<PAGE>
SECURITIES AND EXCHANGE COMMISSION {PRIVATE}
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, 1999
Commission File Number 0-16187
GRANDBANC, INC.
-------------------------
(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
--------------
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
--------------------------------------
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. $9,223,208
The aggregate market value of the voting stock held by non-affiliates as of
March 21, 2000 was $4,219,314. 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 21, 2000: 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, 1999. (Parts I and II)
2. Portions of the Proxy Statement for 1999 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 third 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 STAR system and the PLUS system, providing 24-hour access to funds.
The Bank's mission is to provide a high level of personal service to the
local community and also to participate in community service within the
Montgomery County, Alexandria, Virginia, and the Washington, D.C. metropolitan
area. The Bank competes with local and regional commercial banks, savings
associations, mutual
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savings banks, credit unions, money market brokers, and other financial
institutions that provide loan and deposit relationships. The Bank competes with
these other institutions for customers by offering competitive products and
services, interest rates, and delivery of quality service and expertise.
Lending Activities
The Bank's lending activities are broken into three broad types of loan
categories consisting of commercial, real estate and consumer loans. The overall
size and composition of the loan portfolio depends upon the market demand for
credit and management's requirements for liquidity, asset quality and
profitability. The composition of the Bank's loan portfolio is shown on the
following table.
<TABLE>
<CAPTION>
A. Loans Outstanding by Type at December 31
(in thousands)
% of % of % of
1999 Portfolio 1998 Portfolio 1997 Portfolio
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate - Mortgage..................... $ 40,988 69% $ 37,659 61% $ 47,017 61%
Real Estate - Construction................. 94 0 210 1 434 1
Commercial................................. 13,381 23 17,477 28 21,684 28
Consumer................................... 4,530 8 5,954 10 8,311 10
---------- --- ------ ---- ----- ---
Total................................. $ 58,993 100% $ 61,300 100% $ 77,446 100%
========= ==== ========= ==== ========= ===
</TABLE>
<TABLE>
<CAPTION>
B. Maturities and Sensitivity to Changes in Interest Rates
(in thousands)
Due In One Due After Due After
At December 31, 1999 Year or Less One-Five Years Five Years
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate - Mortgage $22,925 $ 14,055 $ 4,009
Real Estate - Construction 94 --- ---
Commercial 7,194 3,307 2,880
Consumer 2,680 1,597 252
------- -------- --------
Total loans maturities $32,893 $ 18,959 $ 7,141
======= ========= ========
</TABLE>
<TABLE>
<CAPTION>
Variable
Loans with Maturities of One Year or Greater Fixed Rate Rate
---------- -------
<S> <C> <C>
Real Estate - Mortgage $ 16,840 $ 1,224
Real Estate - Construction --- ---
Commercial 1,532 4,655
Consumer 1,718 131
-------- ---------
Total Loans $ 20,090 $ 6,010
======== =========
</TABLE>
Real Estate Mortgage and Construction Loans
The Bank makes a wide variety of mortgage loan products available to
businesses and individuals. Residential mortgages are made through the Bank's
mortgage lending division, with numerous pricing, term and structuring options
available. The Bank makes home equity lines of credit available to homeowners
for a variety of purposes, with rates based upon the prime rate published in The
---
Wall Street Journal, as well as fixed rate home equity term loans for a variety
- -------------------
of purposes including home
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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. Also, 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 $2,099,493
and $3,064,911 at December 31, 1999 and December 31, 1998, 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
-----------------
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 deterioration in the borrower's financial
condition or collateral values. Each loan is rated through a criteria and
classification system based on the quality of the loan. There are eight ratings
that can be assigned to a loan. These ratings are reviewed on an annual basis.
These ratings are intended to be identical to the ratings used by the Bank's
regulatory agencies. Of the eight ratings, the first four are generally referred
to as "pass" loans, the fifth as "special mention" loans and the sixth, seventh,
and eighth as "substandard," "doubtful," and "loss." When the Bank classifies
loans as either "substandard" or "doubtful," it is required to establish a
specific allowance for loss in an amount deemed prudent by management. When the
Bank classifies a loan as "loss" it is required to establish a specific
allowance equal to 100% of the amount or to charge-off the amount against the
allowance for credit losses. In addition to these specific allowances, the Bank
maintains a general allocation which represents loss allowances which have been
established to recognize the inherent risk associated with lending activities
but have not been allocated to particular loans. The Bank's determination as to
the classification of its assets and the amount of its allowance for 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
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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. Performing loans
considered potential nonperforming loans, loans which are not included in the
past-due, nonaccrual or restructured categories, but for which known information
about possible credit problems cause management to be uncertain as to the
ability of the borrowers to comply with the present loan repayment terms,
amounted to approximately $281 thousand at December 31, 1999.
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)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ----------------
Non-Performing Assets:
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis $592 $535 $ 2,772
Restructured loans --- -- ----
------ ------ ------
Total non-performing loans 592 535 2,272
Other real estate owned net of allowance 114 374 1,435
Other non-performing assets 0 0 3
------ ------ ------
Total non-performing assets $706 $909 $4,220
====== ====== ======
Total non-performing assets to total assets 0.60% 0.83% 4.06%
Total non-performing loans to total loans 1.00% 0.87% 3.58%
Past Due Loans:
Loans contractually past due 90 days or more as to
interest or principal payments, still accruing $ 1,187 $ 127 $ 13
Loans contractually past due 30 days or more through
90 days as to interest or principal payments, still accruing 1,422 1,113 350
----- ----- ---
Total Past Due Loans $ 2,609 $ 1,240 $363
======= ======= ====
</TABLE>
4
<PAGE>
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>
1999 1998 1997
-----------------------------------
<S> <C> <C> <C> <C>
Balance January 1 $ 927 $ 1,702 $ 1,016
-------- -------- --------
Provision (recovery) charged to operating expense 269 10 1,209)
-------- -------- --------
Recoveries:
Commercial 12 430 53
Real Estate - Construction -- -- --
Real Estate - Mortgage 36 78 --
Consumer and other 28 6 10
-------- -------- --------
Total recoveries 76 514 63
-------- -------- --------
Charge-offs:
Commercial 43 260 322
Real Estate - Construction -- -- --
Real Estate - Mortgage -- 621 234
Consumer and other 539 418 30
-------- -------- --------
Total charge-offs 582 1,299 586
Net (charge-offs) recoveries (506) (785) (523)
Allowance acquired -- -- --
-------- -------- --------
Balance December 31 $ 690 $ 927 $ 1,702
======== ======== ========
Average amount of total loans outstanding, net $ 58,453 $ 73,176 $ 74,822
Total loans outstanding at December 31, gross 58,993 61,300 77,446
Loan loss ratios:
Net charge-offs (recoveries) to average loans outstanding, net 0.87% 1.07% .70%
Allowance for possible loan losses to total
loans outstanding December 31 1.17% 1.51% 2.20%
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Allocation of allowance for loan
losses among loan type and % of % of % of % of
loan type to total loan portfolio 1999 Portfolio 1998 Portfolio 1997 Portfolio
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial ............... $ 49 23% $ 114 28% $ 560 28%
Real Estate - Construction 1 0 1 1 5 1
Real Estate - Mortgage ... 224 69 450 61 745 61
Consumer ................. 304 8 281 10 25 10
Unallocated .............. 112 N/A 81 N/A 367 N/A
------ ------ ------
Total ............... $ 690 $ 927 $1,702
====== ====== ======
</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 are 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, 1999, the
Corporation's investments portfolio totaled $ 44,967,011. 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. The following
table depicts the matirities and weighted average yields of the investment
securities portfolio by category. Amounts represent stated maturities adjusted
for estimated calls.
Investment Securities at December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Available for Sale
--------------------------------------------
Amortized Estimated Weighted
Cost Fair Value Average
Yield
------------- ------------ ------------
U.S. Agency:
<S> <C> <C> <C>
Due in one year or less $ 500 $489 3.36%
Due after one year through five years 3,600 3,483 6.21%
Due after five years through ten years 22,405 20,867 6.45%
------ ------
Total U.S. Agency 26,506 24,839
Mortgage-backed securities 20,709 19,650 6.51%
Other investments 420 478 7.00%
------ ------
Total Securities Available for Sale $ 47,634 $ 44,967 6.38%
-------- --------
</TABLE>
Deposit Activities
6
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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
1999, 1998, and 1997 can be found in the Three Year Average Consolidated Balance
Sheet contained in Item 6 hereof.
A. Certificate of Deposit of over $100,000 by Maturity at December 31,
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ----------------
<S> <C> <C> <C>
Three months or less $ 2,753 $ 4,960 $ 5,591
Over three months through six months 5,633 3,404 5,110
Over six months through one year 3,864 4,749 1,760
Over one year 2,441 4,138 2,808
----- ----- -----
Total $ 14,691 $ 17,251 $ 15,269
======== ======== ========
</TABLE>
Borrowings
The average amounts of borrowings outstanding during 1999, 1998 and 1997
and the approximate weighted average interest rate thereon are 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.
