equipment and
services, government agencies, and other parties as to their Year 2000
compliance and compliance costs. 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.
i
<PAGE>
March 6, 1999
To our Shareholders:
Nineteen ninety-eight was a very challenging year for GrandBanc, Inc. and
its banking subsidiary GrandBank. Ongoing volatility in interest rates,
additional mergers between financial institution in the Washington Metropolitan
area, and newly established community banks have added to already existing
competitive pressures. Competition is expected to intensify as interest rates
stay low and loan demand decreases.
GrandBank has continued to grow it asset and deposit base. Year-end assets
totaled $109.7 million, a 5.6 percent increase over 1997 assets of $103.9. Total
deposits increased by 9.1 percent to $96.7 million while total loans decreased
by 20.8 percent to $61.3 million. Investment Securities and short term money
market instruments grew to $39.2 million, a 128.0 percent increase over 1997
total of $17.2. This aggressive shift from loan balances to high quality
investment securities reflects the results of the ongoing effort to increase the
quality of the loan portfolio and to reduce the level of non-performing assets.
As of December 31, 1998, non-performing assets totaled $909 thousand compared to
$4.2 million as of December 31, 1997 representing a decrease of 78.5 percent.
GrandBank has gone through a few changes over the past several years. Among
them were the new name, new products and services, key acquisitions, conversion
to a state of the art banking delivery systems, and the introduction of
"GrandChecking", the highest rated checking account in the Washington
metropolitan area. Despite all of this, our most important tradition has
remained the same: the ability to provide the best and most personalized service
to our customers. The ability of any customers to access the president of the
Bank or any other member of the senior management team, and receive the response
that only a "true" community bank can offer - usually that same business day. It
is such accessibility that makes GrandBank different from other financial
institutions in this area. At GrandBank we call it "The Grand Difference" and it
will continue to be the most important element of our service strategy.
We understand that individuals as well as businesses can bank anywhere they
wish. We must therefore provide excellent, tangible reasons to bank with
GrandBank. This basic promise drives our customer service standards, our
employees and our overall business philosophy. It also drives our future. We
will continue to be an institution that is customer service oriented,
strategically aggressive, and financially conservative.
Our employees, officers and directors deserve recognition for their
dedication, enthusiasm and commitment to the Company during this year. Also, a
special thanks to you, our shareholders, for your continued encouragement and
support of the Company, its management team, and its long term business
objectives. We will continue to work hard to reward your faith in us by making
GrandBank the finest community banking organization in the Washington
metropolitan area.
Sincerely,
/s/ Steven K. Colliatie
Steven K. Colliatie
President & Chief Executive Officer
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Business of the Company and Bank
GrandBanc, Inc. (the "Corporation") is a one bank holding company for
GrandBank (the "Bank) and is headquartered in Rockville, Maryland. GrandBank is
a growing community bank serving individuals and small businesses with special
interest on real estate and the professional community. The Bank operates 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 were $109.7 million at December 31, 1998 compared to $103.9
million as of December 31, 1997. This represented an increase of 5.6%. Average
earning assets for 1998 were $93.6 million, a decrease of 1.0% from the 1997
average of $94.6 million.
Total loans decreased by $16.1 million to $61.3 million or 20.8% at
December 31, 1998 compared to $77.4 million at December 31, 1997. Total deposits
increased by 9.1% to $96.7 million. Investment securities and short term money
market instruments increased to $39.2 million, a 128.0% increase from the $17.2
million as of December 31, 1997.
Capital Adequacy. Stockholders' equity total $7.7 million at December 31,
1998 compared to $7.5 million at December 31, 1997. The change represents an
increase of $202 thousand or 2.7%. This increase includes net earnings of $99
thousand, an improvement in net unrealized holding losses on investment
securities of $68 thousand in 1998 and proceeds from the issuance of common
stock totaling $35 thousand.
At December 31, 1998, the Bank's ratio of Tier I capital to total average
assets equaled 7.60% which exceeded the minimum leverage capital ratio of 4% by
3.60% and the minimum leverage ratio for "well capitalized" banks of 5% by
2.60%. At December 31, 1998, the Bank's Tier I capital to risk-weighted assets
ratio was 10.73%, which exceeded the minimum required ratio of 4% by 6.73% and
the "well capitalized" ratio of 6% by 4.73%. The Bank's total capital to risk
weighted assets ratio at December 31, 1998 was 12.02%, which exceeded the
minimum required ratio of 8% by 4.02% and the "well capitalized" ratio of 10% by
2.02%.
Investment Activity. During 1998, the Corporation's investment securities
portfolio increased by $19.7 million, or 137.3%. This increase in the securities
portfolio reflects management's commitment to reduce the level of non-performing
assets, increase the quality of the loan portfolio and enhance the Bank's
liquidity level. The results of such actions reflect the significant decreases
reported on loans and non-performing assets.
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 and such fluctuations can
significantly impact the Bank's level of profitability. Managing interest rate
risk is fundamental to banking. The inherent maturing and re-pricing
characteristics of our day-to-day lending and deposit activities create a
naturally asset-sensitivity structure. 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 oversees the interest rate risk management process and
approves policy guidelines.
The Chief Financial Officer monitors the day-to-day exposure to changes in
interest rates in response to loan and deposit flows. The Bank's methodology for
measuring exposure to interest rate risk is intended to ensure that we include a
sufficiently broad range of rate scenarios and pattern of rate movements that we
believe to be reasonably possible. The Bank's methodology measures the impact
that 100, 200, and 300 basis point rate changes would have on earnings over the
subsequent twelve months. The Bank's earnings simulation model reflects a number
of variables that we identify as being affected by interest rates. The ALCO also
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 federal funds, and
obligations of the U.S. Government, its agencies and sponsored entities
available for sale, of $38.9 million at December 31, 1998, reflected an increase
of $33.0 million from December 31, 1997, or 559.3%. Funds available through
short-term
2
<PAGE>
borrowings and asset maturities are considered adequate to meet all current
needs. At December 31, 1998, the Corporation had the ability to borrow against
collateral consisting of securities in its investment portfolio. Although this
liquidity position remains adequate, increased loan demand 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. In addition, the Bank's ALCO has
established minimum standards and key ratios of asset quality and performance.
These standards and ratios provide the framework for guidance and measurement.
Management evaluates these standards and ratios on an ongoing basis.
The loan to deposit ratio at December 31, 1998 was 63.4% down from 80.8% at
December 31, 1997. Loan to total assets ratio at December 31, 1998 was 55.9%
compared 74.5% at December 31, 1997.
The amounts of interest-earning assets and interest-bearing liabilities
outstanding at December 31, 1998 which are anticipated by the Bank based on
certain assumptions, to re-price or mature in future time periods, are set forth
in the Sensitivity Analysis below.
