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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission file number 0-15645
FCNB Corp
(Exact name of registrant as specified in its charter)
MARYLAND 52-1479635
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7200 FCNB Court, Frederick, Maryland 21703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(301) 662-2191 Securities
registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period of time 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock (based on $19.75 per share)
held by nonaffiliates on February 2, 1996 was
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approximately $95,078,515.
As of March 1, 1996, there were 5,390,779 shares of Common Stock, par
value $1.00 per share, of FCNB Corp issued and outstanding.
Documents Incorporated by Reference
Portions of the 1995 Annual Report to Stockholders
for the year ended December 31, 1995-PARTS I, II, & IV
PART I
Item 1. Business.
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General
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FCNB Corp (the "Registrant" or "Company") is a two bank holding company
organized under the laws of the State of Maryland and serves as the holding
company for FCNB Bank ("FCNB") and Elkridge Bank ("Elkridge") (collectively, the
"Banks").
On December 22, 1995, the Company entered into an Agreement and Plan of
Merger to acquire all of the common stock of Harbor Investment Corporation
("Harbor"), the parent company of Odenton Federal Savings and Loan Association
("Odenton"), Odenton, Maryland. At December 31, 1995, Harbor had total assets
and stockholders' equity of approximately $35 million and $4 million,
respectively. The aggregate consideration paid to the stockholders of Harbor
will be approximately $6.72 million. The proposed acquisition is subject to
regulatory and shareholder approval, and is anticipated to be completed in the
second quarter of 1996.
On January 26, 1996, the Company consummated its merger of Laurel
Bancorp, Inc. ("Laurel"), the holding company for Laurel Federal Savings Bank,
Laurel, Maryland ("Laurel FSB"), with and into the Company. Pursuant to the
terms of this merger, Laurel FSB was merged with and into the Company's
wholly-owned subsidiary, Elkridge, and the branch of Laurel FSB in Monrovia,
Maryland was transferred to FCNB. A total of approximately 1,321,000 shares of
the Company's common stock was issued in the transaction, which will be
accounted for as a pooling of interests. Laurel had approximately $108 million
in assets at the time of the merger.
In connection with this merger, certain costs incurred to effect the
combination, accounted for as a pooling of interests, are expenses of the
combined enterprise and, accordingly, are charged to expense and deducted in
determining the results of operations of the combined entity. The specific
one-time costs associated with this merger that will be charged to the combined
entity's results of operations in the first quarter of 1996
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following consummation of the merger include: (1) income tax expense of
approximately $1.60 million associated with accumulated bad debt reserves for
income tax purposes in excess of those maintained for financial reporting
purposes; (2) salaries and employee benefits associated with change-in-control
payments to certain executive officers of Laurel totalling approximately $1.20
million; and (3) other operating expenses of approximately $300,000 associated
with a consulting fee payable to Laurel's financial advisor.
FCNB
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FCNB, a state-chartered commercial bank under the laws of the State of
Maryland was converted from a national bank in June 1993, and was originally
chartered in 1818. FCNB is engaged in a general commercial and retail banking
business serving individuals and businesses in Frederick, Carroll and Montgomery
counties in Maryland. FCNB operates seven banking offices located in Frederick,
Maryland and one office each in Brunswick, Damascus, Eldersburg, Middletown,
Mount Airy, Walkersville, and Westminster, Maryland. Subsequent to December 31,
1995, FCNB acquired the branch office of Laurel FSB located in Monrovia,
Maryland and opened its new headquarter's branch in Frederick, Maryland. At
December 31, 1995, FCNB had total loans, net of unearned income, of
approximately $302.89 million, total assets of approximately $458.20 million,
total deposits of approximately $371.49 million, and a legal lending limit of
approximately $5.97 million to any one borrower. The deposits of FCNB are
insured by the FDIC.
FCNB's primary market area consists of the City of Frederick (with a
population of approximately 35,000 people) and the surrounding area. Frederick
is the county seat of Frederick County, Maryland and is located approximately 49
miles west of Baltimore, Maryland and 46 miles northwest of Washington, D.C.
Elkridge
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Elkridge, a state-chartered commercial bank under the laws of the State
of Maryland was converted from a national bank in March 1995, and was originally
chartered in 1961. Elkridge is engaged in a general commercial and retail
banking business serving individuals and businesses in Howard, Prince George's
and Anne Arundel counties in Maryland. Elkridge operates one banking office each
in Columbia, Elkridge and Glen Burnie, Maryland. Subsequent to December 31,
1995, Elkridge acquired Laurel FSB, which was merged with and into Elkridge.
With this transaction, Elkridge now has an office in Laurel, Maryland. At
December 31, 1995, Elkridge had total loans, net of unearned income, of
approximately $52.02 million, total assets of approximately $86.93 million,
total deposits of approximately $79.14 million, and a legal lending limit of
approximately $1.08 million to any one borrower. The deposits of Elkridge are
insured by the FDIC.
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Elkridge's primary market area consists of the territory immediately
south of the City of Baltimore, Maryland.
Commercial Banking and Related Services. The Banks are engaged in the financing
of commerce and industry, providing credit facilities and related services
principally for businesses located in their market areas. The Banks offer all
forms of commercial lending, including lines of credit, revolving credits, term
loans, accounts receivable financing, real estate loans, and other forms of
secured financing.
Personal Banking Services. A wide range of personal banking services are
provided to individuals at each of the Banks' offices. Among the services
provided at most locations are checking accounts, savings accounts, various
savings programs, installment and other personal loans, credit card lines
("VISA" and "MASTERCARD"), home improvement loans, personal lines of credit,
automobile and other consumer financing, safe deposit services, and mortgage
loans. The Banks also have automatic teller machines and are members of the MOST
and CIRRUS networks.
Competition. The Banks face strong competition in all areas of their operations.
This competition comes from entities principally operating in each of the Banks'
marketing areas and includes branches of some of the largest banks in Maryland.
Their most direct competition for deposits historically has come from other
commercial banks, savings banks, savings and loan associations and credit unions
operating in Frederick, Carroll, Howard, Prince George's, Anne Arundel and
Montgomery counties, Maryland. The Banks also compete for deposits and
investment dollars with money market mutual funds and public debt and equity
markets. The Banks compete with banking entities, mortgage banking companies,
and other institutional lenders for loans. The competition for loans varies from
time to time depending on certain factors. These factors include, among others,
the general availability of lendable funds and credit, general and local
economic conditions, current interest rate levels, and conditions in the
mortgage market. As a result of recently enacted Federal and State legislation
allowing interstate banking, branching and mergers, additional competitors not
currently in the Banks' markets may enter into the Banks' markets.
Supervision and Regulation
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Holding Company Regulation. The Company is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended (the BHCA"), and
as such it is subject to regulation, supervision and examination by, and
reporting to, the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). For capital adequacy purposes, the Federal Reserve requires bank
holding companies to maintain two separate capital ratios, both of
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which compare certain capital account items to total assets and off-balance
sheet instruments, as adjusted to reflect their relative credit risks ("Total
Risk Weighted Assets"). These are called "Risk-Based Capital Ratios." The first
of these is the "Total Risk Based Capital Ratio," which compares the total
capital account, which may include a limited amount of general reserves for loan
losses to Total Risk Weighted Assets. The minimum level for this ratio is 8.0%.
The second of these is the "Tier 1 Risk Based Capital Ratio," where "Tier 1
Capital" (which must constitute at least one-half of total capital) defined as
common equity, retained earnings, non-cumulative perpetual preferred stock and a
limited amount of cumulative perpetual preferred stock, less goodwill, is
compared to Total Risk Weighted Assets. The minimum level for this ratio is
4.0%.
The Federal Reserve also has established an additional capital adequacy
guideline referred to as the "Leverage Capital Ratio," which measures the ratio
of Tier 1 Capital to total assets, less goodwill. Although the most highly-rated
bank holding companies are required to maintain a minimum Leverage Capital Ratio
of 3.0%, most bank holding companies, are required to maintain Leverage Capital
Ratios of 4.0% to 5.0%. The actual required ratio is based on the Federal
Reserve's assessment of the individual bank holding company's asset quality,
earnings performance, interest-rate risk and liquidity.
BHCA - Activities and Other Limitations. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve has determined to be so closely related
to banking or to managing or controlling banks as to be a proper incident
thereto. In making such determinations, the Federal Reserve is required to weigh
the expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
on interest or unsound banking practices.
The Federal Reserve has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include: making or servicing loans such as would be made by a
mortgage company, consumer finance company, credit card company, or factoring
company; performing trust company
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functions; performing certain data processing operations; providing limited
securities brokerage services; acting as an investment or financial advisor;
ownership or operation of a savings association; acting as an insurance agent
for certain types of credit-related insurance; leasing personal property on a
full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve also has determined that certain other activities, including
real estate brokerage and syndication, land development, property management and
underwriting life insurance not related to credit transactions, are not closely
related to banking and a proper incident thereto.
Commitments to Subsidiary Banks. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Banks and to
commit resources to support the Banks in circumstances when it might not do so
absent such policy.
Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group from acquiring "control" of a bank
holding company unless the Federal Reserve has been given 60 days' prior written
notice of such proposed acquisition and within that time period the Federal
Reserve has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to expiration of the disapproval
period if the Federal Reserve issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act would, under the circumstances set forth in the presumption,
constitute the acquisition of control.
In addition, with limited exceptions, any "company" would be required
to obtain the approval of the Federal Reserve under the BHCA before acquiring
25% (5% in the case of an acquiror that is a bank holding company) or more of
the outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquiror registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.