Under the Act, a bank holding company must obtain the prior approval of the
FRB before (i) acquiring direct or indirect ownership or control of any class of
voting securities of any bank or bank holding company if, after the acquisition,
the bank holding company would directly or indirectly own or control more than
5% of the class; (2) acquiring all or substantially all of the assets of another
bank or bank holding company; or (3) merging or consolidating with another bank
holding company.
Under the Act, any company must obtain approval of the FRB prior to
acquiring control of the Corporation or the Bank. For purposes of the Act,
"control" is defined as ownership of more than 25% of any class of voting
securities of the Corporation or the Bank, the ability to control the election
of a majority of the directors, or the exercise of a controlling influence over
management or policies of the Corporation or the Bank.
The Change in Bank Control Act and the related regulations of the FRB
require any person or persons acting in concert (except for companies required
to make application under the Act,) to file a written notice with the FRB before
the person or persons acquire control of the Corporation or the Bank. The Change
in Bank Control Act defines "control" as the direct or indirect power to vote
25% or more of any class of voting securities or to direct the management or
policies of a bank holding company or an insured bank.
The Act also limits the investments and activities of bank holding
companies. In general, a bank holding
7
<PAGE>
company is prohibited from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of a company that is not a bank or bank
holding company or from engaging directly or indirectly in activities other than
those of banking, managing or controlling banks, providing services for its
subsidiaries, non-bank activities that are closely related to banking, and other
financially related activities. The activities of the Corporation are subject to
these legal and regulatory limitations under the Act and FRB regulations.
The Gramm Leach Bliley Act of 1999 (the "GLB Act") made major changes in
the historical restrictions on the non-bank activities of bank holding
companies, and allows affiliations between types of companies that were
previously prohibited. (See "Competition" below.) In general, bank holding
companies that qualify as financial holding companies under the GLB Act may
engage in an expanding list of non-bank activities. The GLB Act also created a
new regulatory framework by expanding the extent to which non-bank and
financially related activities of bank holding companies, including companies
that become financial holding companies under the GLB Act, are subject to
regulation and oversight by regulators other than the FRB. Many of the changes
in law enacted by the GLB Act became effective March 11, 2000, although some
become effective at later dates.
The FRB also has the power to order a holding company or its subsidiaries
to terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that holding
company.
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 1999, reserves of 3% must be maintained
against aggregate transaction
8
<PAGE>
accounts of $44.3 million or less (subject to adjustment by the Federal Reserve
Board) and an initial reserve of $1.329 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
$44.3 million. Since the amount of the Bank's transaction accounts is below the
$44.3 million, the Bank is currently subject to the 3% reserve requirement for
maintaining reserves. Because required reserves must be maintained in the form
of either vault cash, a noninterest-bearing account at a Federal Reserve Bank,
or a pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets.
Effect of Governmental Action
Operating results of the Corporation and the Bank are affected by the
policies of various regulatory, fiscal and monetary authorities including the
FRB. Major functions of the FRB, in addition to those set out under Supervision
and Regulation above, are to regulate the supply of bank credit and to deal
generally with economic conditions within the United States, including efforts
to combat recessionary economic conditions and to curb inflationary pressures.
The instruments of monetary policy employed by the FRB for these purposes
influence in 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 affected by any pending or future Federal or
state legislative actions.
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.
9
<PAGE>
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, 1999, the capital ratios of core capital to
total average assets of GrandBank, the Corporation's banking subsidiary, equaled
6.4% 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, 1999, the Bank's total capital to risk-weighted assets was
11.0% and the Bank's core capital to risk-weighted assets was 10.1%, 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
10
<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.
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
11
<PAGE>
In order to compete effectively, the Bank relies substantially on local
commercial and consumer activity; personal contacts by its directors, officers,
other employees and shareholders; personalized services; and its reputation in
the communities it serves.
The Bank presently competes within its market area with numerous bank
subsidiaries of larger bank holding companies, including the subsidiaries of
regional bank holding companies with principal operations in states other than
Maryland. It also competes with numerous independent banks, thrift institutions,
credit unions, and various other nonbank financial companies.
The banking business in Maryland and Virginia generally, and the Bank's
primary service areas specifically, are highly competitive with respect to both
loans and deposits. As noted above, the Bank competes with many larger banking
organizations that have offices over a wide geographic area. These larger
institutions have certain inherent advantages, such as the ability to finance
wide ranging advertising campaigns and promotions and to allocate their
investment assets to regions offering the highest yield and demand. They also
offer services such as international 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.
The GLB Act permits the creation of a new type of regulated entity, the
financial holding company, that can offer a broad range of financial products.
These new financial holding companies may engage in banking as well as types of
securities, insurance, and other financial activities that had been prohibited
for bank holding companies
12
<PAGE>
under prior law. The GLB Act also permits banks with or without holding
companies to establish and operate financial subsidiaries that may engage in
most financial activities in which financial holding companies may engage.
Competition may increase as bank holding companies and other large financial
service companies take advantage of the new activities and provide a wider array
of products. By removing historical restrictions on affiliations between banks
and certain type of companies, the GLB Act expands the number of potential
acquirers of existing banks and bank holding companies, and makes it possible
for bank holding companies to acquire new types of existing businesses.
Year 2000
Many computer programs in use prior to the end of 1999 had not been
designed to properly recognize years after 1999. If not corrected, these
programs could have resulted in system and processing failures or create
erroneous results. The year 2000 ("Y2K") issue affected 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 Corporation's computer systems and business processes successfully
handled the date change from December 31, 1999 to January 1, 2000. The Company
is not aware of any significant year 2000 problems encountered internally or
with third parties with which interfaces or receives services.
Based on operations since January 1, 2000, the Corporation does not
expect any significant impact to its ongoing operations as a result of the year
2000 issue. However, the corporation will continue to follow its Y2K plan into
the year 2000.
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 that expires in 1999. The Bank leases two branches; the Germantown
location is operating under a lease which expires in 2005, the River Road,
Bethesda location operates under a lease which expire in 2002. The Bank owns the
building located at 7535 Old Georgetown Road, Bethesda, Maryland. The Bank
acquired this building in February 12, 1999. Facility Holdings, Inc., a wholly
owned, direct subsidiary of the Company, also owns a 6,000 square foot office
building in Alexandria, Virginia that is leased to the subsidiary Bank. The
Company considers these properties suitable and adequate for current operations.
During 1999, the Bank incurred rental expenses for properties totaling $393,046.
Refer to Note 5--"Bank Premises and Equipment" on pages 18 and 19 of the Annual
Report, which is hereby incorporated by reference.
Item 3. LEGAL PROCEEDINGS
Note 14 --"Litigation" on page 29 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, 1999, through solicitation of
proxies or otherwise.
PART II
Item 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
13
<PAGE>
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 and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" on page 7 of the Corporation's definitive proxy
statement for the Corporation's 2000 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 ended December 31,
1999 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, 1999 and 1998
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
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
Date: March 28, 2000 President and Chief Executive Officer
In accordance with the Securities and Exchange Act of 1934, the following
persons on behalf of the registrant and in the capacities and on the dates
indicated have signed this report below:
March 28, 2000
/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, 1999. This report has been signed below by such
attorney-in-fact as of March 28, 2000.
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> <C>
3.1 GrandBanc, Inc. Articles of Incorporation, as amended Exhibit 3.1
to Report on
Form 10-QSB for
the Quarter
Ended September
30, 1999
3.2 GrandBanc, Inc. Bylaws Exhibit 3.2
to Report on
Form 10-QSB for
the Quarter
Ended September
30, 1999
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 June 1999, Exhibit 10.3
by and between GrandBanc, Inc., GrandBank, and to Report on
Steven K. Colliatie Form 10-QSB for
the Quarter
Ended September
30, 1999
** 10.4 Form of Employment Agreement Dated December 1998, Exhibit 10.2
by and between GrandBank, and Domingo Rodriguez to Report on
Form 10-QSB for
the Quarter
Ended September
30, 1999
** 10.5 Form of Employment Agreement Dated December 1998, Exhibit 10.1
by and between GrandBank, and Gary Hobert to Report on
Form 10-QSB for
the Quarter
Ended September
30, 1999
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
24 Power of Attorney
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
27 Financial Data Schedule
* 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.