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
December 31, 1998
(Dollars in thousands)
1-90 91-180 181-365 1-5 Over 5
Days Days Days Years Years
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
- -------------------------------------------------
Federal Funds Sold $5,132 $0 $0 $0 $0
Securities 652 1,676 4,691 19,284 7,830
Loans Maturing 1,655 293 0 12,229 6,652
Loans Re-pricing 22,292 6,223 3,351 5,251 289
Credit Card Receivables 3,065 0 0 0 0
---------------------------------------------------------------------------
Total $32,796 $8,192 $8,042 $36,764 $14,771
---------------------------------------------------------------------------
Cumulative Totals $32,796 $40,988 $49,030 $85,794 $100,565
---------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES:
- -------------------------------------------------
Certificate of Deposits & CD IRA's 13,437 9,558 12,288 26,385 19
Savings Accounts & Savings IRA's 4,308 0 0 0 0
Interest Checking Accounts 9,970 0 0 0 0
Money Market Deposit Accounts 10,691 0 0 0 0
Sweep Accounts & Repurchase Agreements 2,664 0 0 0 0
Other 1,900 0 0 200 0
---------------------------------------------------------------------------
Totals $42,970 $9,558 $12,288 $26,585 $19
---------------------------------------------------------------------------
Cumulative Totals $42,970 $52,528 $64,816 $91,401 $91,420
---------------------------------------------------------------------------
Gap (10,174) (1,366) (4,246) 10,179 14,752
===========================================================================
Cumulative Gap ($10,174) ($11,540) ($15,786) ($5,607) $9,145
===========================================================================
Adjustments:
Beta Adjustments
Interest Checking (beta factor .30) 6,979
Savings accounts (beta factor .30) 3,016
Money Market Accounts (beta factor .40) 6,415
---------------------------------------------------------------------------
Cumulative Adjusted Gap $6,236 $4,870 $624 $10,803 $25,555
===========================================================================
As Reported Information:
- -------------------------------------------------
Interest-Sensitive Assets/Interest-
Sensitive Liabilities (Cumulative): 76.32% 78.03% 75.64% 93.86% 110.00%
Cumulative Gap/Total Assets -9.28% -10.52% -14.39% -5.11% 8.134
Beta Adjusted Information:
- -------------------------------------------------
Interest-Sensitive Assets/Interest-
Sensitive Liabilities (Cumulative): 123.47% 113.48% 101.29% 114.40% 134.07%
Cumulative Gap/Total Assets 5.68% 4.44% 0.57% 9.85% 23.30%
</TABLE>
3
<PAGE>
Note: The table represents the earlier of the maturity or re-pricing dates for
various assets and liabilities at December 31, 1998.
The amount of assets and liabilities shown which re-price or mature during a
particular period were determined in accordance with the earlier of term to re-
pricing or the contractual terms of the asset or liability. The Bank has
assumed that its savings, interest checking, and money market accounts re-price
daily. At December 31, 1998, 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 re-price within one year) as a
percentage to total assets was a negative 14.39%. This negative gap position
means the Bank had $15.8 million more liabilities than assets re-pricing 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. However, this approach assumes that all re-pricing assets and
liabilities will re-price the same way. Historical data indicates that certain
deposit liabilities such as interest checking, savings, and money market
deposits do not re-price the same way as other products and interest gap
analysis tend to be more accurate when adjusted to reflect such behavior. The
Beta adjusted cumulative gap in the above table reflects a positive gap of less
than 1% or $622 thousand. This adjusted scenario indicates that the impact of
changes in interest rates would have a minimal effect on the Bank's net
interest.
Allowance for Loan Losses. At December 31, 1998, the allowance for losses
was $927 thousand or 1.51% of loans outstanding compared to $1.7 million or
2.20% of loans outstanding as of December 31, 1997, a decrease of $775 thousand.
Such decrease was attributed primarily to the reduction in the total loans
outstanding and the decrease in non-performing loans. At December 31, 1998, non-
accrual loans decreased by $1.7 million or 76.6% to $535 thousand compared to
$2.8 million at December 31, 1997. The allowance for loan losses coverage of
non-accrual loans was 173.3% at December 31, 1998 compared to a coverage of
74.9% at December 31, 1997.
Non-Performing Loans and Asset. The Bank's non-performing assets which are
comprised of loans delinquent 90 days or more, non-accrual loans, and other real
estate owned ("OREO"), totaled $1.0 million at December 31, 1998 compared to
$4.2 million at December 31, 1997. The percentage of non-performing assets to
total assets decreased to 0.9% at December 31, 1998 from 4.06% at December 31,
1997.
Non-performing loans totaled $662 thousand at December 31, 1998 compared to
$2.3 million at December 31, 1997. Non-performing loans at December 31, 1998
consist of loans in non-accrual status in the amount of $535 thousand and loans
past-due over 90 days of $127 thousand. The decrease of non-performing loans is
primarily the result of the Bank's credit policies and management's willingness
to improve the quality of the loan portfolio.
At December 31 1998, OREO, net of valuation reserve, was $374 thousand,
compared to $1.4 million at December 31, 1997, representing a decrease of $1.03
million or 73.6%. Generally, the Bank evaluates the fair value of each property
owned annually. These evaluations may be appraisals or other market studies.
Results of Operations
Net Income. The corporation had income before income taxes of $252 thousand
for the year ended December 31, 1998 compared to a loss of $1.2 million for the
same period in 1997. Net income totaled $99 thousand the year ended December 31,
1998, a decrease of $751 thousand or 88.4% compared to net income in 1997.
Earnings per share were $0.02 in 1998 compared to $0.21 in 1997. The decrease in
net income is attributable to the 1997 recognition of deferred tax benefits in
the amount of $2.06 million.
1997 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
carry-forwards and temporary differences when it is ""more likely than not" that
they will be realized from the company's future earnings. These tax benefits
totaled $2.06 million, and were recorded as an income tax benefits it 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, 1998 totaled $4.19
million compared to $3.98 million in 1997, reflecting an increase of $215
thousand or 5.4%. Total interest income totaled $8.2 million in 1998 compared to
$8.1 million in 1997. This increase was primarily the result of increases of $77
thousand in interest and fees on loans and $78 thousand in interest on fed funds
and other short-term investments. The increase in earnings on loans was
primarily due to improvements in the interest rate earned, which increased to
9.62% in 1998 from 9.30% in 1997. The increase in interest on short-term
investments was due to increases in average outstanding balances of
approximately $80 thousand. Despite a 6.3% increase in deposits and other
borrowed funds, interest expense actually decreased by $112 thousand from 1997.
The decrease was attributable to improvements in the overall cost of funds.
Improvements in cost of funds accounted for a benefit of $127 thousand which was
offset by cost due to volume of $15 thousand.