Bank Regulation. The Banks are each commercial banks chartered by the
State of Maryland which are members of the Federal Reserve System, and as such,
is subject to extensive regulation and examination by the Office of the Maryland
State Bank Commissioner (the "Banking Commissioner"), the FDIC, which insures
their deposits to the maximum extent permitted by law, and by the Federal
Reserve. The federal laws and regulations which are applicable to
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banks regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of
deposited funds and the nature and amount of collateral for certain loans. The
laws and regulations governing the Banks generally have been promulgated to
protect depositors and not for the purpose of protecting shareholders.
FDIC Insurance Premiums. Until December 31, 1992, the Banks paid
deposit insurance premiums to the FDIC based on a single, uniform assessment
rate established by the FDIC for all institutions which are members of the Bank
Insurance Fund of the FDIC (the "BIF") of 0.23% of insured deposits per annum.
The Federal Deposit Insurance Act (the "FDIA"), as amended by the FDIC, however,
requires the FDIC to establish a risk-based assessment system. The FDIC has
issued a final regulation which was fully implemented on January 1, 1994. Under
the regulation, institutions are assigned to one of three capital groups based
solely on the level of the institution's capital - "well capitalized,"
"adequately capitalized" and "under capitalized" - which would be defined in the
same manner as the regulations establishing the prompt corrective action system
under Section 38 of the FDIA, as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates ranging from 0.23%
for well capitalized, healthy institutions to 0.31% for undercapitalized
institutions with substantial supervisory concerns. The lower end of that rate
schedule was reduced in the second half of 1995 for deposits insured by the BIF
from 0.23% to 0.04% of insured deposits, and was subsequently further reduced to
the statutory minimum of $1,000.
As a result of acquisition activity in which the Banks assumed deposit
liabilities of institutions which were members of the Savings Association
Insurance Fund of the FDIC (the "SAIF"), and with respect to which the Bank's
did not pay "exit and entrance fees" amounting to approximately 1.79% of the
insured deposits assumed, the Banks had approximately $44.0 million of deposits
which are deemed to be insured by the SAIF. As the SAIF has not reached the
level of reserves mandated by statute, deposit insurance premiums on SAIF
insured deposits have not been reduced from the 0.23 % to 0.31% range. As a
result of the acquisition of Laurel and the pending acquisition of Harbor, the
Banks will assume an aggregate of approximately $110.0 million of additional
deposits insured by the SAIF. There are currently being discussed certain
proposals relating to the reform or restructuring of the deposit insurance fund
system. Among the proposals to recapitalize SAIF and allow the equalization, at
the lower BIF levels, of premiums between, or the merger of, BIF and SAIF, is
one which would impose a one-time assessment of up to .85% to .90% of SAIF
insured deposits (including any deemed growth in such deposits) on all
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institutions holding SAIF insured deposits. There can be no assurance as to the
enactment of any of the current proposals, the form of any such proposals, the
amount, tax treatment or timing of any one-time assessment, or the means used to
calculate the deposit base subject to any such assessment.
Capital Adequacy Guidelines. The Federal Reserve has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising banks and bank holding companies and in analyzing
applications to the Federal Reserve under the BHCA. Risk-based capital
requirements, which became effective on December 31, 1990, establish a new
method for determining the adequacy of capital, based on the risk inherent in
various classes of assets and off-balance sheet items.
The Banks are required to meet a minimum ratio of total qualifying
capital (the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to
risk weighted assets of 8%. At least half of this amount (4%) should be in the
form of core capital. These requirements are substantially the same as those
relating to the Company and which are discussed above.
Tier 1 Capital generally consists of the sum of common stockholders'
equity and perpetual preferred stock (subject in the case of the latter to
limitations on the kind and amount of such stock which may be included as Tier 1
Capital), less goodwill. Tier 2 Capital generally consists of the following:
hybrid capital instruments; perpetual preferred stock which is not eligible to
be included as Tier 1 Capital; term subordinated debt and intermediate-term
preferred stock; and, subject to limitations, general allowances for loan
losses. Assets are adjusted under the risk-based guidelines to take into account
different risk characteristics, with the categories ranging from 0% (requiring
no additional capital) for assets such as cash, to 100% for the bulk of assets
which are typically held by a bank holding company, including certain
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Residential first mortgage loans on one to four family
residential real estate and certain seasoned multifamily residential real estate
loans, which are not (90 days or more) past-due or non-performing and which have
been made in accordance with prudent underwriting standards are assigned a 50%
level in the risk- weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans. Off-
balance sheet items also are adjusted to take into account certain risk
characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
has established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total
assets, less goodwill) requirement for the most highly-rated banks, with an
additional cushion of at least 100 to 200 basis points for all other banks,
which
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effectively increases the minimum Leverage Capital Ratio for such other banks to
4.0% - 5.0% or more. The highest-rated banks are those that are determined not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, those which are considered a strong
banking organization. A bank having less than the minimum Leverage Capital Ratio
requirement shall, within 60 days of the date as of which it fails to comply
with such requirement, submit a reasonable plan describing the means and timing
by which the bank shall achieve its minimum Leverage Capital Ratio requirement.
A bank which fails to file such a plan is deemed to be operating in an unsafe
and unsound manner, and could subject the bank to a cease-and-desist order. An
insured depository institution with a Leverage Capital Ratio that is less than
2.0% is deemed to be operating in an unsafe or unsound condition pursuant to
Section 8(a) of the FDIA and is subject to potential termination of deposit
insurance. However, such an institution will not be subject to an enforcement
proceeding thereunder, solely on account of its capital ratios if it has entered
into and is in compliance with a written agreement to increase its Leverage
Capital Ratio to such level as its regulators deem appropriate and to take such
other action as may be necessary for the institution to be operated in a safe
and sound manner.
At December 31, 1995, the Company and the Banks were in compliance with
all minimum federal regulatory capital requirements which are generally
applicable to banks.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
FDICIA, each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies have promulgated substantially similar regulations to implement the
system of prompt corrective action established by Section 38 of the FDIA, which
became effective on December 19, 1992. Under the regulations, a bank shall be
deemed to be: (i) "well capitalized" if it has a Total Risk Based Capital Ratio
of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage
Capital Ratio of 5.0% or more and is not subject to any written capital order or
directive; (ii) "adequately capitalized" if it has a Total Risk Based Capital
Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a
Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk
Based Capital Ratio that is less than 4.0% or a Leverage Capital Ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage
Capital Ratio that is less than 3.0%; and (v) "critically
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undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guarantee shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guarantee, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership. The general
rule is that the FDIC will be appointed as receiver within 90 days after a bank
becomes critically undercapitalized unless extremely good cause is shown and an
extension is agreed to by the federal regulators.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA (i) restricting payment of
capital distributions and management fees, (ii) requiring that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital, (iii) requiring submission of a capital restoration
plan, (iv) restricting the growth of the institution's assets and
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(v) requiring prior approval of certain expansion proposals. The appropriate
federal banking agency for an undercapitalized institution also may take any
number of discretionary supervisory actions if the agency determines that any of
these actions is necessary to resolve the problems of the institution at the
least possible long-term cost to the deposit insurance fund, subject in certain
cases to specified procedures. These discretionary supervisory actions include:
requiring the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, as amended by the
FDICIA, a conservator or receiver may be appointed for an institution where: (i)
an institution's obligations exceed its assets; (ii) there is substantial
dissipation of the institution's assets or earnings as a result of any violation
of law or any unsafe or unsound practice; (iii) the institution is in an unsafe
or unsound condition; (iv) there is a wilful violation of a cease and desist
order; (v) the institution is unable to pay its obligations in the ordinary
course of business; (vi) losses or threatened losses deplete all or
substantially all of an institution's capital, and there is no reasonable
prospect of becoming "adequately capitalized" without assistance; (vii) there is
any violation of law or unsafe or unsound practice or condition that is likely
to cause insolvency or substantial dissipation of assets or earnings, weaken the
institution's condition, or otherwise seriously prejudice the interests of
depositors or the insurance fund; (viii) an institution ceases to be insured;
(ix) the institution is undercapitalized and has no reasonable prospect that it
will become adequately capitalized, fails to become adequately capitalized when
required to do so, or fails to submit or materially implement a capital
restoration plan; or (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital.
At December 31, 1995 each of the Banks would be deemed to be a "well
capitalized" institution for purposes of Section 38 of the FDIA.
Regulatory Enforcement Authority. The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA") included substantial
enhancement to the enforcement powers available to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to
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issue cease-and-desist or removal orders and to initiate injunctive actions
against banking organizations and institution-affiliated parties, as defined in
FIRREA. In general, these enforcement actions may be initiated for violations of
laws and regulations and unsafe or unsound practices. Other actions or inactions
may provide the basis for enforcement action, including misleading or untimely
reports filed with regulatory authorities. FIRREA significantly increased the
amount of and grounds for civil money penalties and requires, except under
certain circumstances, public disclosure of final enforcement actions by the
federal banking agencies.
The foregoing references to laws and regulations which are applicable
to the Company and the Banks are brief summaries thereof which do not purport to
be complete and which are qualified in their entirety by reference to such laws
and regulations.
FCNB Investment Holdings, Inc.
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FCNB Investment Holdings, Inc., a Delaware corporation, is a
wholly-owned subsidiary of FCNB that was organized on April 21, 1994. This
subsidiary was established to manage a portion of the investment portfolio of
FCNB.
FCNB Realty, Inc.
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FCNB Realty, Inc., a Maryland corporation, is a wholly-owned subsidiary
of FCNB Corp that was organized on October 20, 1994. This subsidiary was
established to hold real property for affiliated companies.
First Choice Insurance Agency, Inc.
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First Choice Insurance Agency, Inc., a Maryland corporation, is a
wholly-owned subsidiary of FCNB that was organized on June 13, 1994. This
subsidiary was established to enable FCNB to sell insurance products.