</TABLE>
<PAGE>
EXHIBIT 13
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Selected Financial Data i
President's Message 1
Management's Discussion and Analysis of Results
of Operations and Financial Condition 2
Independent Auditor's Report 8
Consolidated Financial Statements:
Balance Sheets 9
Statements of Income 10
Statement of Changes in Stockholders' Equity 11
Statement of Cash Flows 12
Notes to Consolidated Financial Statements 14
Report of Management 29
Directors and Officers 30
Locations and General Information 31
Directory of Products and Services 32
- --------------------------------------------------------------------------------
i
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At or for Year Ended December 31
================================================================
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Results:
Net interest income $ 4,046 $ 4,192 $ 3,977 $ 2,743 $ 2,381
Provision for loan losses 269 10 1,209 (35) (30)
Non-interest income 610 638 645 520 442
Non-interest expense 4,823 4,567 4,620 3,085 2,577
Net income (loss) before income taxes (436) 252 (1,207) 213 276
Income Taxes (benefit) (166) 153 (2,057) 5 -
Net income (270) 99 850 208 276
Per Share Data:
Net income $ (0.07) $ 0.02 $ 0.21 $ 0.06 $ 0.09
Book value 1.44 1.90 1.85 1.53 1.15
Financial Condition:
Total assets $ 117,267 $ 109,673 $ 103,872 $ 101,125 $ 40,678
Investment securities 44,967 34,080 14,365 16,478 8,027
Loans - net 58,303 60,374 75,744 72,707 29,064
Deposits 101,256 96,725 88,698 91,283 36,671
Stockholders' equity 5,812 7,687 7,485 6,021 3,740
Selected Ratios:
Return on average assets (0.23)% 0.10% 0.84% 0.34% 0.65%
Return on average equity capital (3.91)% 1.28% 14.74% 4.30% 7.88%
Average equity to average assets 5.84% 7.54% 5.68% 7.99% 8.28%
Non-performing loans to total loans 1.00% 0.87% 3.60% 1.75% 1.56%
Non performing assets to total assets 0.60% 0.83% 4.06% 2.24% 3.98%
</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. 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 23, 2000
To our Shareholders:
Nineteen ninety-nine was a year of joy and celebration for GrandBank as it
celebrated its twentieth anniversary serving communities and customers
throughout the Washington Metropolitan area. Nineteen ninety-nine was also a
year filled with fear and uncertainty due to the potentially negative effect in
systems and services associated with "Y2K." At GrandBank, directors, management,
and employees worked very hard and diligently to ensure that the Bank
implemented its "Y2K" plan in a way that would ensure that all data and
resources were adequately maintained and preserved.
Today, as we reflect on the work done to complete GrandBank's year 2000
program, the Company's computer systems and business processes successfully
handled the date change from December 31, 1999 to January 1, 2000. We are not
aware of any significant year 2000 problems encountered internally or with the
third parties with which we interface or receive data processing services from.
Based on the operations since January 1, 2000, GrandBank does not expect any
significant impact to its ongoing business as result of the year 2000 issue.
During the past year, GrandBank continued to grow its assets and deposit
base. Year-end assets totaled $117.3 million, a 6.9 percent increase over 1998
assets of $109.7. Total deposits increased by 4.8 percent to $101.3 million. Net
loans decreased by 3.4 percent to $58.3 million. Investment Securities and
short-term money market instruments grew to $45.0 million, a 14.2 percent
increase over 1998 totals of $39.4. Bank management continues to emphasize and
promote high credit quality in the loan portfolio.
GrandBank continues to provide its customers with state of the art banking
delivery systems and superb products such as "GrandChecking", the highest rated
checking account in the Washington metropolitan area. The Bank also continues to
promote and deliver the best and most personalized service to our customers. Our
customers have the ability to access the president of the Bank or any other
member of the senior management team in person when they have the need. It is
such accessibility that makes GrandBank different from other financial
institutions in this area. At GrandBank we call it "The Grand Difference."
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,
Steven K. Colliatie
President & Chief Executive Officer
<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 $117.3 million at December 31, 1999 compared to $109.7
million at December 31, 1998. This represented an increase of 6.9%. Average
earning assets for 1999 were $108.3 million, an increase of 15.7% from the 1998
average of $93.6 million.
Total loans decreased by $2.3 million to $59.0 million or 3.8% at
December 31, 1999 compared to $61.3 million at December 31, 1998. Total deposits
increased by 4.7% to $101.3 million. Investment securities and short-term money
market instruments increased to $45.0 million, a 14.7% increase from the $39.2
million as of December 31, 1998.
Capital Adequacy. Stockholders' equity total $5.8 million at December 31,
1999 compared to $7.7 million at December 31, 1998. The change represents an
decrease of $1.9 million or 24.7%. This decrease includes an adjustment of $1.6
million to account for the changes in unrealized losses in the Bank's securities
portfolio, and the net loss for 1999 of $270 thousand.
At December 31, 1999, the corporation's ratio of Tier I capital as a
percentage of risk weighted assets equaled 7.4% which exceeded the minimum
leverage capital ratio of 4%, and the minimum leverage ratio for "well
capitalized" bank holding companies of 6%. At December 31, 1999, the
corporation's Bank subsidiary's Tier I capital to risk-weighted assets ratio was
10.1%, which exceeded the minimum level for capital adequacy ratio of 4% by 6.1%
and the minimum level to be "well capitalized" under prompt corrective action
provisions ratio of 6%. The Bank's total capital to risk weighted assets ratio
at December 31, 1999 was 11.0%, which exceeded the minimum level for capital
adequacy ratio of 8%, and the minimum level to be "well capitalized" under
prompt corrective action provisions ratio of 10% by 1.0%.
Investment Activity. During 1999, the Corporation's investment securities
portfolio increased by $10.9 million, or 32.0%. This increase in the securities
portfolio reflects management's strategy to improve the level of earning assets,
to continue to increase the quality of the loan portfolio and to enhance the
Bank's liquidity. The results of such actions reflect the significant decreases
reported on loans and non-performing assets during the past two years.
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 $45.0 million at December 31, 1999, reflected an increase
of $5.7 million from December 31, 1998, or 14.7%. Funds available through short-
term borrowings, asset maturities and loan payments are considered adequate to
meet all current needs. At December 31, 1999, the Corporation had the ability to
borrow against collateral consisting of securities in its investment portfolio.
Although the Bank's liquidity position remains adequate, potential increases in
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
2
<PAGE>
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, 1999 was 58.4% compared to 63.4%
at December 31, 1998. Loan to total assets ratio at December 31, 1999 was 50.3%
compared to 55.9% at December 31, 1998.
The amounts of interest-earning assets and interest-bearing liabilities
outstanding at December 31, 1999 which are anticipated by the Bank based on
certain assumptions, to re-price or mature in future time periods, are set forth
in the Interest Sensitivity Analysis below.
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
December 31, 1999
(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 $ 9 $ 0 $ 0 $ 0 $ 0
Securities 539 557 1,659 11,459 33,420
Loans Maturing 752 0 1,979 13,727 6,801
Loans Re-pricing 22,016 0 6,047 5,232 340
Credit Card Receivables 2,099 0 0 0 0
------------------------------------------------------------------
Total $25,415 $557 $9,685 $30,418 $40,561
------------------------------------------------------------------
Cumulative Totals $25,415 $25,972 $35,657 $66,075 $106,636
------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES:
- -----------------------------------------------
Certificate of Deposits & CD IRA's 8,288 20,184 19,432 14,391 15
Savings Accounts & Savings IRA's 4,420 0 0 0 0
Interest Checking Accounts 11,531 0 0 0 0
Money Market Deposit Accounts 12,358 0 0 0 0
Sweep Accounts & Repurchase Agreements 7,206 0 0 0 0
Other 2,350 0 0 193 0
------------------------------------------------------------------
Totals $46,153 $20,184 $19,432 $14,584 $15
------------------------------------------------------------------
Cumulative Totals $46,153 $66,337 $85,769 $100,353 $100,368
------------------------------------------------------------------
Gap (20,738) (19,627) (9,747) 15,834 40,546
==================================================================
Cumulative Gap ($20,738) (40,365) (50,112) (34,278) 6,268
==================================================================
Adjustments:
Beta Adjustments
Interest Checking (beta factor .30) 8,072
Savings accounts (beta factor .30) 3,094
Money Market Accounts (beta factor .40) 7,415
------------------------------------------------------------------
Cumulative Adjusted Gap ($2,158) ($21,785) ($31,532) ($15,698) $24,849
==================================================================
As Reported Information:
- -----------------------------------------------
Interest-Sensitive Assets/Interest-
Sensitive Liabilities (Cumulative): 55.07% 39.15% 41.57% 65.84% 106.25%
Cumulative Gap/Total Assets -18.91% -36.80% -45.69% -31.25% 5.72%
Beta Adjusted Information:
- -----------------------------------------------
Interest-Sensitive Assets/Interest-
Sensitive Liabilities (Cumulative): 92.18% 54.38% 53.07% 80.80% 130.38%
Cumulative Gap/Total Assets -1.97% -19.86% -28.75% -14.31% 22.66%
</TABLE>
Note: The table represents the earlier of the maturity or re-pricing dates for
various assets and liabilities at December 31, 1999.