The average yield on earning assets for the year ended December 31, 1998,
was 8.77% compared to 8.57% in 1997. The average interest
4
<PAGE>
rate paid on interest bearing deposits in 1998 was 4.69% compared to 4.68% in
1997. The average interest rate paid on other borrowed funds in 1998 was 6.30%
compared to 8.32% in 1997. Net interest margin is the ratio of net interest
income to average earning assets. For the year ended 1998, net interest margin
was 4.48% compared to 4.21% for the year ended December 31, 1997. The following
tables illustrate the Corporation's analysis of average balances, yields and
changes in net interest income for the fiscal years indicated.
<TABLE>
<CAPTION>
THREE YEAR AVERAGE CONSOLIDATED BALANCE SHEET AND RATES
(Dollars in thousands)
Average Balance (1) Yield/Cost (2) Income/Expense (2)
=============================== ============================= ===========================
1998 1997 1996 1998 1997 1996 1998 1997 1996
========= ========= ========= ======== ======== ========= ======== ======= ========
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $73,176 $74,822 $42,891 9.62% 9.30% 9.44% $7,038 $6,960 $4,051
Investment securities 16,768 17,170 10,297 5.71% 5.89% 6.05% 957 1,011 623
Other interest-earning assets 3,662 2,582 3,386 5.84% 5.27% 3.84% 214 136 130
--------- --------- --------- -------- -------- --------- -------- -------- --------
Total interest-earning assets 93,606 94,574 56,574 8.77% 8.57% 8.49% 8,209 8,107 4,804
Non-interest-earning assets 8,980 6,984 3,899
--------- --------- ---------
Total assets $102,586 $101,558 $60,473
========= ========= =========
Interest-bearing liabilities:
Savings & interest checking $12,856 $12,853 $10,141 2.31% 2.26% 2.32% $297 $291 $235
Money market accounts 11,158 13,893 11,187 3.23% 3.34% 3.33% 360 464 373
Time deposits 55,107 54,681 23,398 5.55% 5.59% 5.44% 3,057 3,056 1,272
--------- --------- --------- -------- -------- --------- -------- -------- --------
Total interest-bearing deposits 79,121 81,427 44,726 4.69% 4.68% 4.20% 3,714 3,811 1,880
Other interest-bearing liabilities 4,828 3,835 1,745 6.30% 8.32% 10.37% 303 319 181
--------- --------- --------- -------- -------- --------- -------- -------- --------
Total interest -bearing 83,949 85,262 46,471 4.79% 4.84% 4.44% 4,017 4,130 2,061
liabilities
Non-interest-bearing liabilities
Demand deposits 10,221 10,304 8,973
Other 677 224 195
non-interest-bearing liabilities
Stockholders' equity 7,739 5,768 4,834
--------- --------- ---------
Total liabilities and stockholders'
equity 102,586 101,558 60,473
========= ========= =========
Interest rate spread 3.98% 3.73% 4.06% $4,192 $3,977 $2,743
Net interest margin/income 4.48% 4.21% 4.85%
</TABLE>
1. Non-accrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
2. Yield/costs are derived by dividing income or expense by the average balance
of the underlying asset or liability, respectively, for the periods
presented.
NET INTEREST INCOME ANALYSIS/CHANGES DUE TO VOLUME AND RATE
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 over 1997 1997 Over 1996
----------------------------------- ---------------------------------
Increase Due to changes in (1) Increase Due to changes in (1)
======================= =====================
(Decrease) Rate Volume (Decrease) Rate Volume
----------- ----------------------- ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income from earning assets:
Interest and fees on loans $78 $231 ($153) $2,909 ($107) $3,016
Interest and dividends on investment (54) (30) (24) 388 (28) 416
securities
Interest on other interest earning assets 78 21 57 6 37 (31)
--------- ---------- -------- --------- -------- ---------
Total 102 222 (120) 3,303 (98) 3,401
========= ========== ======== ========= ======== =========
Interest expense on deposits and borrowed funds:
Interest on savings and interest checking 6 6 0 56 (7) 63
deposits
Interest on money market deposits (104) (13) (91) 91 1 90
Interest on time deposits 1 (23) 24 1,784 83 1,701
Interest on other borrowed funds (16) (98) 83 138 (79) 217
--------- ---------- -------- --------- -------- ---------
Total (113) (128) 15 2,069 (2) 2,071
========= ========== ======== ========= ======== =========
Net interest income $215 $350 ($135) $1,234 ($96) $1,330
</TABLE>
1. The rate/volume change is allocated between volume change and rate change
using the ratio each of the components bears to the absolute value of their
total.
5
<PAGE>
Provision for Loan Losses. The provisions for loan losses added $10
thousand to the allowance for loan losses in 1998 compared to $1.02 million in
1997. This decrease was primarily attributed to the decrease in total loans and
the significant improvement in the quality of the portfolio as evidenced by the
decrease in non-performing loans. Total charge-offs net of recoveries totaled
$785 thousand in 1998 compared to $524 thousand in 1997.
Non-interest Income. Non-interest income for the year ended December 31,
1998 was $638 thousand compared to $645 thousand in 1997, a decrease of $7
thousand or approximately 1.1%. This change was primarily due to decreases in
miscellaneous fee income related to the loan portfolio.
Non-interest expense. Total non-interest expense for the year ended
December 31, 1998 of $4.57 million reflected a decrease of approximately $54
thousand or 1.2% primarily as a result of decreases in personnel costs. The 1998
salaries and benefits expense decreased by $193 thousand or 9.7% to $1.80
million compared to $1.99 million in 1997. Occupancy and equipment expense of
$1.02 million increased $34 thousand or 3.5% in 1998.
Taxes on Income. Income tax expense totaled $153 thousand for 1998 compared
to a deferred income tax benefit of $2.06 million in 1997, which reflected a
$1.3 million recognition of $3.3 million in tax loss carry-forwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax assets 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 160,500 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:
<TABLE>
<CAPTION>
Quarter Ended Bid Price Quarter Ended Bid Price
1998 1997
<S> <C> <C> <C>
March 31 $ 3.50 March 31 $ 2.50
June 30 3.50 June 30 2.50
September 30 3.00 September 30 2.50
December 31 2.00 December 31 2.37
</TABLE>
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, 1998 there were 414 holders of record. There have been no
dividends paid in the past two years.
Year 2000 Compliance
Many computer programs now in use have not been designed to properly
recognize years after 1999. If not corrected, these programs could fail or
create erroneous results. The year 2000 ("Y2K") issue affects the entire banking
industry because of its reliance on computers and other equipment that use
computer chips, and may have significant adverse effects on banking customers,
bank regulators, and the general economy.