Monocacy Management Company
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Monocacy Management Company, a Maryland corporation, is a wholly-owned
subsidiary of FCNB that was organized on January 6, 1992. This subsidiary was
established to purchase troubled assets from FCNB.
Laurel Service Corporation
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Laurel Service Corporation, a Maryland corporation, is a wholly-owned
subsidiary of Elkridge that was acquired in the merger transaction on January
26, 1996. This subsidiary purchases troubled assets from Elkridge.
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Governmental Monetary Policies and Economic Controls
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The Banks are affected by monetary policies of regulatory authorities,
including the Federal Reserve Board, which regulates the national money supply
in order to mitigate recessionary and inflationary pressures. Among the
techniques available to the Federal Reserve Board are engaging in open market
transactions in United States Government securities, changing the discount rate
on bank borrowings and changing reserve requirements against bank deposits.
These techniques are used in varying combinations to influence the overall
growth of bank loans, investments and deposits. Their use may also affect
interest rates charged on loans or paid on deposits. The effect of governmental
policies on the earnings of the Banks or the Company for any future periods
cannot be predicted.
Employees
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At December 31, 1995, the Company had approximately 305 employees of
which 6 were executive officers, 72 were other officers, 191 were full-time
employees and 36 were part-time employees.
Item 2. Properties.
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The Company owns the property on which the principal office of the
Company and the main office of FCNB are located at 7200 FCNB Court, Frederick,
Maryland. FCNB also owns the properties which house the Square Corner Branch at
1 North Market Street, the Rosemont Branch at 1602 Rosemont Avenue, the East
Frederick Branch at 1303 East Patrick Street, the Route 85 Branch at 5602
Buckeystown Pike, the Walkersville Branch at 100 Commerce Drive, Walkersville,
Maryland, the Eldersburg Branch at 6229 Sykesville Road, Eldersburg, Maryland,
and the Middletown Branch at 819 East Main Street, Middletown, Maryland. The
land upon which the Middletown Branch office is located is leased pursuant to a
twenty-year lease, with an expiration date of November 2009 and contains
provisions to extend the initial lease term for three ten-year periods. The
lease also contains an option to purchase the land at fair market value at the
end of the initial lease term or at the end of any extension term.
FCNB leases the following properties: the Antietam Branch at 1595
Opossumtown Pike, the 40 West Branch at 1100 West Patrick Street, the FSK Mall
Branch at 5500 Buckeystown Pike, the Brunswick Branch at 94 Souder Road,
Brunswick, Maryland, the Damascus Branch at 9815 Main Street, Damascus,
Maryland, the Green Valley Branch at 11801 Fingerboard Road, Monrovia, Maryland,
the Mount Airy Branch at 400 Ridgeville Boulevard, Mount Airy, Maryland, and the
Englar Road Branch at Route 140 and Englar Road, Westminster, Maryland. FCNB
normally leases branch facilities with a term of five (5) to ten (10) years that
include renewal options. A facility is leased
-13-
<PAGE>
at 15 East Main Street, Westminster, Maryland, for a loan production office.
FCNB also owns a 12,000 square foot building that is adjacent to its
East Frederick Branch office, which was previously used as FCNB's operations
center and was recently vacated upon completion of the new headquarters
facility.
Elkridge owns its Elkridge Branch at 7290 Montgomery Road, Elkridge
Maryland. Elkridge leases the following properties: the Columbia Branch at 5585
Twin Knolls Road, Columbia, Maryland, the Glen Burnie Branch at 7381
Baltimore-Annapolis Blvd., Glen Burnie, Maryland and its Administrative Office
at 6810 Deerpath Road, Elkridge, Maryland.
As a result of the merger transaction with Laurel, Elkridge owns the
property that houses the Laurel Branch at 380 Main Street and leases office
space at 8101 Sandy Springs Road, both in Laurel, Maryland.
Elkridge normally leases branch facilities with a term of five (5) to
ten (10) years that include renewal options.
Item 3. Legal Proceedings.
-----------------
The Company and the Banks are subject to various legal proceedings
which are incidental to their business. In the opinion of management, the
liabilities (if any) resulting from such legal proceedings will not have a
material effect on the consolidated financial statements or consolidated ratios
of the Company and the Banks.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
There were no matters that were submitted to a vote of the security
holders during the fourth quarter of 1995.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
----------------------------------------------------------------------
The information required by this item is contained on page 44 of the
Company's 1995 Annual Report to Stockholders. Such information is incorporated
herein by reference to the Annual Report.
Dividend Limitations and Certain Other Restrictions
- ---------------------------------------------------
The payment of dividends by the Company depends largely upon the
ability of the Banks to declare and pay dividends to the Company because the
principal source of the Company's revenue is dividends paid by the Banks. Future
dividends will depend
-14-
<PAGE>
primarily upon the Banks' earnings, financial condition, and need for funds, as
well as governmental policies and regulations applicable to the Company and the
Banks.
Regulations of the Federal Reserve Board and the Office of the Banking
Commissioner place a limitation on the amount of dividends the Banks may pay to
the Company without prior approval. Prior approval of the Federal Reserve Board
and the Office of the Banking Commissioner is required to pay dividends which
exceed the Banks' net profits for the current year plus its retained net profits
for the preceding two calendar years, less required transfers to surplus. Net
profits in 1996, plus $885,000 (representing the Banks' net profits from 1995
and 1994, less all required transfers to permanent capital) will be available
for the payment of dividends in 1996 without prior regulatory approval. The
Federal Reserve Board also has authority to prohibit a state chartered member
bank from paying dividends if the Board of Governors of the Federal Reserve
deems such payment to be an unsafe or unsound practice.
The Federal Reserve has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that the Company may pay in the future. In 1985, the Federal Reserve issued a
policy statement on the payment of cash dividends by bank holding companies. In
the statement, the Federal Reserve expressed its view that a holding company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income or which could only be funded in ways that weakened the holding company's
financial health, such as by borrowing.
As depository institutions, deposits of which are insured by The
Federal Deposit Insurance Corporation ("FDIC"), the Banks may not pay dividends
or distribute any of their capital assets while they remain in default on any
assessment due the FDIC. The Banks currently are not in default under any of
their obligations to the FDIC.
-15-
<PAGE>
Item 6. Selected Financial Data.
-----------------------
The information required by this item is contained on page 25 of the
Company's 1995 Annual Report to Stockholders. Such information is incorporated
herein by reference to the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
-------------
The information required by this item is contained on pages 12 to 24 of
the Company's 1995 Annual Report to Stockholders. Such information is
incorporated herein by reference to the Annual Report.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
The information required by this item is contained in the Consolidated
Financial Statements and Notes to Consolidated Financial Statements appearing on
pages 26 to 43 of the Company's 1995 Annual Report to Stockholders. Such
information is incorporated herein by reference to the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure.
---------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The Board of Directors has set the number of directors that constitute
the Board of Directors at fourteen. The Articles of Incorporation of the Company
provide that the directors shall be classified with respect to the time for
which they severally hold office into three classes. Each year all of the
directors in one class are elected to serve for a term of three years or until
their respective successors have been elected and qualified.
-16-
<PAGE>
The following table sets forth as to each director of the Company, his
or her name, age, the year he or she first became a director of the Company and
the number of shares of Common Stock beneficially owned at February 2, 1996.
Shares of
Common Stock
Year Beneficially
First Year Owned at Percent
Elected Term February 2, of
Name Age(1) Director Expires 1996(2) Class
- ---- ------ -------- ------- -------------- -----
Nevin S. Baker 73 1986 1997 59,203(7) 1.10%
George B.
Callan, Jr. 64 1986 1997 10,159 0.19
Miles M. Circo 49 1986 1998 928 0.02
Clyde C. Crum 60 1986 1997 38,059(8) 0.71
James S. Grimes 56 1989 1998 4,906 0.09
Bernard L.
Grove, Jr. 62 1988 1999 10,771(4) 0.20
Gail T. Guyton 55 1986 1998 57,001(9) 1.06
Frank L. Hewitt, III 54 1996(3) 1997 122,271(3) 2.27
A. Patrick Linton 46 1991 1998 59,171(10) 1.09
Jacob R.
Ramsburg, Jr. 59 1986 1998 90,681(11) 1.68
Ramona C. Remsberg 67 1987 1999 48,000(5) 0.89
Kenneth W. Rice 52 1988 1999 8,781 0.16
Rand D. Weinberg 39 1996(6) 1999 1,000 0.02
DeWalt J.
Willard, Jr. 64 1986 1997 30,103 0.56
(1) At February 2, 1996.
(2) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this
-17-
<PAGE>
table, of any shares of Common Stock if he or she has sole or shared
voting and/or investment power with respect to such security. The table
includes shares owned by spouses, other immediate family members in
trust, shares held in retirement accounts or funds for the benefit of
the named individuals, and other forms of ownership, over which shares
the persons named in the table possess voting and investment power.
Except as otherwise noted, each person has sole voting and investment
power with respect to all shares beneficially owned.
(3) Mr. Hewitt was elected to the Board of Directors as a member of the
Class of 1997 in connection with the Company's acquisition of Laurel.
The shares attributed to Mr. Hewitt include 28,153 shares as to which
he shares voting and investment power with his wife, 13,920 shares
owned by Mr. Hewitt's children, as to which he has voting and
investment power, 2,000 shares held in trust as to which he has shared
voting and investment power and 1,000 shares owned by Mr. Hewitt's wife
as to which Mr. Hewitt disclaims beneficial ownership.
(4) The shares attributed to Mr. Grove include 6,459 shares as to which Mr.
Grove shares voting and investment power with his wife.
(5) The shares attributed to Ms. Remsberg include 2,100 shares held in
trust as to which she has shared voting and investment power.
(6) Mr. Weinberg was elected to the Board of Directors to fill a vacancy in
the Class of 1999.