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 Corporation
has assumed that its savings, interest checking, and money market accounts
re-price daily. At December 31, 1999, the Corporation's one-year interest
3
<PAGE>
sensitivity gap (the difference between the amount of interest-earning assets
and interest bearing liabilities anticipated by the Corporation, based on
certain assumptions, to mature or re-price within one year) as a percentage to
total assets was a negative 45.69%. This negative gap position means the
Corporation had $50.1 million more liabilities than assets re-pricing within one
year. This generally indicates that in a period of declining interest rates, the
Corporation's net interest income may improve. Conversely, in a rising interest
rate environment, the Corporation'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 negative gap of
28.75% or $31.5 million.
Allowance for Loan Losses. At December 31, 1999, the allowance for losses
was $690 thousand or 1.17% of loans outstanding compared to $927 thousand or
1.51% of loans outstanding as of December 31, 1998, a decrease of $237 thousand.
Such decrease was attributed primarily to the reduction in the total loans
outstanding. At December 31, 1999, non-accrual loans increased by $57 thousand
or 10.7% to $592 thousand compared to $535 thousand at December 31, 1998. The
allowance for loan losses coverage of non-accrual loans was 116.6% at December
31, 1999 compared to a coverage of 173.3% at December 31, 1998.
Non-Performing Loans and Assets. 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 $1.9 million at December 31, 1999 compared to
$1.0 million at December 31, 1998. The percentage of non-performing assets to
total assets increased to 1.61% at December 31, 1999 from 0.91% at December 31,
1998.
Non-performing loans totaled $1.8 million at December 31, 1999 compared to
$662 thousand at December 31, 1998. Non-performing loans at December 31, 1999
consisted of loans in non-accrual status in the amount of $592 thousand and
loans past-due over 90 days of $1.2 million.
At December 31 1999, OREO, net of valuation reserve, was $114 thousand,
compared to $374 thousand at December 31, 1998, representing a decrease of $260
thousand or 69.5%. 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 a loss before income taxes of $436 thousand
for the year ended December 31, 1999 compared to income $252 thousand for the
same period in 1998. Net loss totaled $270 thousand the year ended December 31,
1999, a decrease of $369 thousand compared to net income in 1998. Earnings per
share were -$0.07 in 1999 compared to $0.02 in 1998. The decrease in earning in
1999 was attributable to higher than anticipated charges to the provision for
loan losses, higher overhead, and lower fee income.
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, 1999 totaled $4.05
million compared to $4.19 million in 1998, reflecting a decrease of $145
thousand or 3.5%. Total interest income totaled $8.6 million in 1999 compared to
$8.2 million in 1998. This increase was the result of $1.9 million improvement
in interest income from securities which helped offset a decreased in interest
and fees on loans of $1.4 million. The decrease in interest and fee revenue from
loans was the result of the continuing decrease in loan volume experienced
during 1999. Interest expense increased by $549 thousand to $4.6 million in
1999, compared to $4.0 million in 1998. The increase in interest expense was
attributable to increases in deposits on other borrowed funds. Deposits and
other borrowed funds increased by $9.5 million or 9.4%; however, the cost of
funding deposit and other borrowings decreased to 4.56% in 1999 from 4.79% in
1998. However, the gains in the cost of funding liabilities were significantly
offset by the loss in loan volume which negatively affected the overall net
interest margin.
The average yield on earning assets for the year ended December 31, 1999,
was 7.95% compared to 8.77% in 1998. The average interest rate paid on interest
bearing deposits in 1999 was 4.50% compared to 4.69% in 1998. The average
interest rate paid on other borrowed funds in 1999 was 5.32% compared to 6.30%
in 1998. Net interest margin is the ratio of net interest income to average
earning assets. For the year ended 1999, net interest margin was 3.74% compared
to 4.48% for the year ended December 31, 1998. The following tables illustrate
the Corporation's analysis of average balances, yields and changes in net
interest income for the fiscal years indicated.
THREE YEAR AVERAGE CONSOLIDATED BALANCE SHEET AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
Average Balance (1) Yield/Cost (2) Income/Expense (2)
============================= ============================ =========================
1999 1998 1997 1999 1998 1997 1999 1998 1997
========= ========= ========= ========== ======== ======== ======== ======= ========
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $58,453 $73,176 $74,822 9.60% 9.62% 9.30% $5,613 $7,038 $6,960
Investment securities 47,718 16,768 17,170 6.07% 5.71% 5.89% 2,896 957 1,011
Other interest-earning assets 2,133 3,662 2,582 4.88% 5.84% 5.27% 104 214 136
--------- --------- --------- ---------- -------- -------- -------- ------- --------
Total interest-earning assets 108,304 93,606 94,574 7.95% 8.77% 8.57% 8,613 8,209 8,107
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-earning assets 9,922 8,980 6,984
--------- --------- ---------
Total assets $118,226 $102,586 $101,558
========= ========= =========
Interest-bearing liabilities:
Savings & interest checking $14,710 $12,856 $12,853 2.16% 2.31% 2.26% $318 $297 $291
Money market accounts 11,291 11,158 13,893 3.29% 3.23% 3.34% 371 360 464
Time deposits 67,115 55,107 54,681 5.22% 5.55% 5.59% 3,502 3,057 3,056
--------- --------- --------- ---------- -------- -------- -------- ------- --------
Total interest-bearing deposits 93,116 79,121 81,427 4.50% 4.69% 4.68% 4,191 3,714 3,811
Other interest-bearing liabilities 7,066 4,828 3,835 5.32% 6.30% 8.32% 376 304 319
--------- --------- --------- ---------- -------- -------- -------- ------- --------
Total interest-bearing
liabilities 100,182 83,949 85,262 4.56% 4.79% 4.84% 4,567 4,018 4,130
Non-interest-bearing liabilities
Demand deposits 10,650 10,221 10,304
Other non-interest-bearing
liabilities 494 677 224
Stockholders' equity 6,900 7,739 5,768
--------- --------- ---------
Total liabilities and stockholders'
equity 118,226 102,586 101,558
========= ========= =========
Interest rate spread
Net interest margin/income 3.39% 3.98% 3.73% $4,046 $4,191 $3,977
3.74% 4.48% 4.21%
</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>
1999 over 1998 1998 Over 1997
================================ ================================
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 ($1,425) ($9) ($1,416) $78 $231 ($153)
Interest and dividends on
investment securities 1,939 173 1,766 (54) (30) (24)
Interest on other interest earning
assets (110) (21) (89) 78 21 57
---------- ---------- ---------- ---------- ---------- ----------
Total 404 143 261 102 222 (120)
========== ========== ========== ========== ========== ==========
Interest expense on deposits and borrowed funds:
Interest on savings and interest
checking deposits 21 (22) 43 6 6 0
Interest on money market deposits 11 7 4 (104) (13) (91)
Interest on time deposits 445 (221) 666 1 (23) 24
Interest on other borrowed funds 72 (69) 141 (16) (98) 83
---------- ---------- ---------- ---------- ---------- ----------
Total 549 (305) 854 (113) (128) 15
========== ========== ========== ========== ========== ==========
Net interest income $ (145) $448 ($593) $215 $350 ($135)
</TABLE>
1. The rate/volume change is allocated between volume change and rate change
using the ratio each of the components bears to the total of their absolute
values.
Provision for Loan Losses. The provisions for loan losses added $269
thousand to the allowance for loan losses in 1999 compared to $10 thousand in
1998. This increase was primarily attributed to higher than anticipated
write-off of credit card receivables. Other than the credit cards, the quality
of the loan portfolio remained strong. Loans other than credit cards reflected a
significant improvement in 1999 as compared to 1998. This portfolio experienced
a net recovery of $7 thousand for 1999 compared to net charge-offs of $394
thousand in 1998. Total charge-offs net of recoveries totaled $506 thousand in
1999 compared to $785 thousand in 1998. Total charge-offs net of recoveries
related to credit card receivables totaled $513 thousand in 1999 compared to
$391 thousand in 1998.
Non-interest Income. Non-interest income for the year ended December 31,
1999 was $610 thousand compared to $638 thousand in 1998, a decrease of $28
thousand or approximately 4.4%. This change was primarily due to decreases in
miscellaneous fee income related to the loan portfolio. Service charges on
deposit accounts for 1999 actually increased by 28.1% to $410 thousand, compared
to $320 thousand in 1998.
Non-interest expense. Total non-interest expense for the year ended
December 31, 1999 of $4.82 million reflected an increase of approximately $256
thousand or 5.6% primarily as a result of increases in personnel costs and other
operating
5
<PAGE>
expenses. The 1999 salaries and benefits expense increased by $293 thousand or
16.3% to $2.09 million compared to $1.80 million in 1998. However, occupancy and
equipment expense decreased by $103 thousand to $918 thousand. The improvement
in occupancy cost resulted from the efficiencies gained as a result of the
purchase of the Old Georgetown Road, Bethesda bank building early in 1999.