6
<PAGE>
The Corporation initiated the process of preparing its computer systems and
applications for the Year 2000 in 1997. The process involves modifying or
replacing certain hardware and software maintained by the Corporation as well as
communicating with external service providers to ensure that they are taking the
appropriate action to remedy their Y2K issues. Specific goals of the Y2K Plan
include identifying risks, testing data processing and other systems and
equipment used by the Company, informing customers of Y2K issues and risks,
establishing a contingency plan for operating if Y2K issues cause important
systems or equipment failure, implementing changes necessary to achieve Y2K
compliance, and verifying that these changes are effective. The Company's Board
of Directors reviews progress under the plan on a monthly basis.
Management designed the Y2K Plan to comply with the requirements for Y2K
efforts established by the Federal Deposit Insurance Corporation, the primary
federal regulator of the Bank.
As of December 31, 1998, the Corporation had met its Y2K goals and will
continue to meet the goals of the overall Y2K Plan. By December 31, 1998, the
Corporation had performed risk assessments, had assessed the Y2K preparedness of
suppliers of data processing services to the Corporation, had implemented its
customer awareness program, had developed its Y2K contingency Plan, and had
tested and implemented necessary changes in hardware and software. Elements of
the Y2K Plan, such as risk assessments, customer communications, and the
continuing testing and evaluation of systems and equipment, are processes that
will continue into the year 2000.
Another significant aspect of the Y2K project is business continuity
planning, which is the process to ensure that GrandBanc, Inc. and its affiliates
can continue operations in the event that information technology systems, non-
information technology systems and business relationships are not Y2K compliant.
As of December 31, 1998, all critical areas of the Corporation were actively
engaged in the business continuity program, and a plan will be available and
operational by June 30, 1999. The Y2K contingency plan calls for the company to
manually process bank transactions and to use other data processing methods, in
the event that Y2K efforts of the Corporation and its data services providers
are not successful. The plan also addresses key issues such as human resources,
additional liquidity levels and customer service.
The Corporation's primary supplier of data processing services also has
adopted a Y2K plan and time table to make changes necessary for it to provide
services in the year 2000, and has provided written assurances to the
Corporation of its progress. The suppliers and the Corporation have
successfully tested the software changes that have been made to date. The
Corporation is also monitoring the progress of its other suppliers of data
processing services.
Purchases of hardware and software have been and, if applicable, will
continue to be capitalized in accordance with normal policy. Internal personnel
and all other costs related to the project are being expensed and will continue
to be expensed as incurred. Because of the high level of dependency on outside
data service providers, the cost of resolving Y2K issues has not been
significant to the Corporation. Management believes that any additional cost
related to Y2K issues both internal and external will not be material to the
Corporation's business, operations, liquidity, capital resources, or financial
condition, based on the information developed to date and communications from
data processing suppliers. The Corporation is funding its Y2K expenditures
through continuing operations as part of the overall data processing budget. The
1999 budget for this category is $475,000.
7
<PAGE>
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997; and the consolidated results
of their operations and cash flows for each of the three years in the period
ended December 31, 1998, are in conformity with generally accepted accounting
principles.
/s/ Stegman & Company
- ---------------------
Stegman & Company
Baltimore, Maryland
February 1, 1999
8
<PAGE>
GRANDBANC, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks $ 3,224,516 $ 2,460,222
Federal funds sold 5,131,629 2,837,000
Investment securities:
Available for sale - at fair value 34,080,428 3,395,125
Held to maturity - at amortized cost - fair value of
$-0- (1998) and $11,033,305 (1997) - 10,969,615
Loans 61,300,297 77,445,689
Less allowance for loan losses (926,749) (1,701,702)
------------ ------------
Loans - net 60,373,548 75,743,987
Bank premises and equipment 1,824,766 1,971,573
Foreclosed real estate 374,223 1,434,739
Accrued interest receivable 668,952 602,770
Intangible assets 1,178,753 1,337,886
Deferred income taxes 1,923,647 2,056,713
Prepaid expenses and other assets 892,566 1,061,948
------------ ------------
TOTAL ASSETS $109,673,028 $103,871,578
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Non-interest-bearing deposits $ 10,069,575 $ 9,933,030
Interest-bearing deposits 86,655,753 78,764,994
------------ ------------
Total deposits 96,725,328 88,698,024
Short-term borrowings 4,564,371 5,698,037
Long-term debt 200,000 1,500,000
Accrued expenses and other liabilities 496,004 490,474
------------ ------------
Total liabilities 101,985,703 96,386,535
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.10 par value; 20,000,000 shares
authorized; 4,049,590 and 4,040,915 shares outstanding
in 1998 and 1997, respectively 404,959 404,091
Additional paid-in capital 10,962,879 10,928,460
Accumulated deficit (3,648,090) (3,747,332)
Accumulated other comprehensive income (32,423) (100,176)
------------ ------------
Total stockholders' equity 7,687,325 7,485,043
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $109,673,028 $103,871,578
============ ============
</TABLE>
See accompanying notes.
9
<PAGE>
GRANDBANC, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $7,037,460 $6,960,287 $4,051,127
Interest on investment securities - U.S. Government,
its agencies, and sponsored entities 957,360 903,867 548,095
Interest on other investment securities - 107,362 75,020
Interest on federal funds sold 214,203 136,082 130,065
---------- ---------- ----------
Total interest income 8,209,023 8,107,598 4,804,307
---------- ---------- ----------
INTEREST EXPENSE:
Interest on certificates of deposit of $100,000 or more 811,234 766,752 250,063
Interest on other deposits 2,902,410 3,044,216 1,629,463
---------- ---------- ----------
Total interest on deposits 3,713,644 3,810,968 1,879,526
Interest on short-term borrowings 257,966 162,778 144,972
Interest on long-term debt 45,865 156,569 36,479
---------- ---------- ----------
Total interest expense 4,017,475 4,130,315 2,060,977
---------- ---------- ----------
NET INTEREST INCOME 4,191,548 3,977,283 2,743,330
PROVISION (RECOVERY) FOR LOAN LOSSES 10,000 1,209,000 (35,000)
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION (RECOVERY)
FOR LOAN LOSSES 4,181,548 2,768,283 2,778,330
---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 320,219 315,778 367,614
Net realized gain on sales of securities 5,799 1,274 7,050
Other income 312,093 328,416 144,988
---------- ---------- ----------
Total non-interest income 638,111 645,468 519,652
---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,799,906 1,993,005 1,384,515
Occupancy and equipment expense 1,021,654 987,545 686,750
Data processing services 469,919 487,403 264,921
FDIC insurance 52,901 43,430 10,961
Insurance 77,009 70,817 62,804
Legal fees 108,184 54,068 159,485
Foreclosed real estate expenses 46,661 81,449 60,708
Other expenses 991,245 903,237 454,803
---------- ---------- ----------
Total non-interest expense 4,567,479 4,620,954 3,084,947
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 252,180 (1,207,203) 213,035
INCOME TAX EXPENSE (BENEFIT) 152,938 (2,056,713) 5,000
---------- ---------- ----------
NET INCOME $ 99,242 $ 849,510 $ 208,035
========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic $.02 $.21 $.06
Diluted $.02 $21 $.06
</TABLE>
See accompanying notes.