(7) The shares attributed to Mr. Baker include 37,878 shares held in trust
as to which he has shared voting and investment power.
(8) The shares attributed to Mr. Crum include 4,893 shares owned by Mr.
Crum's wife, as to which Mr. Crum disclaims beneficial ownership.
(9) The shares attributed to Mr. Guyton include 2,364 shares owned by Mr.
Guyton's wife, as to which Mr. Guyton disclaims beneficial ownership
and 3,645 shares held in trust by a corporation controlled by Mr.
Guyton, as to which he has shared voting and investment power.
(10) The shares attributed to Mr. Linton include 30,307 shares as to which
he shares voting and investment power with his wife and 2,302 shares
owned by Mr. Linton's children, as to which he has voting and
investment power. Mr. Linton also has options to purchase 28,484
shares, of which 22,187 are presently exercisable and are included in
the total shares beneficially owned.
(11) The shares attributed to Mr. Ramsburg include 4,906 shares owned
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<PAGE>
by Mr. Ramsburg's wife, and 4,833 shares owned jointly by Mr.
Ramsburg's wife and son, as to which Mr. Ramsburg disclaims beneficial
ownership, and 22,766 shares owned by two corporations controlled by
Mr. Ramsburg, as to which he holds voting and investment power.
Set forth below is certain information with respect to the directors of
the Company. Unless otherwise indicated, the principal occupation listed for
each person below has been his or her occupation for the past five years.
FRANK L. HEWITT, III is retired after being president of Laurel and Laurel FSB
until the merger of Laurel with and into the Company and the merger of Laurel
FSB with and into Elkridge, a wholly-owned subsidiary of the Company, on January
26, 1996.
BERNARD L. GROVE, JR. is an advisor to Genstar Stone Products, Inc. since
January 1996, after having been president since January 1, 1992, and having
previously served as executive vice president of that company.
RAMONA C. REMSBERG is the former vice chairman of the board of both FCNB and of
the Company, having retired from FCNB and the Company in September 1993. Ms.
Remsberg served as president of each entity from December 1987 to January 1991.
KENNETH W. RICE is president of Donald B. Rice Tire Co., Inc., a tire
distribution firm.
RAND D. WEINBERG is a partner with Weinberg & Weinberg, a law firm in Frederick,
Maryland.
MILES M. CIRCO is general manager of Patapsco Designs, Inc., an electronic
design and manufacturing firm.
JAMES S. GRIMES has been Mayor of the City of Frederick, Maryland since 1994 and
is president of James S. Grimes, Inc., a full service truck transportation
service operation.
GAIL T. GUYTON, vice chairman of the board of both FCNB and the Company since
January 1995, is president of Morgan-Keller, Inc., a commercial/industrial
construction firm.
A. PATRICK LINTON has been president and chief executive officer of FCNB and the
Company since January 1991. During 1990, he served as executive vice president
of the Company and executive vice president and chief operating officer of FCNB.
Prior to this time Mr. Linton has held several executive officer positions for
FCNB and the Company, with principal responsibilities in the areas of finance
and administration.
JACOB R. RAMSBURG, JR. is president of Frederick Underwriters, Inc., a general
insurance agency.
-19-
<PAGE>
NEVIN S. BAKER served as chairman of the board of both FCNB and the Company
until January 1995, having served as chairman of the board and chief executive
officer of each entity from December 1987 to January 1991.
GEORGE B. CALLAN, JR. has been president of Associates in Management, a company
that specializes in historic preservation, museum management and automotive
sales, since July 1991. Prior to that time he was president of Callan & Cramer,
Inc., an automotive parts distribution firm.
CLYDE C. CRUM, chairman of the board of both FCNB and the Company since January
1995, is president of Clyde C. Crum and Son, Inc., a dairy farm operation.
DEWALT J. WILLARD, JR. is president of Ideal Buick-GMC, an automobile
dealership.
Board and Committee Meetings
The Board of Directors of the Company has standing Audit and Compensation
committees, but does not have a standing Nominating committee.
The Audit Committee, comprised of Directors Circo, Ramsburg and Willard,
assists the Boards of Directors of the Banks in exercising their fiduciary
responsibilities for oversight of audit and related matters, including corporate
accounting, internal controls and regulatory compliance. Its duties include:
monitoring the Banks' internal controls and procedures; meeting with the
internal auditors and reviewing their reports; recommending the selection of
independent auditors; reviewing the scope of audits conducted by the independent
auditors, as well as the results of their audits; and reviewing policies
relating to compliance with applicable banking and other laws.
The Compensation Committee, comprised of Directors Baker, Grove, and Rice,
reviews and recommends to the Board of Directors the overall compensation policy
for the Company. The Board of Directors for each Bank follows this policy
specifically related to the salaries and other benefits for senior management
thereof.
The Board of Directors of the Company held fifteen meetings during 1995,
and the Audit and the Compensation Committees held seven and six meetings,
respectively, during 1995. Each of the directors of the Company attended at
least 75% of the meetings of the Board of Directors and all committees on which
they served during 1995.
Compliance with Section 16(a) of the Exchange Act
Martin S. Lapera and Jacob R. Ramsburg, Jr. failed to file reports
required by Section 16(a) of the Exchange Act on a timely
-20-
<PAGE>
basis during 1995. Both of these individuals filed one report late,
that included one transaction each.
Executive Officers of the Company.
- ----------------------------------
Information concerning non-director executive officers of the
Registrant is as follows:
Martin S. Lapera (age 43) became an Executive Vice President of the
Company in June 1992 after having been a Vice President. Mr. Lapera became the
Executive Vice President, Chief Operating Officer and Chief Lending Officer of
FCNB in January 1995 after having been the Executive Vice President and Chief
Lending Officer of FCNB.
Charles E. Weller (age 47) became a Senior Vice President of the
Company in January 1996 after having been a Vice President of the Company since
March 24, 1995. Mr. Weller has been President of Elkridge since January 1987.
Mark A. Severson (age 42) became a Senior Vice President and Treasurer
of the Company in January 1996 after having been the Vice President and
Treasurer. Mr. Severson is the Senior Vice President and Chief Financial Officer
of FCNB.
Fern W. Mercer (age 58) is a Vice President of the Company and is a
Senior Vice President of FCNB.
Helen G. Hahn (age 59) is a Vice President and Secretary of the
Company. Mrs. Hahn became a Senior Vice President and Cashier of FCNB in June
1992 and was the Cashier prior to that time.
Item 11. Executive Compensation.
-----------------------
Compensation of Directors
During 1995, the directors of the Company did not receive compensation for
attending Board of Directors meetings of the Company. All members of the Board
of Directors of the Company were also members of the Board of Directors of FCNB
and, as such, each non-employee director of FCNB received an annual retainer of
$5,000 and a fee of $200 for each bi-weekly Board of Directors and committee
meeting attended. Any member of the Board of Directors of the Company who is
also on the Board of Directors of Elkridge received board meeting fees of
$350.00 and committee meeting fees of $250.00 for each meeting attended.
Elkridge does not pay an annual retainer fee.
Beginning in 1996, the directors of the Company will also receive an
annual retainer fee of $2,000. Also, any director of the Company who is not also
on FCNB's Board of Directors will receive a fee of $200 for each monthly meeting
attended.
-21-
<PAGE>
Directors who agree to defer receipt of at least four years of their
annual retainers may participate in an unfunded deferred compensation plan
maintained by FCNB. Under this plan, deferred amounts earn interest at the rate
of 10% per annum until the director attains age sixty-five, dies or becomes
disabled. Upon any such event, the deferred amount plus credited interest
thereon will be paid to the participant or his beneficiary over a period of up
to ten years, with interest continuing to accrue on the unpaid balance at the
rate of 10% per annum.
The Company paid a total of $94,900 in director and committee fees for
the fiscal year ended December 31, 1995.
Clyde C. Crum received a $25,000 annual fee for his services as
Chairman of the Board of both the Company and FCNB, along with the bi-weekly
Board of Directors meeting fees. However, he did not receive any committee
meeting fees. Effective in January 1996, the annual fee for Mr. Crum was
increased to $30,000.
EXECUTIVE OFFICERS' COMPENSATION AND CERTAIN TRANSACTIONS
Compensation - Overview
Set forth below are summarized tables of all compensation awarded to,
earned by, or paid to certain executive officers. It should be noted that no
cash compensation was paid to any executive officer of the Company in his or her
capacity as such. Each of the executive officers of the Company received
compensation from the Banks for services rendered in their capacities as
executive officers of the Banks.
The following table sets forth a comprehensive overview of the
compensation for the Company's Chief Executive Officer and the most highly
compensated executive officers for the fiscal year just ended. Comparative data
is also provided for the previous two fiscal years, in selected categories.
-22-
<PAGE>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Restr- Secur-
icted ities All
Name and Stock Under- Other
Principal Fiscal Awards lying Compen-
Position Year Salary(1) Bonus (3) Options sation(5)
- -------- ---- --------- ----- --- ------- ---------
A. Patrick 1995 $186,352 $66,516(2) 1,259 6,297 $7,747
Linton, 1994 161,321 46,283(2) 1,154(4) 5,765(4) 2,087
Director, 1993 155,987 55,500 1,457(4) 7,284(4) 2,784
President and
Chief Executive
Officer of the
Company and
FCNB
Martin S. 1995 $112,091 $30,513(2) 497 2,485 $ --
Lapera, 1995 93,723 23,013(2) 447(4) 2,232(4) --
Executive Vice 1993 88,569 24,700 447(4) 2,757(4) 308
President of
the Company and
Executive Vice
President,
Chief Operating
Officer and
Chief Lending
Officer of FCNB
Charles E. 1995 $100,836 $12,909(2) 370 1,852 $ --
Weller, Senior
Vice President
of the Company
and President
of Elkridge(6)
Mark A. 1995 $ 94,677 $19,620(2) 298 1,491 $ --
Severson, 1994 83,309 15,568(2) 278(4) 1,389(4) --
Senior Vice 1993 79,948 16,200 350(4) 1,745(4) 2,000(7)
President and
Treasurer of
the Company and
Senior Vice
President and
Chief Financial
Officer of FCNB
-23-
<PAGE>
(1) Includes contributions made by the Banks under their 401(k) Profit
Sharing Plans. Contributions made by the Banks in 1995, 1994 and 1993,
respectively, amounted to $8,977, $6,321 and $7,987 for Mr. Linton,
$7,091, $3,723 and $4,569 for Mr. Lapera, and $4,677, $3,309 and $3,948
for Mr. Severson. Mr. Weller's contribution for 1995 was $3,036.