Income Taxes. Income tax benefit totaled $166 thousand for 1999 compared to
an income tax expense of $153 thousand in 1998. In 1997, the corporation
recorded a deferred tax benefit of $1.3 million from the 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 189,500 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 High/Ask Low/Bid Quarter Ended High/Ask Low/Bid
1999 Price Price 1998 Price Price
================================================================= ========================================================
<S> <C> <C> <C> <C> <C>
March 31 $ 2.00 $ 2.00 March 31 $ 4.50 $ 3.50
June 30 2.13 2.13 June 30 4.50 3.50
September 30 2.25 1.85 September 30 4.50 3.00
December 31 2.00 2.00 December 31 2.63 2.00
</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, 1999 there were 411 holders of record. There have been no
dividends paid in the past two years.
Year 2000 Compliance
Many computer programs in use prior to the end of 1999 had not been
designed to properly recognize years after 1999. If not corrected, these
programs could have resulted in system and processing failures or create
erroneous results. The year 2000 ("Y2K") issue affected 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 involved modifying or
replacing certain hardware and software maintained by the Corporation as well as
communicating with external service providers to ensure that they were taking
the appropriate action to remedy their Y2K issues. Specific goals of the Y2K
Plan included identifying risks, testing data processing and other systems and
equipment used by the Corporation, 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 reviewed 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.
Prior to December 31, 1999, 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.
Another significant aspect of the Y2K project was the development and
implementation of business continuity plan which included a process to ensure
that GrandBanc, Inc. and its affiliates could continue operations in the event
that information technology systems, non-information technology systems and
business relationships were not Y2K compliant. By December 31, 1998, all
critical areas of the Corporation were actively engaged in the business
continuity program, and a plan was available and
6
<PAGE>
operational by June 30, 1999. The Y2K contingency plan called 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
were not successful. The plan also addressed key issues such as human resources,
additional liquidity levels and customer service.
The Corporation's primary supplier of data processing services also adopted
a Y2K plan and time table to make changes necessary for it to provide services
in the year 2000, and provided written assurances to the Corporation of its
progress. The suppliers and the Corporation successfully tested all applicable
software changes that have been made. The Corporation also monitored the
progress of its other suppliers of data processing services.
Purchases of hardware and software were made in accordance with plan. This
purchases capitalized in accordance with normal policy. Internal personnel and
all other costs related to Y2K project were expensed as incurred. The
Corporation funded its Y2K expenditures through continuing operations as part of
the overall data processing budget. The 1999 budget for this category was
$475,000. Actual data processing expenses incurred amounted to $565 thousand.
Reflecting on the work done to complete the Corporation's year 2000
program, the Corporation's computer systems and business processes successfully
handled the date change from December 31, 1999 to January 1, 2000. The Company
is not aware of any significant year 2000 problems encountered internally or
with third parties with which interfaces or receives services from.
Based on operations since January 1, 2000, the Corporation does not expect
any significant impact to its ongoing operations as a result of the year 2000
issue. However, the corporation will continue to follow its Y2K plan into the
year 2000.
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, 1999 and 1998, and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for each of three
years in the period ended December 31, 1999. 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, 1999 and 1998; and the consolidated results
of its operations and cash flows for each of the three years in the period ended
December 31, 1999, are in conformity with generally accepted accounting
principles.
Baltimore, Maryland
January 28, 2000
8
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,299,075 $ 3,224,516
Federal funds sold 8,769 5,131,629
Investment securities:
Available for sale - at fair value 44,967,011 34,080,428
Loans 58,992,986 61,300,297
Less allowance for loan losses (690,364) (926,749)
-------------- --------------
Loans - net 58,302,622 60,373,548
Bank premises and equipment 3,891,768 1,824,766
Foreclosed real estate 114,223 374,223
Accrued interest receivable 868,486 668,952
Intangible assets 1,017,291 1,178,753
Deferred income taxes 3,100,116 1,923,647
Prepaid expenses and other assets 697,597 892,566
-------------- --------------
TOTAL ASSETS $ 117,266,958 $ 109,673,028
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits $ 10,637,342 $ 10,069,575
Interest-bearing deposits 90,618,858 86,655,753
-------------- --------------
Total deposits 101,256,200 96,725,328
Short-term borrowings 9,556,919 4,564,371
Long-term debt 192,500 200,000
Accrued expenses and other liabilities 448,953 496,004
-------------- --------------
Total liabilities 111,454,572 101,985,703
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock - $.10 par value; 20,000,000 shares authorized; 4,049,590 and
4,049,590 shares outstanding
in 1999 and 1998, respectively 404,959 404,959
Additional paid-in capital 10,962,879 10,962,879
Accumulated deficit (3,918,210) (3,648,090)
Accumulated other comprehensive income (loss) (1,637,242) (32,423)
-------------- --------------
Total stockholders' equity 5,812,386 7,687,325
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 117,266,958 $ 109,673,028
============== ==============
</TABLE>
See accompanying notes.
9
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $5,613,215 $7,037,460 $6,960,287
Interest on investment securities - U.S. Government,
its agencies, and sponsored entities 2,896,016 957,360 903,867
Interest on other investment securities - - 107,362
Interest on federal funds sold 103,968 214,203 136,082
------------ ------------ ------------
Total interest income 8,613,199 8,209,023 8,107,598
------------ ------------ ------------
INTEREST EXPENSE:
Interest on certificates of deposit of $100,000 or more 877,985 811,234 766,752
Interest on other deposits 3,312,749 2,902,410 3,044,216
------------ ------------ ------------
Total interest on deposits 4,190,734 3,713,644 3,810,968
Interest on short-term borrowings 359,008 257,966 162,778
Interest on long-term debt 17,139 45,865 156,569
------------ ------------ ------------
Total interest expense 4,566,881 4,017,475 4,130,315
------------ ------------ ------------
NET INTEREST INCOME 4,046,318 4,191,548 3,977,283
PROVISION FOR LOAN LOSSES 269,330 10,000 1,209,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,776,988 4,181,548 2,768,283
------------ ------------ ------------
NONINTEREST INCOME:
Service charges on deposit accounts 410,255 320,219 315,778
Net realized gain on sales of securities 6,022 5,799 1,274
Other income 193,732 312,093 328,416
------------ ------------ ------------
Total non-interest income 610,009 638,111 645,468
------------ ------------ ------------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,093,337 1,799,906 1,993,005
Occupancy and equipment expense 918,425 1,021,654 987,545
Data processing services 564,575 469,919 487,403
FDIC insurance 71,045 52,901 43,430
Insurance 65,155 77,009 70,817
Legal fees 93,877 108,184 54,068
Foreclosed real estate expenses 423 46,661 81,449
Other expenses 1,016,447 991,245 903,237
------------ ------------ ------------
Total non-interest expense 4,823,284 4,567,479 4,620,954
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (436,287) 252,180 (1,207,203)
INCOME TAX EXPENSE (BENEFIT) (166,167) 152,938 (2,056,713)
------------ ------------ ------------
NET INCOME (LOSS) $ (270,120) $ 99,242 $ 849,510
============ ============ ============
NET INCOME PER COMMON SHARE:
Basic ($.07) $.02 $.21
Diluted ($.07) $.02 $ 21
</TABLE>
See accompanying notes.
10
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other Total Stock-
Common Paid-in Accumulated Comprehensive holders'
Stock Capital (Deficit) (Loss) Income Equity
--------- ----------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 $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
Comprehensive income:
Net loss - - (270,120) - (270,120)
Other comprehensive income net of tax:
Unrealized loss on investment securities - - - (1,604,819) (1,604,819)
------------
Total comprehensive income (loss) (1,874,939)
--------- ----------- ------------- -------------- ------------
BALANCE AT DECEMBER 31, 1999 $404,959 $10,962,879 $(3,918,210) $ (1,637,242) $5,812,386
========= =========== ============= ============== ============
</TABLE>
See accompanying notes.