10
<PAGE>
GRANDBANC, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Additional Other Total Stock-
Common Paid-in Accumulated Comprehensive holders'
Stock Capital (Deficit) Income Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $325,883 $8,475,617 $(4,804,877) $(257,117) $3,739,506
Comprehensive income:
Net income - - 208,035 - 208,035
Other comprehensive income net of tax:
Unrealized gain on investment securities - - - 77,394 77,394
-----------
Total comprehensive income 285,429
-----------
Issuance of common stock at $3.00 per share 66,667 1,929,386 - - 1,996,053
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31,1996 392,550 10,405,003 (4,596,842) (179,723) 6,020,988
Comprehensive income:
Net income - - 849,510 - 849,510
Other comprehensive income net of tax:
Unrealized gain on investment securities - - - 79,547 79,547
-----------
Total comprehensive income 929,057
-----------
Issuance of common stock at $4.00 per share 875 34,123 - - 34,998
Issuance of common stock at $4.69 per share 10,666 489,334 - - 500,000
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 404,091 10,928,460 (3,747,332) (100,176) 7,485,043
Comprehensive income:
Net income - - 99,242 - 99,242
Other comprehensive income net of tax:
Unrealized gain on investment securities - - - 67,753 67,753
-----------
Total comprehensive income 166,995
-----------
Issuance of common stock at $4.06 per share 868 34,419 - - 35,287
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 $404,959 $10,962,879 $(3,648,090) $ (32,423) $7,687,325
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
11
<PAGE>
GRANDBANC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 99,242 $ 849,510 $ 208,035
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 254,848 230,175 119,571
Accretion and amortization of securities 59,126 87,719 (11,661)
Amortization of intangibles 159,133 160,818 46,522
Provision for loan losses 10,000 1,209,000 (35,000)
Net realized (gain) loss from sales of assets (72,176) (1,274) 26,206
Foreclosed real estate - valuation adjustments - 57,000 -
Deferred income taxes 133,066 (2,056,713) -
Net changes in:
Accrued interest receivable (66,182) (14,822) (110,100)
Prepaid expenses and other assets 169,382 (415,804) (448,480)
Accrued expenses and other liabilities 40,817 204,132 (425,832)
Other - net 226,109 62,714 226,771
------------ ----------- -----------
Net cash provided (used) by operating activities 1,013,365 402,099 (403,968)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in time deposits with banks - 3,300,000 (3,205,000)
Net increase in federal funds sold (2,294,629) (2,213,000) (624,000)
Purchases of available for sale securities (34,965,701) (3,188,050) (3,787,000)
Proceeds from sales and maturities of
available for sale securities 8,047,947 3,440,981 3,300,724
Purchases of held to maturity securities - (5,099,766) (8,868,870)
Proceeds from sales and maturities of
held-to maturity securities 7,216,490 6,953,222 1,000,000
Net decrease (increase) in loans 15,134,330 (5,121,165) (9,030,750)
Proceeds from sale of participation loans - 1,490,000 3,752,411
Purchases of loans - (1,273,652) (2,031,887)
Purchase of property and equipment (108,041) (378,944) (295,212)
Proceeds from sale of foreclosed real estate and other assets 1,126,895 79,650 45,744
Net funds received in acquisition - - 20,756,587
------------ ----------- -----------
Net cash (used) provided by investing activities (5,842,709) (2,010,724) 1,012,747
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 8,027,304 (2,584,812) (5,147,663)
Net (decrease) increase short-term borrowings (1,133,666) 3,698,037 1,941,000
Proceeds from long-term debt - - 1,500,000
Proceeds from issuance of common stock - 500,000 1,996,053
Repayment of long-term borrowings (1,300,000) - -
------------ ----------- -----------
Net cash provided by financing activities 5,593,638 1,613,225 289,390
------------ ----------- -----------
NET INCREASE IN CASH 764,294 4,600 898,169
CASH AT BEGINNING OF YEAR 2,460,222 2,455,622 1,557,45
------------ ----------- -----------
CASH AT END OF YEAR $ 3,224,516 $ 2,460,222 $ 2,455,622
============ =========== ===========
</TABLE>
12
<PAGE>
GRANDBANC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Supplemental disclosures:
Interest payments $4,181,945 $4,089,718 $1,998,225
Income tax payments - - 5,000
Non-cash investing and financing activities:
Unrealized gain on investment securities
available for sale $67,753 $79,547 $77,394
Stock issued in consideration
of professional services $35,287 $34,998 $ -
</TABLE>
See accompanying notes.
13
<PAGE>
GRANDBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 1998.
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,
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 non-accrual 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 non-accrual loans is recognized only to the extent of interest payments
received.
14
<PAGE>
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 non-accrual. 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 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 non-interest 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
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. This statement establishes standards for reporting the
components of comprehensive income and requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be included in a financial statement that is displayed with the same
prominence as other financial statements.
15
<PAGE>
Comprehensive income includes net income as well as certain items that are
reported directly within a separate component of stockholders' equity and bypass
net income. The Corporation adopted the provisions of this statement in 1998.
Adoption of this disclosure requirement did not have a material impact on the
Corporation's financial condition.
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131), which was issued
in June 1997 establishes new standards for reporting information about operating
segments in annual and interim financial statements. The standard requires
descriptive information about the way that operating segments are determined,
the products and services provided by the segments, and the nature of
differences between reportable years beginning after December 15, 1997.
Operating segments are defined under the standard based on the availability and
utilization of discrete financial information as well as the necessity for this
discrete financial information to meet certain quantitative thresholds.
Management believes that it has no reportable components that qualify as an
operating segment under SFAS 131 for the year ended December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The provisions of this statement require
that derivative instruments be carried at fair value on the balance sheet. The
statement continues to allow derivative instruments to be used to hedge various
risks and set forth specific criteria to be used to determine when hedge
accounting can be used. The statement also provided for offsetting changes in
fair value or cash flows of both the derivative and the hedged asset or
liability to be recognized in earnings in the same period; however, any change
in fair value or cash flow that represent the ineffective portion of a hedge are
required to be recognized in earnings and cannot be deferred. For derivative
instruments not accounted for as hedges, changes in fair value are required to
be recognized in earnings. The provision of this statement becomes effective
for quarterly and annual reporting beginning after June 15, 1999 although the
statement allows for early adoption. The impact of adopting Statement No. 133
on the Corporation's financial position or results of operation has not been
determined at this time.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at
December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available for Sale - 1998 Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of U.S. government, its
agencies and sponsored entities $17,600,889 $ 28,158 $111,198 $17,517,849
Mortgage-backed securities 16,132,534 51,732 78,987 16,105,279
Other investments 399,300 58,000 - 457,300
----------- -------- -------- -----------
Total $34,132,723 $137,890 $190,185 $34,080,428
=========== ======== ======== ===========
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
=========== ======== ======== ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Held to Maturity - 1997 Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
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
=========== ======== ======== ===========
</TABLE>
16
<PAGE>
The amortized cost and estimated fair value of investment securities at
December 31, 1998, 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.