(2) During 1994, FCNB changed the method of paying the annual bonuses.
There were no cash bonuses paid in 1994, however, annual bonuses
accrued as of December 31, 1995 and 1994 were paid in January 1996 and
1995, respectively. Previously, the annual bonuses were paid in the
year earned. The annual bonus for Mr. Weller is paid by Elkridge.
(3) The awards of restricted stock received are based on the formula of a
grant of one (1) restricted share for every five (5) shares of Common
Stock purchased pursuant to the exercise of stock options. The
restriction period is for three (3) years from the date of receipt, and
if the shares purchased pursuant to the exercise of stock options are
sold within this time period, a pro rata percentage of the restricted
shares are forfeited and must be returned to the Company. In 1994, Mr.
Lapera exercised options resulting in 696 restricted shares outstanding
at year end December 31, 1995.
(4) The amounts shown have been adjusted to reflect a three-for-two stock
split effected in the form of a 50% stock dividend declared in April
1995.
(5) Includes payments for vacation pay taken in lieu of vacation. Included
in the 1995 amount for Mr. Linton are $5,700 of Elkridge directors
fees.
(6) Mr. Weller became an executive officer of the Company on March 24,
1995, as a result of the merger of ENB Financial Corporation with and
into the Company.
(7) This amount consists of moving expenses paid for Mr. Severson.
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<PAGE>
Stock Option Plan. The following table sets forth as to the executive
officers whose compensation is reported in the SUMMARY COMPENSATION TABLE
certain information relating to options to purchase Common Stock of the Company
granted during fiscal 1995 under the 1992 Employee Stock Option Plan.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(5)
- --------------------------------------------------------------------------------
% of Total
Number of Options
Securities Granted
Underlying to Exercise
Options Employees or Base Expira-
Granted in Fiscal Price tion
Name (#) Year ($/share) Date 5% ($) 10% ($)
- --------- ------- --------- --------- -------- ------- -------
A. Patrick 6,297(1) 33% $21.00 12/31/05 $36,534 $80,732
Linton
Martin S. 2,485(2) 13% $21.00 12/31/05 $14,417 $31,859
Lapera
Charles E. 1,852(3) 10% $21.00 12/31/05 $10,745 $23,743
Weller
Mark A. 1,491(4) 8% $21.00 12/31/05 $ 8,650 $19,115
Severson
- --------------------
(1) The options granted to Mr. Linton to purchase 6,297 shares become
exercisable on December 31, 1996, and entitle Mr. Linton to receive an
aggregate of 1,259 shares of restricted stock when the underlying stock
options are exercised. The awards of restricted stock received are
based on the formula of one (1) restricted share for every five (5)
shares of Common Stock purchased pursuant to the exercise of stock
options. The restriction period is for three (3) years from the date of
receipt, and if the shares purchased pursuant to the exercise of stock
options are sold within this time period, a pro rata percentage of the
restricted shares are forfeited and must be returned to the Company.
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<PAGE>
(2) The options granted to Mr. Lapera to purchase 2,485 shares become
exercisable on December 31, 1996, and entitle Mr. Lapera to receive an
aggregate of 497 shares of restricted stock when the underlying stock
options are exercised.
(3) The options granted to Mr. Weller to purchase 1,852 shares become
exercisable on December 31, 1996, and entitle Mr. Weller to receive an
aggregate of 370 shares of restricted stock when the underlying stock
options are exercised.
(4) The options granted to Mr. Severson to purchase 1,491 shares become
exercisable on December 31, 1996, and entitle Mr. Severson to receive
an aggregate of 298 shares of restricted stock when the underlying
stock options are exercised.
(5) The assumed annual rates of appreciation in the table are shown for
illustrative purposes only pursuant to applicable SEC requirements.
Actual values realized on stock options are dependent on actual future
performance of the Company's stock, among other factors. Accordingly,
the amounts shown may not necessarily be realized. Does not include the
value of restricted stock awards in conjunction with the grant of
options.
-26-
<PAGE>
The table set forth below presents the amount and potential value of
options held by each named executive at the end of fiscal 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
Shares at FY-End (#) at FY-End ($)
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable(1)
- ---- ----------- -------- ------------- ----------------
A. Patrick -- -- 22,187/6,297 $133,737/-
Linton
Martin S. -- -- 4,989/2,485 $17,745/-
Lapera
Charles E. -- -- 13,039/1,852 $208,741/-
Weller
Mark A. -- -- 5,362/1,491 $32,403/-
Severson
_______________
(1) Does not include the value of restricted stock awards in conjunction
with the grant of options.
Profit Sharing Plan. The Company has a Section 401 (k) profit sharing plan
(the "Plan") covering employees meeting certain eligibility requirements as to
minimum age and years of service. Employees may make voluntary contributions to
the Plan through payroll deductions on either a pre-tax or after-tax basis. The
Company makes contributions to the Plan in its discretion, based on a percentage
of each Bank's earnings. The Company's contributions are subject to a vesting
period based upon the completion of five years of service with the Company, at
which time they are fully vested. A participant's account under the Plan,
together with investment earnings thereon, is normally distributable, following
retirement, death, disability or other termination of employment, in a single
lump-sum payment.
-27-
<PAGE>
The Company's annual contribution to the Plan totaled $241,000 in 1995,
including an aggregate of $23,781 of contributions for the executive officers
named in the SUMMARY COMPENSATION TABLE.
Executive Compensation Plan. FCNB maintains an Executive Compensation Plan
which is intended to provide supplemental retirement benefits to executive
officers designated by the Compensation Committee of FCNB's Board of Directors.
Under this plan, an amount determined by the Committee will be paid to a
participant annually (in twelve monthly payments) for up to ten years commencing
upon the earliest of (a) his or her attaining sixty-five years of age (or such
later date as the participant and the Bank agree), (b) his or her death or (c)
his or her disability. The payments will be made to a participant or his or her
beneficiaries from the general funds of the Bank. Periodically, the Compensation
Committee will approve a change to the amount of annual benefits payable under
the Executive Compensation Plan. Under the plan, the current annual benefits at
normal retirement age established by the Compensation Committee for Messrs.
Linton, and Lapera are $20,000 and $10,000, respectively. Messrs. Severson and
Weller have no benefits under this plan.
Compensation Committee Report
The Compensation Committee of the Company is composed of three outside
directors, Messrs. Nevin S. Baker, Bernard L. Grove, Jr. and Kenneth W. Rice.
Mr. Baker is a former employee of the Company, whereas neither of the remaining
committee members has ever been an employee of the Company or any of its
subsidiaries. The Committee makes recommendations to the full Board of Directors
regarding the adoption, extension, amendment and termination of the Company's
compensation plans. In conjunction with the Company's Chairman and
President/Chief Executive Officer ("CEO"), it reviews the performance of senior
management, recommends annual salary revisions and administers the Company's
compensation plans.
The Committee is guided by the following executive compensation
philosophy of the Company:
1. Enable the Company to attract and retain superior management
by providing a very competitive total compensation package.
2. Align the interests of stockholders and management by
providing stock options as a portion of the executive's total
compensation package.
3. Base a portion of the executive's total compensation package
upon the attainment of defined performance goals that support
the growth and appreciation of the Company's value over time.
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<PAGE>
4. Balance objectives of short-term performance and long-term
growth and appreciation of the Company through a combination
of an annual incentive compensation program using annual cash
bonuses, and the stock option plan that rewards the executives
through long-term growth and appreciation of the Company.
Executive compensation consists primarily of three components: Base
Salary, Annual Bonus, and Stock Options.
Base Salary
The Company's policy is to set base salaries for each executive officer
position, including that of the CEO, in a range commensurate for equivalent
banking jobs in the Mid-atlantic region. The Company utilizes outside
consultants to monitor the Company's competitive compensation status. The base
salaries of executive officers are set by the Board of Directors based upon the
Compensation Committee's recommendations.
Executive officers, other than the CEO, are reviewed annually by their
superiors while the CEO is reviewed by the Compensation Committee and the
Executive Committee of the Board of Directors of the Company. Salary adjustments
for executive officers are determined by the quality of their individual
performances and the relationship of their salary to their established salary
range.
Adjustments to the base salary of the CEO are governed by the same
factors as other executive officers, but also specifically take into account the
Company's current financial performance as measured by earnings, asset growth,
and overall financial soundness. The Committee also considers the CEO's
leadership in setting high standards for financial performance, motivating his
management colleagues, and representing the Company and its values to internal
and external communities.
Annual Bonus
The Company has an Employee Performance Bonus Plan (the "Bonus Plan").