11
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (270,120) $ 99,242 $ 849,510
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 282,127 254,848 230,175
Accretion and amortization of securities 116,792 59,126 87,719
Amortization of intangibles 161,462 159,133 160,818
Provision for loan losses 269,330 10,000 1,209,000
Net realized gain from sales of assets (6,022) (72,176) (1,274)
Foreclosed real estate - valuation adjustments - - 57,000
Deferred income taxes (166,167) 133,066 (2,056,713)
Net changes in:
Accrued interest receivable (199,534) (66,182) (14,822)
Prepaid expenses and other assets 194,969 169,382 (415,804)
Accrued expenses and other liabilities (47,051) 40,817 204,132
Other - net 75,994 226,109 62,714
------------- ------------ -----------
Net cash provided by operating activities 411,780 1,013,365 402,099
------------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in time deposits with banks - - 3,300,000
Net decreases (increases) in federal funds sold 5,122,860 (2,294,629) (2,213,000)
Purchases of available for sale securities (22,464,716) (34,965,701) (3,188,050)
Proceeds from sales and maturities of
available for sale securities 8,852,242 8,047,947 3,440,981
Purchases of held to maturity securities - - (5,099,766)
Proceeds from sales and maturities of
held-to maturity securities 7,216,490 6,953,222
Net decrease (increase) in loans 1,725,602 15,134,330 (5,121,165)
Proceeds from sale of participation loans - - 1,490,000
Purchases of loans - (1,273,652)
Purchase of property and equipment (2,349,129) (108,041) (378,944)
Proceeds from sale of foreclosed real estate and other assets 260,000 1,126,895 79,650
------------- ------------ -----------
Net cash used by investing activities (8,853,141) (5,842,709) (2,010,724)
------------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 4,530,872 8,027,304 (2,584,812)
Net increase (decrease) in short-term borrowings 4,992,548 (1,133,666) 3,698,037
Proceeds from issuance of common stock - - 500,000
Repayment of long-term borrowings (7,500) (1,300,000) -
------------- ------------ -----------
Net cash provided by financing activities 9,515,920 5,593,638 1,613,225
------------- ------------ -----------
NET INCREASE IN CASH 1,074,559 764,294 4,600
CASH AT BEGINNING OF YEAR 3,224,516 2,460,222 2,455,622
------------- ------------ -----------
CASH AT END OF YEAR $ 4,299,075 $ 3,224,516 $2,460,222
=========== =========== ==========
</TABLE>
12
<PAGE>
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- ------------
Supplemental disclosures:
<S> <C> <C> <C>
Interest payments $ 4,636,875 $4,181,945 $4,089,718
Income tax payments - - -
Non-cash investing and financing activities:
Unrealized gain on investment securities
available for sale $(1,604,819) $ 67,753 $ 79,547
Stock issued in consideration
of professional services $ - $ 35,287 $ 34,998
</TABLE>
See accompanying notes.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of GrandBanc, Inc. (the Corporation),
including its wholly owned subsidiaries, GrandBank (the Bank) and Facility
Holdings, Inc, 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 1999.
Consolidation Policy
--------------------
The consolidated financial statements include the accounts of the
Corporation, the Bank, and Facility Holdings, Inc., 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 accumulated other comprehensive income, 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 accumulated other comprehensive income,
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.
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
14
<PAGE>
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 on 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. FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," which
delayed the effective date of SFAS No. 133 to January 1, 2001 for calendar year
companies such as the Corporation. This statement requires 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
sets forth specific criteria to be used in determining when hedge accounting can
be used. The statement also provides 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 changes in fair value or
cash flow that represent the ineffective portion of the 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.
15
<PAGE>
The Corporation plans to adopt the provisions of this statement, as
amended, for its quarterly and annual reporting beginning January 1, 2001, the
statements effective date. The impact of adopting the provisions of this
statement on the Corporation's financial position, results of operations and
cash flows subsequent to the effective date is not currently estimable and will
depend on the financial position of the Corporation and the nature and purpose
of any derivative instrument in use at that 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 - 1999 Cost Gains Losses Value
---- ------ ------ -----
<S> <C> <C> <C> <C>
Obligations of U.S. government, its
agencies and sponsored entities $26,505,063 $ - $1,665,812 $24,839,251
Mortgage-backed securities 20,709,235 1,463 1,061,038 19,649,660
Other investments 420,100 58,000 - 478,100
------------------ -------------- ---------------- ---------------
Total $47,634,398 $59,463 $2,726,850 $44,967,011
================== =============== =============== ===============
Available for Sale - 1998
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
================== =============== =============== ===============
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1999, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 500,000 $ 488,925
Due after one year through five years 3,599,684 3,483,008
Due after five years through ten years 22,405,379 20,867,318
Due after ten years - -
------------- -------------
26,505,063 24,839,251
Mortgage-backed securities 20,709,235 19,649,660
Other investments 420,100 478,100
------------- -------------
Total $47,634,398 $44,967,011
=========== ===========
</TABLE>
At December 31, securities pledged as collateral for public deposits and
for other purposes as required or permitted by law were as follows:
16
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- --------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale $11,676,829 $11,080,291 $11,368,931 $11,355,272
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Proceeds from sales together with gross gains and losses realized on sales of securities were as follows:
Available for Sale
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Proceeds from sale $2,788,977 $477,500 $550,516
Gross realized gains 6,022 5,799 1,274
Gross realized losses - -
</TABLE>
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio at December 31 was as follows:
1999 1998
------------------- -------------------
Real estate - mortgage $40,988,523 $37,658,527
Real estate - construction 93,500 210,500
Commercial 13,381,261 17,477,183
Consumer 2,430,209 2,889,176
Credit card receivable 2,099,493 3,064,911
------------------- -------------------
Total loans $58,992,986 $61,300,297
=================== ===================
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 1999 and 1998:
1999 1998
--------------------- ----------------------
Balance at January 1 $2,259,000 $2,260,000
Amounts borrowed 754,564 713,000
Amounts paid 1,560,000 (714,000)
--------------------- -----------------------
Balance at December 31 $1,453,564 $2,259,000
===================== =======================
17
<PAGE>
Activity in the allowance for loan losses for the three years ended December 31
is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at January 1 $ 926,749 $1,701,702 $1,016,478
Provision for loan losses 269,330 10,000 1,209,000
Loans charged-off (581,710) (1,299,250) (586,491)
Recoveries 75,995 514,297 62,715
--------------- ---------------- ----------------
Balance at December 31 $690,364 $ 926,749 $1,701,702
=============== ================ ================
</TABLE>
At December 31, 1999, 1998 and 1997, the total recorded investment in impaired
loans amounted to $591,997, $535,292 and $2,272,052, respectively. The average
balances of these loans were $416,948, $797,148 and $326,268 for the years ended
December 1999, 1998 and 1997, respectively. Following is a summary of cash
receipts on impaired loans and how they were applied:
1999 1998 1997
--------------- ---------------- -------------
Cash receipts applied $109,178 $ 87,588 $ -
to principal power =============== ================ =============
The allowance for loan losses related to impaired loans amounted to
approximately $59,000, $2,000 and $639,000 at December 31, 1999, 1998 and 1997,
respectively. If interest had been recognized on impaired loans at the original
interest rate, interest income would have increased approximately $48,000,
$91,000 and $133,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following at December 31:
1999 1998
------------------ ------------------
Land $1,847,288 $360,000
Building 1,638,068 840,000
Leasehold improvements 765,256 769,924
Equipment 895,777 1,135,225
Furniture and fixtures 196,322 192,434
------------------ ------------------
5,342,711 3,297,583
Less accumulated depreciation (1,450,943) (1,472,817)
------------------ ------------------
$3,891,768 $1,824,766
================== ==================
On February 12, 1999, the corporation purchased the banking building
located at 7535 Old Georgetown Road, Bethesda, Maryland. The cost of the
building and land was $2,227,146. The cost was allocated on a prorated basis
using appraised values. The assigned costs were $1,487,288 and 739,858 to land
and building, respectively.
The Bank leases office space under various lease agreements. Rental expense
for 1999, 1998 and 1997 totaled $393,046, $563,128 and $581,044. Future, minimum
annual lease payments for operating leases are as follows:
2000 $ 361,646
2001 370,867
2002 376,596
2003 342,475
2004 346,787
Thereafter 1,366,699
----------
Total $3,165,070
==========
6. INTANGIBLE ASSETS
18
<PAGE>
Following is a summary of intangible assets, net of accumulated
amortization, included in the consolidated balance sheets:
Premium on
Purchased
Goodwill Deposits Total
-------- ------------- -------------
Balance, January 1, 1998 $ 318,076 $1,019,810 $1,337,886
Amortization (27,901) (131,232) (159,133)
--------- ---------- ----------
Balance, December 31, 1998 290,175 888,578 1,178,753
Amortization (30,224) (131,238) (161,462)
--------- ---------- ----------
Balance, December 31, 1999 $ 259,951 $ 757,340 $1,017,291
========= ========== ==========
7. DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
<S> <C> <C>
Non-interest-bearing $10,637,342 $10,069,575
-------------------- --------------------
Interest-bearing:
Savings and interest checking 15,600,802 13,825,599
Money market 12,358,120 10,691,252
Certificates of deposit of $100,000 or more 14,690,520 17,250,883
Other 47,969,416 44,888,019
-------------------- --------------------
Total interest-bearing 90,618,858 86,655,753
-------------------- --------------------
Total $101,256,200 $96,725,328
==================== ====================
</TABLE>
8. SHORT-TERM BORROWINGS
At December 31, 1999, the Corporation is indebted to an unaffiliated bank
in the amount of $1,800,000. The note bears interest at the prime rate (as
defined) plus 1/4% and is adjusted annually. Interest is payable monthly and it
requires quarterly principal payments of $25,000 and the remaining balance due
November 1, 2000. The common stock of the Corporation's wholly owned subsidiary
bank is pledged as collateral for this debt.