Available for Sale
----------------------------
Estimated
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ - $ -
Due after one year through five years 5,498,129 5,466,895
Due after five years through ten years 12,102,760 12,050,954
Due after ten years - -
----------- -----------
17,600,889 17,517,849
Mortgage-backed securities 16,132,534 16,105,279
Equity investments 399,300 457,300
----------- -----------
Total $34,132,723 $34,080,428
=========== ===========
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>
1998 1997
---------------------------- ----------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale $11,368,931 $11,355,272 $ 3,005,322 $ 3,004,225
Held to maturity - - 10,969,615 11,033,305
----------- ----------- ----------- -----------
Total $11,368,931 $11,355,272 $13,974,937 $14,037,530
=========== =========== =========== ===========
</TABLE>
Proceeds from sales together with gross gains and losses realized on
sales of securities were as follows:
Available for Sale
----------------------------
1998 1997
----------- -----------
Proceeds from sale $477,500 $550,516
Gross realized gains 5,799 1,274
Gross realized losses - -
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio at December 31 was as follows:
1998 1997
----------- -----------
Real estate - mortgage $37,658,527 $47,016,711
Real estate - construction 210,500 433,826
Commercial 17,477,183 21,684,319
Consumer 2,889,176 4,501,261
Credit card receivable 3,064,911 3,809,572
----------- -----------
Total loans $61,300,297 $77,445,689
=========== ===========
17
<PAGE>
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 1998 and 1997:
1998 1997
---------- ----------
Balance at January 1 $2,260,000 $ 769,000
Amounts borrowed 713,000 2,702,000
Amounts paid (714,000) (1,211,000)
---------- ----------
Balance at December 31 $2,259,000 $2,260,000
========== ==========
Activity in the allowance for loan losses for the three years ended
December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1 $ 1,701,702 $1,016,478 $ 748,480
Provision (recovery) for loan losses 10,000 1,209,000 (35,000)
Allowance acquired - - 220,470
Loans charged-off (1,299,250) (586,491) (143,773)
Recoveries 514,297 62,715 226,301
----------- ---------- ----------
Balance at December 31 $ 926,749 $1,701,702 $1,016,478
=========== ========== ==========
</TABLE>
At December 31, 1998, 1997 and 1996, the total recorded investment in
impaired loans amounted to $535,292, $2,272,052 and $742,033, respectively. The
average balances of these loans were $797,148, $326,268 and $220,487 for the
years ended December 1998, 1997 and 1996, respectively. Following is a summary
of cash receipts on impaired loans and how they were applied:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Cash receipts applied to principal balance $87,588 $ - $ -
Cash receipts recognized as interest income - - 2,900
------- ---- ------
Total cash receipts $87,588 $ - $2,900
======= ==== ======
</TABLE>
The allowance for loan losses related to impaired loans amounted to
approximately $2,000, $639,000 and $111,000 at December 31, 1998, 1997 and 1996,
respectively. If interest had been recognized on impaired loans at the original
interest rate, interest income would have increased approximately $91,000,
$133,000 and $70,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land $ 360,000 $ 360,000
Building 840,000 840,000
Leasehold improvements 769,924 751,848
Equipment 1,135,225 1,045,297
Furniture and fixtures 192,434 192,434
---------- ----------
3,297,583 3,189,579
Less accumulated depreciation (1,472,817) (1,218,006)
---------- ----------
$1,824,766 $1,971,573
========== ==========
</TABLE>
18
<PAGE>
The Bank leases office space under various lease agreements. Rental
expense for 1998, 1997 and 1996 totaled $563,128, $581,044, and $428,049
respectively. Future, minimum annual lease payments for operating leases are as
follows:
1999 $ 449,970
2000 297,860
2001 303,216
2002 308,688
2003 230,226
Thereafter 557,654
----------
Total $2,147,614
==========
6. INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated
amortization, included in the consolidated balance sheets:
<TABLE>
<CAPTION>
Premium on
Purchased
Goodwill Deposits Total
-------- ----------- ----------
<S> <C> <C> <C>
Balance, January 1, 1997 $328,211 $1,151,069 $1,479,280
Addition 19,424 - -
Amortization (29,559) (131,259) (160,818)
-------- ---------- ----------
Balance, December 31, 1997 318,076 1,019,810 1,337,886
Addition - - -
Amortization (27,901) (131,232) (159,133)
-------- ---------- ----------
Balance, December 31, 1998 $290,175 $ 888,578 $1,178,753
======== ========== ==========
</TABLE>
7. DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Non-interest-bearing $10,069,575 $ 9,933,030
----------- -----------
Interest-bearing:
Savings and interest checking 13,825,599 12,712,234
Money market 10,691,252 11,966,323
Certificates of deposit of $100,000 or more 17,250,883 15,268,806
Other 44,888,019 38,817,631
----------- -----------
Total interest-bearing 86,655,753 78,764,994
---------- -----------
Total $96,725,328 $88,698,024
=========== ===========
</TABLE>
19
<PAGE>
8. SHORT-TERM BORROWINGS
At December 31, 1998, the Corporation is indebted to an unaffiliated bank
in the amount of $1,900,000. 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 November 1, 1999. The common stock of the Corporation's wholly
owned subsidiary bank is pledged as collateral for this debt.
Short-term borrowings at December 31, 1998 also consisted of securities
sold under agreement to repurchase, which are securities sold to the Bank's
customers, at the customer's request, under a continuing "roll-over" contract
that matures in one business day. The underlying securities sold are U.S.
Treasury notes or Federal agencies which are segregated in the Bank's Federal
Reserve Bank account from the Company's other investment securities. The
following table presents certain information for short-term borrowings:
Average amount outstanding during the year $2,290,607
Weighted average interest rate during the year 3.63%
Amount outstanding at year end 2,664,371
Weighted average interest rate at year end 2.99%
Maximum amount at any month end 3,701,587
9. LONG-TERM DEBT
At December 31, 1998, the Corporation is also indebted to the same
unaffiliated bank in the amount of $200,000. 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 September 30, 2001. The common stock of the
Corporation's wholly owned subsidiary bank is pledged as collateral for this
debt.