Annual bonuses are accrued as of the end of the fiscal year and are
paid in January. The Company's Bonus Plan has several components related to the
Company's performance. For 1995, these components consisted of the Company
achieving pre-determined levels of earnings, appreciation in stockholder value
and asset growth. The CEO's annual cash bonus is strictly related to the
Company's performance goals. The other named executive officers have divisional
performance goals and/or in addition to the Banks' performance goals. Goals for
each component of the Bonus Plan are approved by the Compensation Committee at
the beginning of each
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<PAGE>
year. Annual cash bonuses tied to Bank performance goals and/or the Company's
performance goals are evaluated on a point system. Each component is given
points for equalling or exceeding the predetermined base. Target goals are
determined that exceed the threshold level, as well as maximum goals. For each
specific component, if the threshold level is not achieved, no bonus is awarded
for that component. The maximum potential annual bonus award for the four named
executive officers is 25% to 37.5% of base salary, depending on the executive's
position.
In 1995, the Company substantially exceeded its target performance
goals. Based on these results, the CEO was awarded a bonus of $66,516 which
constituted 37.5% of his 1995 base salary. This annual bonus amount was accrued
as of December 31, 1995 and paid in January 1996. The Committee also considered
the performance of the Company's Common Stock and the CEO's role in promoting
the long-term strategic growth of the Company.
For the other named executive officers, divisional bank performance
goals were substantially met in addition to exceeding the Company's target
performance goals.
As of December 31, 1995, the total accrued annual bonus for the four
named executive officers in the Bonus Plan was $129,558, which was paid in
January 1996.
Stock Options
The Company maintains a 1992 Stock Option Plan currently covering
413,438 shares of the Company's Common Stock. This Stock Option Plan provides
for grants by the Compensation Committee of non-qualified stock options, as well
as incentive stock options, thus tying a portion of the executive's compensation
directly to the performance of the Company's stock price. The exercise price of
the option to purchase stock under the plan may not be less than 100% of the
fair market value of the Company's stock on the date of grant. Stock options
become exercisable one year from the date of the grant and expire five and ten
years from the date of the grant. Stock options for the four named executive
officers typically are granted each year for a number of shares, the aggregate
market value of these shares on the date of grant being in a range of 35% to 75%
of the executive officer's base salary. The Stock Option Plan also provides that
the Company will grant one (1) share of restricted stock for every five (5)
shares of Common Stock purchased pursuant to the exercise of options under the
plan. The Common Stock purchased pursuant to the exercise of such options must
be held for a period of three years before the restricted stock granted by the
Company will fully vest to the recipient thereof. Stock options must be
exercised in the sequence in which they were granted.
In 1995, the CEO received options to purchase 6,297 shares
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<PAGE>
with an exercise price of $21.00 per share. The CEO now owns 36,984 shares of
the Company's Common Stock and holds options to purchase an additional 28,484
shares, of which 22,187 shares are presently exercisable. In 1995, the other
named executive officers received options to purchase an aggregate of 5,828
shares of the Company's Common Stock with an exercise price of $21.00 per share.
The Compensation Committee believes that significant equity interests in the
Company held by the Company's management align the interests of stockholders and
management.
Stock options are designed to align the interests of executives with
those of the stockholders. This approach is designed to incentivize the creation
of stockholder value over the long term since the full benefit of the
compensation package cannot be realized unless stock price appreciation occurs
over a number of years.
Conclusion
Through the programs described above, a moderate portion of the
Company's executive compensation is linked directly to individual and corporate
performance and stock price appreciation. In the case of the CEO, approximately
26% of his total 1995 compensation, including the accrued annual bonus as of
December 31, 1995, consisted of performance-based variable elements. The
Compensation Committee intends to continue the policy of linking executive
compensation to corporate performance and returns to stockholders, recognizing
that ups and downs of the business cycle from time to time may result in an
imbalance for a particular period.
This report has been prepared by the Compensation Committee of the
Company.
Nevin S. Baker Bernard L. Grove, Jr. Kenneth W. Rice
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<PAGE>
Performance Graph
Set forth below is a line graph comparing the yearly percentage change
in cumulative total stockholder return on the Company's Common Stock from
January 1, 1991 to December 31, 1995. The Company's yearly percentage change in
cumulative total stockholder return as shown below is compared to the NASDAQ
Market Index and the published Industry Peer Group Index consisting of 155
middle Atlantic banks published by Media General Financial Services.
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<PAGE>
Plot Points
-------------------------------------------------------
FCNB Peer Group NASDAQ
---- ---------- ------
12/31/90 $100.00 $100.00 $100.00
12/31/91 99.30 133.08 160.56
12/31/92 104.47 166.65 186.87
12/31/93 138.65 207.03 214.51
12/31/94 188.26 196.56 209.69
12/31/95 199.26 298.47 296.30
Notes: 1. Total return assumes reinvestment of dividends.
2. Fiscal Year Ending December 31.
3. Return based on $100 dollars invested on January 1, 1991 in FCNB Corp
Common Stock, an index for NASDAQ Stock Market (U.S. Companies), and
Bank peer group.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
All voting rights are vested exclusively in the holders of the Common
Stock of the Company. Each stockholder is entitled to one vote for each share of
Common Stock owned on all matters brought to a vote of the stockholders. The
Company had 5,390,779 shares of Common Stock outstanding on the February 2, 1996
record date selected for the Annual Meeting. The Company has no other class of
equity securities outstanding.
Persons and groups beneficially owning in excess of 5% of the Common
Stock are required to file certain reports disclosing such ownership pursuant to
the Securities Exchange Act of 1934, as amended (hereinafter called the
"Exchange Act"). The following table sets forth, as of February 2, 1996, certain
information as to the shares of Common Stock beneficially owned by certain
officers of the Company who are not also directors of the Company, and all
officers and directors of the Company as a group. Management knows of no persons
who beneficially owned more than 5% of the outstanding shares of Common Stock at
February 2, 1996.
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<PAGE>
Amount and Nature Percentage
Name of Beneficial Owner of Beneficial Ownership(1) of Class
- ------------------------ -------------------------- --------
Martin S. Lapera 20,563(2) 0.38%
Mark A. Severson 8,745(3) 0.16
Charles E. Weller 13,974(4) 0.26
All Officers and Directors 629,087(5) 11.56
as a Group (19 persons)
_____________________
(1) Unless otherwise indicated, all shares are owned directly by the named
individuals or by the individuals indirectly through a trust,
corporation or association, or by the individuals or their spouses as
custodians or trustees for the shares of minor children. Except as
otherwise indicated, the named individuals exercise sole voting and
investment power over such shares.
(2) The shares attributed to Mr. Lapera include 15,257 shares as to which
Mr. Lapera shares voting and investment power with his wife. Also,
included in the total shares owned are options, currently exercisable,
to purchase 4,989 shares of the Company's Common Stock. In addition,
Mr. Lapera will also receive 999 shares of restricted stock when the
underlying stock options are exercised, which shares are not reflected
in the table.
(3) The shares attributed to Mr. Severson include 1,774 shares as to which
Mr. Severson shares voting and investment power with his wife. Also,
included in the total shares owned are options, currently exercisable,
to purchase 5,362 shares of the Company's Common Stock. In addition,
Mr. Severson will also receive 1,072 shares of restricted stock when
the underlying stock options are exercised, which shares are not
reflected in the table.
(4) The shares attributed to Mr. Weller include 432 shares owned by Mr.
Weller's wife, as to which Mr. Weller disclaims beneficial ownership.
Also, included in the total shares owned are options, currently
exercisable, to purchase 13,039 shares of the Company's Common Stock.
(5) Includes an aggregate of 52,410 shares which may currently be acquired
by certain of such executive officers upon the exercise of stock
options. In addition, such officers will also receive an aggregate of
7,876 shares of restricted stock when the underlying stock options are
exercised, which shares
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<PAGE>
are not reflected in the table. The restricted stock to be received is
based on the formula of one (1) restricted share for every five (5)
shares of Common Stock purchased pursuant to the exercise of stock
options. The restriction period is for three (3) years from the date of
receipt, and if the shares purchased pursuant to the exercise of stock
options are sold within this time period, a pro rata percentage of the
restricted shares are forfeited and must be returned to the Company.
Item 13. Certain Relationships and Related Transactions.
During the past year the Banks have had, and expect to have in the future,
banking transactions in the ordinary course of business with its directors and
officers as well as with their associates. These transactions have been made on
substantially the same terms, including interest rates, collateral, and
repayment terms, as those prevailing at the same time for comparable
transactions with unaffiliated parties. The extensions of credit by the Banks to
these persons have not and do not currently involve more than the normal risk of
collectibility or present other unfavorable features. At December 31, 1995,
loans to directors and officers and their respective associates, including loans
guaranteed by such persons, aggregated $8.8 million, which represented
approximately 18.2% of the consolidated stockholders' equity.
Gail T. Guyton, a director of the Company and FCNB, is president and a
principal stockholder of Morgan-Keller, Inc., a construction firm which is
serving as construction manager in connection with the development of the
Company's new headquarters project. During 1995, the Company paid Morgan-Keller,
Inc. a total of $6.8 million in construction payments, which included $6.6
million for the Company's headquarter's project and $227,000 related to various
other construction projects. Morgan-Keller, Inc. will receive approximately
$400,000 in fees for serving as the construction manager for the headquarter's
project.
Jacob R. Ramsburg, Jr., a director of the Company and FCNB, is
president and a principal stockholder of Frederick Underwriters, Inc., a general
insurance agency which received $88,600 in premiums during 1995 in connection
with the Company's purchase of certain types of insurance coverage.
-35-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
-----------------------------------------------------------------
(a)Documents filed as a part of the Report:
1. The following consolidated financial statements
included in the 1995 Annual Report to Stockholders
are incorporated herein by reference under Item 8 of
this Report:
Page Number in
Annual Report
-------------
Consolidated Balance Sheets 26
Consolidated Statements of Income 27
Consolidated Statements of Changes
in Stockholders' Equity 28
Consolidated Statements of Cash
Flows 29
Notes to Consolidated Financial
Statements 30-43
Report of Independent Auditors 43
2. All schedules for which provision is made in the
accounting regulations of the Securities and Exchange
Commission are not applicable or are not required
under the related instruction and therefore have been
omitted.