Short-term borrowings at December 31, 1999 also consisted of overnight
federal funds borrowed, short-term Federal Home Loan Bank advances, 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 $4,856,188
Weighted average interest rate during the year 4.78%
Amount outstanding at year end $7,206,919
Weighted average interest rate at year end 4.23%
Maximum amount at any month end $7,432,698
9. LONG-TERM DEBT
At December 31, 1999, the Corporation is also indebted to the same
unaffiliated bank in the amount of $192,500. 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.
19
<PAGE>
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>
1999 1998 1997
-------------------------- --------------------------- ---------------------------
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 160,500 $2.88 121,500 $2.40 133,500 $2.31
Granted 45,000 2.48 49,000 4.00 12,500 2.88
Exercised - .00 - - .00
Expired (16,000) 4.00 (10,000) 2.50 (24,500) 2.17
------------- ------------- -------------
Outstanding at end of year 189,500 2.69 160,500 2.88 121,500 2.40
======= ======= =======
Weighted average fair value of
options granted during the year $1.36 $2.22 $1.68
===== ===== =====
</TABLE>
The following summarizes information about options outstanding at
December 31, 1999:
<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 - $4.00 189,500 6.65 years $2.69 179,500 $2.73
</TABLE>
20
<PAGE>
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:
1999 1998 1997
---------- ----------- --------
Dividend yield .00 .00 .00
Expected volatility 30.00% 30.00% 30.00%
Risk-free interest rate 5.93% 5.86% 6.82%
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,
---------------------------------
1999 1998 1997
--------- ---------- -------
Net (loss) income $(320,520) $13,052 $849,510
Net (loss) income per share:
Basic $ (.08) $ - $ .21
Diluted $ (.08) $ - $ .21
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 earnings 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. There is no
adjustment for stock options in the calculation of diluted earnings per share
for 1999 because the effect would have been antidilutable.
The calculation of net earnings per common share follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
------------- ------------ --------
Basic:
<S> <C> <C> <C>
Net income (loss) (applicable to common stock) $ (270,120) $ 99,242 $ 849,510
Average common shares outstanding 4,049,590 4,048,829 4,026,293
Basic net income per share $(.07) $.02 $.21
Diluted:
Net income (applicable to common stock) $ (270,120) $ 99,242 $ 849,510
Average common shares outstanding 4,049,590 4,048,829 4,026,293
Stock option adjustment - 86,190 -
Average common shares outstanding - diluted 4,049,590 4,080,063 4,058,148
Diluted net earnings per share $(.07) $.00 $.21
</TABLE>
21
<PAGE>
12. INCOME TAXES
Federal and state income tax expense (benefit) consists of the
following:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ------------ ---------
<S> <C> <C> <C>
Current federal income tax expense $ - $ - $ -
Deferred federal income tax expense
(benefit) (136,043) 125,217 (1,669,336)
Deferred state income tax expense
(benefit) (30,124) 27,721 (387,377)
---------- ---------- ----------
$(166,167) $152,938 $(2,056,713)
========= ======== ===========
</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>
1999 1998 1997
----------------------- --------------------- ---------------------
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 $(148,338) (34.0)% $ 85,741 34.0% $ (410,449) (34.0)%
State income taxes net of federal
income tax benefit (19,882) (4.6) 13,057 5.2 (60,360) (5.0)
Nondeductible expenses 1,553 0.4 10,230 4.0 11,735 1.0
Elimination of valuation allowance
on deferred tax assets - .0 - .0 (1,597,639) (132.3)
Net operating loss - .0 43,910 17.4 - .0
--------- ----- -------- ---- ----------- ------
$(166,167) (38.2)% $152,938 60.6% $(2,056,713) (170.3)%
========= ===== ======== ==== =========== ======
</TABLE>
At December 31 net deferred tax assets consisted of the following:
1999 1998
---------- ----------
Deferred tax assets:
Net operating loss carryforward $1,764,262 $1,519,223
Allowance for loan losses 181,473 272,765
Foreclosed real estate - valuation allowance 1,932 23,172
Depreciation 29,284 12,572
Intangible assets 62,169 43,346
Loan fees and costs 3,893 32,372
Unrealized holding losses on investment
securities available for sale 1,030,145 20,197
Other 26,958 -
---------- ----------
Total deferred tax assets $3,100,116 $1,923,647
========== ==========
22
<PAGE>
The Company has recorded a deferred tax asset of $3,100,116, which includes
the benefit of $4,519,855 in tax loss carryforwards, which expire in varying
amounts between 2007 and 2014. 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%.
As of December 31, 1999, the capital ratios of the Corporation were as follows:
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its bank affiliate to maintain at least the minimum
amounts of ratios of total Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31, 1999,
that the Corporation and its bank affiliate met all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the primary
regulators for the Corporation's affiliate banking institution categorized the
bank as well capitalized under the prompt corrective action regulations. To be
categorized as well capitalized a bank must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables below.
There are no conditions or events since the last notications that management
believes have changed the affiliate bank's category.
December 31,
-------------------
1999 1998
---------- ----------
Capital:
Tier 1 capital $5,591,337 $5,844,000
Tier 2 capital 690,364 921,000
---------- ----------
Total capital $6,281,401 $6,765,000
========== ==========
Assets:
Risk-weighted assets $ 76,054,676 $ 73,676,000
Average assets (fourth quarter) 118,581,380 104,484,000
Well
Capitalized
Regulatory
Actual Rates Minimums
---------------- --------
Ratios:
Tier 1 capital to risk-weighted assets 7.4% 7.9% 6.0%
Total capital to risk-weighted assets 8.3% 9.2% 10.0%
Tier 1 leverage to average assets 4.7% 5.6% 5.0%
The capital ratios of GrandBank, the Corporation's banking
subsidiary, were as follows:
December 31,
---------------
1999 1998
---------- ----------
Capital:
Tier 1 capital $7,558,793 $7,735,000
Tier 2 capital 690,364 927,000
---------- -----------
Total capital $8,249,157 $8,662,000
========== ==========
Assets:
23
<PAGE>
Risk-weighted assets $ 74,927,000 $ 72,062,000
Average assets (fourth quarter) 118,135,470 102,336,000
Well
Capitalized
Regulatory
Actual Rates Minimums
---------------- --------
Ratios:
Tier 1 capital to risk-weighted assets 10.1% 10.7% 6.0%
Total capital to risk-weighted assets 11.0% 12.0% 10.0%
Tier 1 leverage to average assets 6.4% 7.6% 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, 1999 and 1998, the
Bank was required to maintain reserves of $495,000 and $518,000 respectively.
14. LITIGATION
At December 31, 1999, 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, 1999 and 1998, the Bank's
total unfunded commitments to extend credit were $12,248,000 and $30,556,000,
respectively. These commitments included unused credit card lines of credit of
$6,364,000 and $29,755,000 for 1999 and 1998 respectively. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Bank upon extension of credit is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include loans, property, equipment, commercial properties, and
other business assets as may be deemed appropriate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party and totaled $234,000
and $173,000 at December 31, 1999 and 1998, 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
24
<PAGE>
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>
1999 1998
--------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ----------- ------------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 4,299,075 $ 4,299,075 $ 3,224,516 $3,224,516
Federal funds sold 8,769 8,769 5,131,629 5,131,629
Investment securities available for sale 44,967,011 44,967,011 34,080,428 34,080,428
Loans, net of allowance 58,302,622 58,177,783 60,373,548 61,279,151
Accrued interest receivable 868,486 868,486 668,952 668,952
Financial liabilities:
Deposits 101,256,200 103,395,106 96,725,328 96,765,618
Short-term borrowings 9,556,919 9,556,919 4,564,371 4,564,371
Long-term borrowings 192,500 192,500 200,000 200,000
Accrued interest payable 137,064 137,064 207,058 207,058
Off-balance sheet items:
Commitments to extend credit 5,884,000 5,884,000 801,000 801,000
Unused credit card lines of credit 6,364,000 6,364,000 29,755,000 29,755,000
Standby letters of credit 234,000 234,000 173,000 173,000
</TABLE>
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
. Cash and due from banks, federal funds sold and time deposits: The
carrying amounts reported in the balance sheet for these assets are
considered to approximate their fair values.
. Investment securities: Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments.