10. 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>
1998 1997 1996
--------------------- ------------------- ----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 121,500 $2.40 133,500 $2.31 103,500 $1.89
Granted 49,000 4.00 12,500 2.88 30,000 3.75
Exercised - .00 - .00 - .00
Expired (10,000) 2.50 (24,500) 2.17 - .00
------- ------- -------
Outstanding at end of year 160,500 $2.88 121,500 $2.40 133,500 $2.31
======= ======= =======
Weighted average fair value of
options granted during the year $2.22 $1.68 $1.79
===== ===== =====
</TABLE>
20
<PAGE>
The following summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Prices Number Life Exercise Price Number Exercise Price
--------------- ------- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$1.75 - $4.00 160,500 7.10 years $2.98 111,500 $2.39
</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:
1998 1997 1996
---------- ---------- ----------
Dividend yield .00 .00 .00
Expected volatility 30.00% 30.00% 30.00%
Risk-free interest rate 5.86% 6.82% 6.29%
Expected lives 10 years 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,
1998. 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:
Years Ended December 31,
-------------------------
1998 1997 1996
---------- ---------- ----------
Net income $13,052 $849,510 $154,485
Net income per share:
Basic $ - $.21 $.04
Diluted $ - $.21 $.04
11. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted net income per common share is computed by
dividing net income available to common shareholders by the weighted average
number of common shares outstanding during the year including any potential
dilutive common shares outstanding, such as options and warrants.
The calculation of net income per common share follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Net income (applicable to common stock) $ 99,242 $ 849,510 $ 208,035
Average common shares outstanding 4,048,829 4,026,293 3,446,961
Basic net income per share $.02 $.21 $.06
Diluted:
Net income (applicable to common stock) $ 99,242 $ 849,510 $ 208,035
Average common shares outstanding 4,048,829 4,026,293 3,446,961
Stock option adjustment 86,190 - 43,154
Average common shares outstanding - diluted 4,080,063 4,058,148 3,490,115
Diluted net income per share $.00 $.21 $.06
</TABLE>
21
<PAGE>
12. INCOME TAXES
Federal and state income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current federal income tax expense $ - $ - $5,000
Deferred federal income tax expense
(benefit) 125,217 (1,669,336) -
Deferred state income tax expense
(benefit) 27,721 (387,377) -
-------- ----------- ------
$152,938 $(2,056,713) $5,000
======== =========== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ---------------------- -------------------
Percent Percent
Percent of of
of Pretax Pretax
Pretax Income Income
Amount Income Amount (Loss) Amount (Loss)
--------- ------- ----------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) at statutory rate $ 85,741 34.0% $ (410,449) (34.0)% $ 72,432 34.0%
State income taxes net of federal
income tax benefit 13,057 5.2 (60,360) (5.0) 7,826 3.6
Nondeductible expenses 10,230 4.0 11,735 1.0 5,641 2.6
Elimination of valuation allowance
on deferred tax assets - .0 (1,597,369) (132.3) - .0
Net operating loss 43,910 17.4 - .0 (80,899) (37.9)
-------- ---- ----------- ------ -------- -----
$152,938 60.6% $(2,056,713) (170.3)% $ 5,000 2.3%
======== ==== =========== ====== ======== =====
</TABLE>
At December 31 net deferred tax assets consisted of the following:
1998 1997
---------- ----------
Deferred tax assets:
Net operating loss carryforward $1,519,223 $1,343,255
Allowance for loan losses 272,765 578,904
Foreclosed real estate - valuation allowance 23,172 57,158
Depreciation 12,572 10,056
Intangible assets 43,346 25,239
Loan fees and costs 32,372 2,608
Unrealized holding gains on investment
securities available for sale 20,197 423
Unrealized holding losses on investment
securities transfers from available for
sale to held to maturity - 38,265
Other - 805
---------- ----------
Total deferred tax assets $1,923,647 $2,056,713
========== ==========
22
<PAGE>
The Company has recorded a deferred tax asset of $1,923,647, which
includes the benefit of $3,851,608 in tax loss carryforwards, which expire in
varying amounts between 2007 and 2013. 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.
13. REGULATORY MATTERS
Capital
-------
The Corporation 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 Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The Corporation is required to maintain risk-based and leverage
capital as defined by federal banking agencies. The measurement of risk-based
capital takes into account the risk of both the balance sheet assets and off-
balance sheet exposures. The regulatory guidelines require minimum risk-based
capital ratios of 4% for Tier 1 capital and 8% for total capital. In addition a
minimum leverage ratio of Tier 1 capital to quarterly average assets of 3% is
required for strong banking organizations. A bank is considered "well
capitalized", the highest regulatory category, if it has the following minimum
ratios: Tier 1 capital of 6%, total risk-based capital of 10%, and Tier 1
leverage ratio of 5%. The capital ratios of the Corporation were as follows:
December 31,
------------------------
1998 1997
---------- ----------
Capital:
Tier 1 capital $5,844,000 $5,347,000
Tier 2 capital 921,000 1,020,000
---------- ----------
Total capital $6,765,000 $6,367,000
========== ==========
Assets:
Risk-weighted assets $ 73,676,000 $82,814,000
Average assets (fourth quarter) 104,484,000 98,358,000
<TABLE>
<CAPTION>
Well
Capitalized
Regulatory
Actual Rates Minimums
----------------- -----------
<S> <C> <C> <C>
Ratios:
Tier 1 capital to risk-weighted assets 7.9% 6.5% 6.0%
Total capital to risk-weighted assets 9.2% 7.7% 10.0%
Tier 1 leverage to average assets 5.6% 5.4% 5.0%
</TABLE>
23
<PAGE>
The capital ratios of GrandBank, the Corporation's banking subsidiary,
were as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------------ ------------
<S> <C> <C>
Capital:
Tier 1 capital $ 7,735,000 $ 7,112,000
Tier 2 capital 927,000 1,028,000
------------ ------------
Total capital $ 8,662,000 $ 8,140,000
============ ============
Assets:
Risk-weighted assets $ 72,062,000 $ 81,264,000
Average assets (fourth quarter) 102,336,000 97,556,000
</TABLE>
Well
Capitalized
Regulatory
Actual Rates Minimums
----------------------- ------------
Ratios:
Tier 1 capital to risk-weighted assets 10.7% 8.8% 6.0%
Total capital to risk-weighted assets 12.0% 10.0% 10.0%
Tier 1 leverage to average assets 7.6% 7.3% 5.0%
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, 1998 and
1997, the Bank was required to maintain reserves of $518,000 and $384,000,
respectively.
14. LITIGATION
At December 31, 1998, 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.
15. 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, 1998 and 1997, the Bank's
total unfunded commitments to extend credit were $801,000 and
24
<PAGE>
$3,161,000, 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 $173,000
and $234,000 at December 31, 1998 and 1997, 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 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.