3. Exhibits required by Item 601 of Regulation S-K:
Exhibit No. Item
- ----------- ----
2-A A copy of the Laurel Bancorp, Inc. Agreement and Plan of
Merger is hereby incorporated by reference to Exhibit 2 to
the Registration Statement on Form S-4 of the Registrant
filed on July 31, 1995.
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<PAGE>
Exhibit No. Item
- ----------- ----
2-B A copy of the Harbor Investment Corporation Agreement and
Plan of Merger is hereby incorporated by reference to
Exhibit 99(a) to the Current Report on Form 8-K of the
Registrant dated December 22, 1995 and filed on January
10, 1996.
3-A A copy of the Articles of Restatement of the Articles of
Incorporation of FCNB Corp is hereby incorporated by
reference to Exhibit 3-A of the Annual Report on Form 10-K
for 1994 of the Registrant.
3-B A copy of the amended By-Laws of FCNB Corp is hereby
incorporated by reference to Exhibit 3-B of the Annual
Report on Form 10-K for 1993 of the Registrant.
10-D A copy of the Executive Compensation Plan for Directors of
FCNB Bank is hereby incorporated by reference to Exhibit
10-D to the Registration Statement on Form S-4 (File No.
33-09406) of the Registrant.
10-E A copy of the Executive Compensation Plan for Management
Personnel of FCNB Bank is hereby incorporated by reference
to Exhibit 10-E to the Registration Statement on Form S-4
(File No. 33- 09406) of the Registrant.
10-F A copy of the Employee Incentive Bonus Plan of FCNB Bank
is hereby incorporated by reference to Exhibit 10-F of the
Annual Report on Form 10-K for 1991 of the Registrant.
10-G A copy of the Compensation Agreement with Clyde C. Crum is
hereby incorporated by reference to Exhibit 10-G of the
Annual Report on Form 10-K for 1994 of the Registrant.
10-H A copy of the Construction Loan Agreement between FCNB
Realty and NationsBank, N.A. is hereby incorporated by
reference to Exhibit 1 of the Current Report on Form 8-K
of the Registrant dated June 28, 1995 and filed on July 6,
1995.
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<PAGE>
Exhibit No. Item
- ----------- ----
10-I A copy of the Deed of Trust, Assignment, Security
Agreement and Financing Statement by FCNB Realty in favor
of Trustees thereunder for benefit of NationsBank, N.A. is
hereby incorporated by reference to Exhibit 2 of the
Current Report on Form 8-K of the Registrant dated June
28, 1995 and filed on July 6, 1995.
10-J A copy of the Deed of Trust Note is hereby incorporated by
reference to Exhibit 3 of the Current Report on Form 8-K
of the Registrant dated June 28, 1995 and filed on July 6,
1995.
10-K A copy of the Guaranty Agreement by the Company in favor
of NationsBank, N.A. is hereby incorporated by reference
to Exhibit 4 of the Current Report on Form 8-K of the
Registrant dated June 28, 1995 and filed on July 6, 1995.
10-L A copy of the Environmental Indemnity Agreement by FCNB
Realty and the Company is hereby incorporated by reference
to Exhibit 5 of the Current Report on Form 8-K of the
Registrant dated June 28, 1995 and filed on July 6, 1995.
10-M A copy of the Lease between FCNB bank, as tenant, and FCNB
Realty, as landlord is hereby incorporated by reference to
Exhibit 6 of the Current Report on Form 8-K of the
Registrant dated June 28, 1995 and filed on July 6, 1995.
11 Statement Regarding Computation of Per Share Earnings,
filed herewith.
12 Statement Regarding Computation of Ratios, filed herewith.
13 The Company's 1995 Annual Report to Stockholders, filed
herewith.
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<PAGE>
Exhibit No. Item
- ----------- ----
21 A list of the subsidiaries of FCNB Corp is hereby
incorporated by reference to the 1995 Annual Report to
Stockholders at page 45.
23 Consent of Independent Auditor
27 Financial Data Schedule
99-A A copy of the Dividend Reinvestment and Stock Purchase
Plan of FCNB Corp is hereby incorporated by reference to
Registration Statement on Form S-3 (File No. 33-55040) of
Registrant.
99-B A copy of the FCNB Corp 1992 Employee Stock Option Plan is
hereby incorporated by reference to Registration Statement
on Form S-8 (File No. 33-63092) of Registrant.
(b) There were no Reports on Form 8-K filed during the quarter ended
December 31, 1995.
-39-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FCNB CORP
(Registrant)
Date:March 26, 1996 By/s/A. Patrick Linton
-------------- ---------------------------------
A. Patrick Linton, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated:
PRINCIPAL EXECUTIVE OFFICER:
Date:March 26, 1996 /s/A. Patrick Linton
-------------- ------------------------------------
A. Patrick Linton, President,
Chief Executive Officer and
Director
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
Date:March 26, 1996 /s/Mark A. Severson
-------------- ------------------------------------
Mark A. Severson, Senior Vice
President and Treasurer
Date:March 26, 1996 /s/Nevin S. Baker
-------------- ------------------------------------
Nevin S. Baker, Director
Date:March 26, 1996 /s/George B. Callan, Jr.
-------------- ------------------------------------
George B. Callan, Jr., Director
Date:March 26, 1996 /s/ Miles M. Circo
-------------- ------------------------------------
Miles M. Circo, Director
Date:March 26, 1996 /s/Clyde C. Crum
-------------- ------------------------------------
Clyde C. Crum, Director
(SIGNATURES CONTINUED)
<PAGE>
(SIGNATURES CONTINUED)
Date:March 26, 1996 /s/James S. Grimes
-------------- ------------------------------------
James S. Grimes, Director
Date:March 26, 1996 /s/Bernard L. Grove, Jr.
-------------- ------------------------------------
Bernard L. Grove, Jr.,Director
Date:March 26, 1996 /s/Gail T. Guyton
-------------- ------------------------------------
Gail T. Guyton, Director
Date:March 26, 1996 /s/Frank L. Hewitt, III
-------------- ------------------------------------
Frank L. Hewitt, III, Director
Date:March 26, 1996 /s/Ramona C. Remsberg
-------------- ------------------------------------
Ramona C. Remsberg, Director
Date:March 26, 1996 /s/Jacob R. Ramsburg, Jr.
-------------- ------------------------------------
Jacob R. Ramsburg, Jr., Director
Date:March 26, 1996 /s/Kenneth W. Rice
-------------- ------------------------------------
Kenneth W. Rice, Director
Date:March 26, 1996 /s/Rand D. Weinberg
-------------- ------------------------------------
Rand D. Weinberg, Director
Date:March 26, 1996 /s/DeWalt J. Willard, Jr.
-------------- ------------------------------------
DeWalt J. Willard, Jr., Director
<PAGE>
Exhibit 11
Statement Regarding the Computation of Per Share Earnings
1995 1994 1993
-------- ---------- ------
Earnings per Common Share $1.41 $1.30 $1.32
Average shares outstanding 4,069,879 4,068,329 4,058,137
Fully diluted $1.41 $1.30 $1.32
Average shares outstanding 4,091,081 4,078,455 4,058,147
<PAGE>
Exhibit 12
Statement Regarding the Computation of Ratios
a. The percentage ratio of net income to average total assets is
calculated by dividing the 1995 and 1994 net income of $5,750,000 and
$5,293,000, respectively, by the average total assets for 1995 and 1994
of $528,146,000 and $487,308,000, respectively.
b. The percentage ratio of net income to average stockholders' equity is
calculated by dividing the 1995 and 1994 net income of $5,750,000 and
$5,293,000, respectively, by the average stockholders' equity for 1995
and 1994 of $44,943,000 and $40,683,000, respectively.
c. The percentage ratio of average stockholders' equity to average total
assets is calculated by dividing the 1995 and 1994 average
stockholders' equity of $44,943,000 and $40,683,000, respectively, by
the average total assets for 1995 and 1994 of $528,146,000 and
$487,308,000, respectively.
d. The percentage ratio of cash dividends declared to net income is
calculated by dividing the 1995 and 1994 cash dividends declared of
$1,886,000 and $1,696,000, respectively, by the net income for 1995 and
1994 of $5,750,000 and $5,293,000, respectively.
<PAGE>
FCNB CORP AND SUBSIDIARY
FINANCIAL REPORT
DECEMBER 31, 1995 and 1994
<PAGE>
THE YEAR IN SUMMARY
FCNB CORP AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Years ended December 31, 1995 1994(1) 1993(1)
- ------------------------------------------------------------------------------
(dollars in thousands,
except per share data)
Net income $5,750 $5,293 $5,361
Per share:(2)
Net income 1.41 1.30 1.32
Cash dividends declared .46 .42 .35
Book value at period end(3) 11.87 10.24 10.16
Net income as a percent of average:(3)
Total assets 1.09% 1.09% 1.19%
Stockholders' equity 12.79 13.01 14.06
- ------------------------------------------------------------------------------
December 31, 1995 1994(1) 1993(1)
- ------------------------------------------------------------------------------
(dollars in thousands)
Assets $553,253 $517,521 $488,547
Loans, net of unearned income 352,896 303,997 251,204
Deposits 448,917 427,797 401,327
Federal funds purchased and securities sold
under agreements to repurchase 21,043 25,103 32,304
Other short-term borrowings 25,426 19,089 10,276
Long-term debt 4,680 - -
Stockholders' equity 48,301 41,688 41,252
Banking facilities 17 15 14
____________________________
(1) Restated retroactively to reflect the acquisition of ENB Financial
Corporation consummated on March 24, 1995 and accounted for as a pooling of
interests.