. Loans: For variable-rate loans that 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
25
<PAGE>
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,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS:
Cash $ 259,558 $ 2,448
Investments in subsidiary 7,806,310 9,553,597
Intangible assets 163,369 181,675
Deferred income taxes 400,846 320,515
---------- -----------
TOTAL ASSETS $8,630,083 $10,058,235
========== ===========
LIABILITIES:
Notes payable $ 1,992,500 $ 2,100,000
Accrued expenses and other liabilities 825,197 270,910
---------- -----------
Total liabilities 2,817,697 2,370,910
---------- -----------
STOCKHOLDERS' EQUITY:
Common stock 404,959 404,959
Additional paid-in capital 10,962,879 10,962,879
Accumulated deficit (3,918,210) (3,648,090)
Accumulated other comprehensive income (1,637,242) (32,423)
---------- -----------
Total stockholders' equity 5,812,386 7,687,325
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,630,083 $10,058,235
========== ===========
</TABLE>
26
<PAGE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -------
<S> <C> <C> <C>
INCOME:
Rental income $ - $ - $ 120,000
Interest income 971 4,046 11,096
Other income - 30,000 193
------------ --------- --------
Total income 971 34,046 131,289
------------ --------- --------
EXPENSES:
Interest expense 170,945 215,342 306,250
Professional fees - 28,775 62,758
Other expenses 38,011 39,776 75,130
------------ --------- --------
Total expenses 208,956 283,893 444,138
------------ --------- --------
LOSS BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY (207,985) (249,847) (312,849)
INCOME TAX BENEFIT (80,332) (122,952) (197,563)
------------ --------- --------
LOSS BEFORE EQUITY IN UN-
DISTRIBUTED INCOME OF
SUBSIDIARY (127,653) (126,895) (115,286)
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY (142,467) 226,137 964,796
------------ --------- --------
NET INCOME $ (270,120) $ 99,242 $849,510
============ ========= ========
</TABLE>
27
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C>
Net income $ (270,120) $ 99,242 $849,510
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiary 142,467 (416,213) (964,796)
Depreciation and amortization - 26,450 8,621
Deferred income taxes (80,332) (122,952) (197,563)
Net changes in:
Other assets 18,307 1,494 16,926
Accrued expenses and other liabilities 554,288 19,697 (28,512)
---------- ----------- ---------
Net cash provided (used) in operating activities 364,610 (392,282) (263,440)
---------- ----------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of fixed assets - 1,489,784 -
---------- ----------- ---------
Net cash provided (used) by
investing activities - 1,489,784 -
---------- ----------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from borrowings 1,800,000 - -
Principal payments on borrowings (1,907,500) (1,400,000) -
Proceeds from issuance of common stock - - 500,000
---------- ----------- ---------
Net cash (used) provided by
financing activities (107,500) (1,400,000) 500,000
---------- ----------- ---------
NET INCREASE (DECREASE) IN CASH 257,110 (302,498) 236,560
CASH AT BEGINNING OF YEAR 2,448 304,946 68,386
---------- ----------- ---------
CASH AT END OF YEAR $ 259,558 $ 2,448 $304,946
========== =========== ========
Supplemental disclosures:
Interest payments $170,398 $200,918 $331,868
======== ======== ========
</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 subsidiaries at December 31, 1999, December
31, 1998 and the three year period ending at December 31, 1999. The financial
data included amounts that are based on the best estimates and judgments of
Management.
The Corporation and its subsidiaries 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.
Board of Directors of Officers of GrandBanc, Inc.
GrandBanc, Inc. and GrandBank
Steven K. Colliatie
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Abbey J. Butler President and CEO
Co-Chairman and Co-Chief Executive Officer
Avatex Corporation Domingo Rodriguez
Executive Vice President
Steven K. Colliatie Secretary
President and CEO
GrandBanc, Inc. and GrandBank
Melvyn J. Estrin, Chairman
Co-Chairman and Co-Chief Executive Officer
Avatex Corporation
Chairman of the Board
GrandBanc, Inc. and GrandBank
Avis Y. Pointer
President, The Quantum Leap, Inc.
Joan H. Schonholtz
Retired
Officers of GrandBank
Steven K. Colliatie Andrew Bass
President and Chief Executive Office Assistant Vice President
Branch Manager
Domingo Rodriguez
Executive Vice President Thomas De Young
Chief Financial Officer Assistant Vice President
Secretary Deposit Operations Manager
Gary L. Hobert Carol Epstein
Executive Vice President Assistant Vice President
Senior Lender Information Services
John Shroads Kenneth King
Senior Vice President Assistant Vice President
Credit Administration Branch Manager
Joy I. Kramer Liz Lomicka
Vice President Assistant Vice President
Branch Administration Branch Manager
Richard K. Derrick Mohammed Rahaman
Vice President Assistant Vice President
Lending Lending
Frederick Schultz Vicky Schofield
Vice President Assistant Vice President
Lending Branch Manager
Donna Wilson Laureen Skapik
Vice President Assistant Vice President
Lending Branch Manager
Jim Zillian
Assistant Vice President
Credit Analyst
Corporate Headquarters Shareholder Information
And Main Banking Office
There is a limited trading market for the common Stock.
1800 Rockville Pike Shareholders, analysts and others seeking financial
Rockville, Maryland 20852 information are requested to contact the Chief Financial
Officer.
Mailing Address:
P.O. Box 2022 Transfer Agent
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Rockville, Maryland 20852 Registrar and Transfer Company
Services: ATM Vestibule, Drive Through, 10 Commerce Drive
Night Depository, Safe Deposit Boxes Cranford, New Jersey 07016
Independent Auditors
Branch Offices:
Stegman & Company
Bethesda, Maryland Suite 200
405 East Joppa Road
5272 River Road Baltimore, Maryland 21286
Bethesda, Maryland 20816
Counsel
Services: ATM, Walk-Up Window,
Night Depository, Safe Deposit Boxes Kennedy, Baris & Lundy, L.L.P.
Suite P-15
Germantown, Maryland 4701 Sangamore Road
Bethesda, Maryland 20816
19701 Frederick Avenue
Germantown, Maryland 20876 Annual Meeting
Services: ATM, Drive Through The 2000 Annual Meeting of Shareholders will be held
On May 18, 2000, at 10:00 A.M. at the Corporate
Alexandria, Virginia Headquarters, 1800 Rockville Pike, Rockville, Maryland
301 S. Washington Street 10-K
Alexandria, Virginia 22314
A copy of the Company's Form 10-K may be obtained
Services: Night Depository Free-of-charge by writing the Secretary, GrandBanc,
Inc. at P.O. Box 2022, Rockville, Maryland 20852
</TABLE>
31
<PAGE>
Directory of Products and Services
As a full service community bank, GrandBank offers a variety
of consumer and commercial deposit and loan products.
Deposit Products
Checking/Interest Checking
Savings
Money Market
IRA's
Certificate of Deposit
Escrow Manager
Cash Management Services
Loan Products
Personal
Auto
Home Improvement
Home Equity
Overdraft Protection
Home Mortgage
Commercial/Business Purpose
Electronic Banking Services
ATM - 24 Hour Automated Teller Machines
Member of Honor Network
PC Banking for Businesses and Individuals
Account Information, Bill Payer and Transaction Requests by Telephone
Wire Transfers, Pre-authorized Transfers
Debit Cards
32
<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, 1999, of our
report dated February 1, 2000, relating to the consolidated financial statements
of GrandBanc, Inc. and Subsidiary.
/s/ Stegman & Company
STEGMAN & COMPANY
Baltimore, Maryland
March 24, 2000
<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,
1999, 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 24, 2000
Melvyn J. Estrin
Chairman of the Board, Director
/s/ Avis Y. Pointer
- ----------------------------------
March 24, 2000
Avis Y. Pointer
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,299
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,634
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 44,967
<LOANS> 58,993
<ALLOWANCE> 690
<TOTAL-ASSETS> 117,267
<DEPOSITS> 101,256
<SHORT-TERM> 9,557
<LIABILITIES-OTHER> 449
<LONG-TERM> 192
0
0
<COMMON> 405
<OTHER-SE> 5,407
<TOTAL-LIABILITIES-AND-EQUITY> 117,267
<INTEREST-LOAN> 5,613
<INTEREST-INVEST> 2,896
<INTEREST-OTHER> 104
<INTEREST-TOTAL> 8,613
<INTEREST-DEPOSIT> 4,191
<INTEREST-EXPENSE> 4,567
<INTEREST-INCOME-NET> 4,046
<LOAN-LOSSES> 269
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,823
<INCOME-PRETAX> (436)
<INCOME-PRE-EXTRAORDINARY> (436)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (270)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
<YIELD-ACTUAL> 3.74
<LOANS-NON> 592
<LOANS-PAST> 2,609
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 281
<ALLOWANCE-OPEN> 927
<CHARGE-OFFS> 582
<RECOVERIES> 76
<ALLOWANCE-CLOSE> 690
<ALLOWANCE-DOMESTIC> 690
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