16. 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 non-financial 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>
1998 1997
--------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 3,224,516 $ 3,224,516 $ 2,460,222 $ 2,460,222
Federal funds sold 5,131,629 5,131,629 2,837,000 2,837,000
Investment securities:
Available for sale 34,080,428 34,080,428 3,395,125 3,395,125
Held to maturity - - 10,969,615 11,033,305
Loans, net of allowance 60,373,548 61,279,151 75,743,987 76,996,069
Accrued interest receivable 668,952 668,952 602,770 02,7700
Financial liabilities:
Deposits 96,725,328 96,765,618 88,698,024 89,296,349
Short-term borrowings 4,564,371 4,564,371 5,698,037 5,698,037
Long-term borrowings 200,000 200,000 1,500,000 1,500,000
Accrued interest payable 207,058 207,058 170,668 170,668
Off-balance sheet items:
Commitments to extend credit 801,000 801,000 3,161,000 3,161,000
Standby letters of credit 173,000 173,000 234,171 234,171
</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
25
<PAGE>
quoted market prices of comparable instruments.
. Loans: For variable-rate loans that re-price 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 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.
17. 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,
1998 1997
------------ ------------
ASSETS:
<S> <C> <C>
Cash $ 2,448 $ 304,946
Investments in subsidiary 9,553,597 9,069,631
Bank premises and equipment - net - 1,247,962
Intangible assets 181,675 198,447
Other assets - 1,494
Deferred income taxes 320,515 197,563
------------ ------------
TOTAL ASSETS $10,058,235 $11,020,043
============ ============
LIABILITIES:
Notes payable $ 2,100,000 $ 3,500,000
Accrued expenses and other liabilities 270,910 35,000
------------ ------------
Total liabilities 2,370,910 3,535,000
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 404,959 404,091
Additional paid-in capital 10,962,879 10,928,460
Accumulated deficit (3,648,090) (3,747,332)
Accumulated other comprehensive income (32,423) (100,176)
------------ ------------
Total stockholders' equity 7,687,325 7,485,043
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,058,235 $11,020,043
============ ============
</TABLE>
26
<PAGE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
INCOME:
Rental income $ - $ 120,000 $ 30,000
Interest income 4,046 11,096 -
Fee income - - 34,034
Other income 30,000 193 2,500
--------- --------- ---------
Total income 34,046 131,289 66,534
--------- --------- ---------
EXPENSES:
Salaries and employee benefits - - 51,170
Interest expense 215,342 306,250 84,764
Professional fees 28,775 62,758 69,745
Other expenses 39,776 75,130 11,718
--------- --------- ---------
Total expenses 283,893 444,138 217,397
--------- --------- ---------
LOSS BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY (249,847) (312,849) (150,863)
INCOME TAX BENEFIT (122,952) (197,563) -
--------- --------- ---------
LOSS BEFORE EQUITY IN UN-
DISTRIBUTED INCOME OF
SUBSIDIARY (126,895) (115,286) (150,863)
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 226,137 964,796 358,898
--------- --------- ---------
NET INCOME $ 99,242 $ 849,510 $ 208,035
========= ========= =========
</TABLE>
27
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 99,242 $ 849,510 $ 208,035
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiary (416,213) (964,796) (358,898)
Depreciation and amortization 26,450 60,995 8,621
Deferred income taxes (122,952) (197,563) -
Net realized gain from sales of assets - - (2,500)
Net changes in:
Other assets 1,494 16,926 (36,029)
Accrued expenses and other liabilities 19,697 (28,512) 96,615
----------- ---------- -----------
Net cash used in operating activities (392,282) (263,440) (84,156)
----------- ---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital contributed to subsidiary - - (4,000,000)
Proceeds from sale of fixed assets 1,489,784 - 4,500
Net funds disbursed in acquisition - - (1,500,000)
----------- ---------- -----------
Net cash provided (used) by investing
activities 1,489,784 - (5,495,500)
----------- ---------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from borrowings - - 3,500,000
Principal payments on borrowings (1,400,000) - -
Proceeds from issuance of common stock - 500,000 1,996,053
----------- ---------- -----------
Net cash (used) provided by financing
activities (1,400,000) 500,000 5,496,053
----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH (302,498) 236,560 (83,603)
CASH AT BEGINNING OF YEAR 304,946 68,386 151,989
----------- ---------- -----------
CASH AT END OF YEAR $ 2,448 $ 304,946 $ 68,386
=========== ========== ===========
Supplemental disclosures:
Interest payments $200,918 $331,868 $59,146
======== ======== =======
</TABLE>
28
<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, 1997,
December 31, 1998 and the three year period ending at December 31, 1998. The
financial data included amounts that are based on the best estimates and
judgements 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 authorizations,
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 on the Board of Directors which meets with Management periodically to
evaluate the effectiveness of the system of internal accounting control.
Stegman & 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.
29
<PAGE>
EXHIBIT 21
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary Percentage Owned State of Incorporation
- ---------- ---------------- ----------------------
GrandBank 100% Maryland
Facility Holdings, Inc. 100% Virginia
<PAGE>
EXHIBIT 23
<PAGE>
Stegman & Company
Certified Public Accountants
Suite 200
400 East Joppa Road
Baltimore, Maryland 21286
(410) 823-8000
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, 1998, of our
report dated February 1, 1999, relating to the consolidated financial statements
of GrandBanc, Inc. and Subsidiary.
/s/ Stegman & Company
STEGMAN & COMPANY
Baltimore, Maryland
April 7, 1999
<PAGE>
EXHIBIT 24
<PAGE>
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,
1998, 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.
- ------------------------------------------
Joan H. Schonholtz
Director
- ------------------------------------------
Abbey J. Butler
Director
/s/ Melvin J. Estrin
- ------------------------------------------
March 25, 1999
Melvyn J. Estrin
Chairman of the Board, Director
/s/ Avis Y. Pointer
- ------------------------------------------
March 25, 1999
Avis Y. Pointer
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB FOR THE PERIOD ENDED DECEMBER 31, 1998, 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,225
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,132
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,133
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 34,080<F1>
<LOANS> 61,300
<ALLOWANCE> 927
<TOTAL-ASSETS> 109,673
<DEPOSITS> 96,725
<SHORT-TERM> 4,564
<LIABILITIES-OTHER> 496
<LONG-TERM> 200
405
0
<COMMON> 0
<OTHER-SE> 7,282
<TOTAL-LIABILITIES-AND-EQUITY> 109,673
<INTEREST-LOAN> 7,037
<INTEREST-INVEST> 957
<INTEREST-OTHER> 214
<INTEREST-TOTAL> 8,209
<INTEREST-DEPOSIT> 3,714
<INTEREST-EXPENSE> 4,017
<INTEREST-INCOME-NET> 4,192
<LOAN-LOSSES> 10
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,567
<INCOME-PRETAX> 252
<INCOME-PRE-EXTRAORDINARY> 252
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,702
<CHARGE-OFFS> 1,299
<RECOVERIES> 514
<ALLOWANCE-CLOSE> 927
<ALLOWANCE-DOMESTIC> 927
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>NOT BROKEN OUT IN KSB
</FN>
</TABLE>