(2) The amounts shown have been adjusted retroactively for a three-for-two
stock split, effected in the form of a 50% stock dividend, declared in
April 1995.
(3) Calculations reflect the effects of adopting Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," on December 31, 1993.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and related financial data for FCNB Corp (the
"Company") recognizes the March 24, 1995 acquisition of ENB Financial
Corporation ("ENB"), as if it had occurred on January 1, 1993, which was
accounted for as a pooling of interests. The 1994 and 1993 financial statements,
including earnings per share data and other financial data, have been restated
to reflect this business combination. ENB was the holding company for Elkridge
Bank, an $80 million financial institution headquartered in Elkridge, Maryland,
with additional branches in Columbia and Glen Burnie, Maryland. Pursuant to the
terms of the Agreement and Plan of Merger between ENB and the Company, ENB was
merged with and into the Company and Elkridge Bank became a separate subsidiary
of the Company. The following discussion provides an overview of the financial
condition and results of operations of the Company and its principal
wholly-owned subsidiaries FCNB Bank and Elkridge Bank (the "Banks"). This
discussion is intended to assist the readers in their analysis of the
accompanying consolidated financial statements and notes thereto.
Throughout the discussion on the financial performance of the Company, the yield
on interest-earning assets, the net interest spread, the net interest margin,
the risk-based capital ratios, and the leverage ratio, exclude the effects of
the adoption of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." However, the return on
average assets, the return on average equity, and the book value per share at
period end include the effects of this pronouncement.
The following analysis of the Company's operating results is presented on a
consolidated basis. Net income was $5.75 million in 1995 compared to $5.29
million for 1994. Earnings per share were $1.41 in 1995 compared to $1.30 for
1994.
Return on average assets and return on average stockholders' equity are key
measures of earnings performance. Return on average assets measures the ability
of a bank to utilize its assets in generating income. Return on average assets
was 1.09% in 1995 and 1994. Return on average stockholders' equity, which
measures the income earned on the capital invested, was 12.79% in 1995 compared
to 13.01% in 1994.
During 1995, the Company experienced strong loan demand and, accordingly,
increased net loans $48.35 million (16.1%) over the level at the end of 1994.
Due to this increase in loans the Company increased the amount of the provision
for credit losses.
Noninterest income increased $975,000 (36.2%) from the level in 1994 and
noninterest expenses increased $1.49 million (9.1%) during the same period.
On January 26, 1996, the Company consummated its merger of Laurel Bancorp, Inc.
("Laurel"), the holding company for Laurel Federal Savings Bank, Laurel,
Maryland ("Laurel FSB"), with and into the Company. Pursuant to the terms of
this merger, Laurel FSB was merged with and into the Company's wholly-owned
subsidiary, Elkridge Bank, and the branch of Laurel FSB in Monrovia, Maryland
was transferred to FCNB Bank. A total of approximately 1,321,000 shares of the
Company's common stock was issued in the transaction, which will be accounted
for as a pooling of interests. Laurel had approximately $108 million in assets
at the time of the merger.
In connection with this merger, certain costs incurred to effect the
combination, accounted for as a pooling of interests, are expenses of the
combined enterprise and, accordingly, are charged to expense and deducted in
determining the results of operations of the combined entity. The specific
one-time costs associated with this merger that will be charged to the combined
entity's results of operations in the first quarter of 1996 following
consummation of the merger include: (1) income tax expense of approximately
$1.60 million associated with accumulated bad debt reserves for income tax
purposes in excess of those
3
<PAGE>
maintained for financial reporting purposes; (2) salaries and employee benefits
associated with change-in-control payments to certain executive officers of
Laurel totalling approximately $1.20 million; and (3) other operating expenses
of approximately $300,000 associated with a consulting fee payable to Laurel's
financial advisor.
On December 22, 1995, the Company entered into an Agreement and Plan of Merger
to acquire all of the common stock of Harbor Investment Corporation ("Harbor"),
the parent company of Odenton Federal Savings and Loan Association ("Odenton"),
Odenton, Maryland. Pursuant to the terms of the agreement the aggregate
consideration paid to the shareholders of Harbor shall not exceed $6.72 million.
The proposed acquisition is subject to regulatory and shareholder approval, and
is anticipated to be completed in the second quarter of 1996.
The terms of both of the merger transactions discussed above, were negotiated
considering the impact of any specific one-time costs. Accordingly, management
of the Company believes these acquisitions will make significant contributions
to the Company's earnings in future years.
In April 1995, the Company opened a de novo branch in Brunswick, Maryland. This
brought the number of branch locations to 17 as of December 31, 1995.
In the ordinary course of its business, the Company routinely explores
opportunities for additional growth and expansion of its core banking business
and related activities. However, there can be no assurance that this growth or
expansion will have a positive impact on the Company's earnings, dividends, book
value or market value.
The Company will be moving into its new headquarters facility during the first
quarter of 1996. Accordingly, the Company's operating results for 1996 will be
negatively impacted by the increased overhead costs associated with this
facility. However, the Company will be attempting to lease or sell other
facilities vacated with this move in an attempt to lessen the impact of the new
facility's overhead expenses.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (Statement 121), which will become
effective for fiscal years beginning after December 15, 1995. This Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability, is evaluated based upon the estimated future cash
flows expected to result from the use of the asset and its eventual disposition.
If expected cash flows are less than the carrying amount of the asset, an
impairment loss is recognized. Additionally, this Statement requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
impact of adopting this Statement is not expected to be material to the
Company's consolidated financial statements.
In May 1995, the FASB issued Statement No. 122, "Accounting for Mortgage
Servicing Rights" (Statement 122), which will become effective, on a prospective
basis, for years beginning after December 15, 1995. This Statement requires
mortgage banking enterprises to recognize as separate assets rights to service
mortgage loans, however those servicing rights are acquired. When mortgage
loans, acquired either through a purchase transaction or by origination, are
sold or securitized with servicing rights retained an allocation of the total
cost of the mortgage loans should be made between the mortgage servicing rights
and the loans based on their relative fair values. In subsequent periods, all
mortgage servicing rights capitalized must be periodically evaluated for
impairment based on the fair value of those rights, and any impairments
recognized through a valuation allowance. The impact of adopting this Statement
is not expected to be material to the Company's consolidated financial
statements.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" (Statement 123), which will become effective for transactions
4
<PAGE>
entered into in fiscal years that begin after December 15, 1995, though it may
be adopted early. This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. This Statement uses a fair
value based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting guidance in Opinion 25 must make pro forma disclosures of net income
and, if presented, earnings per share, as if the fair value based method of
accounting defined in this Statement had been applied. The Company has decided
to disclose the effects of adopting Statement 123 in the footnotes to the 1996
consolidated financial statements rather than record the effects in the
consolidated financial statements.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and
Interest Differential
Table 1 shows average balances of asset and liability categories, interest
income and interest paid, and average yields and rates for the periods
indicated.
Net Interest Income
Net interest income is generated from the Company's lending and investment
activities, and is the most significant component of the Company's earnings. Net
interest income is the difference between interest and rate-related fee income
on earning assets (primarily loans and investment securities) and the cost of
the funds (primarily deposits and short-term borrowings) supporting them. To
facilitate analysis, net interest income is presented on a taxable-equivalent
basis to adjust for the tax-exempt status of certain loans and investment
securities. This adjustment, based on the statutory federal income tax rate of
34% in 1995, 1994 and 1993 increases the tax-exempt income to an amount
representing an estimate of what would have been earned if that income were
fully taxable.
Changes in net interest income between periods is affected primarily by the
volume of interest-earning assets and the yield on those assets, and by the
volume of interest-bearing deposits and other liabilities and the rates paid on
those deposits and liabilities. Table 2 reconciles the impact of changes in
average balances and average rates with the change in the Company's net interest
income for the periods indicated.
Taxable-equivalent net interest income totaled $24.03 million in 1995,
increasing 5.7% from the $22.74 million recorded in 1994. The Company's average
interest-earning assets increased 7.5% to $491.75 million during 1995. This
increase was primarily funded by an 8.4% increase in the Company's average
interest-bearing liabilities and by a 6.1% increase in the Company's average
noninterest-bearing deposits during the year.
The Company's net interest margin (taxable-equivalent net interest income as a
percent of average interest-earning assets) was 4.89% in 1995, as compared to
4.97% in 1994. This decrease in net interest margin primarily reflects the
impact of the change in the spread between yields on average interest-earning
assets and rates paid on average interest-bearing liabilities realized during
1995. This spread decreased by 20 basis points during the year reflecting the
increase in rates paid on average interest-bearing liabilities of 91 basis
points while the yield on average interest earning assets increased 71 basis
points.
The yield on the average investment portfolio remained fairly constant, only
increasing 6 basis points during 1995 compared to 1994. The yield on the average
loan portfolio increased reflecting the impact of increases in the prime lending
rate that followed the Federal Reserve Board's increases in the federal funds
5
<PAGE>
rates throughout 1994 and 1995. The rates paid on federal funds purchased and
securities sold under agreements to repurchase, and other short-term borrowings
increased by 172 and 136 basis points, respectively, primarily causing the
increase in rates paid on interest-bearing liabilities. The rate of interest
earned on interest-earning assets and the rate paid on interest-bearing
liabilities, while significantly affected by the actions taken by the Federal
Reserve to control economic growth, are influenced by competitive factors within
the Company's market. Competitive pressures during 1995 for both loans and the
funding sources needed to satisfy loan demand within the Company's market area
caused its net interest spread to narrow. The management of the Company feels
that the competitive pressures in this market will cause the net interest spread
to continue to be under pressure. Therefore, the Company is currently pursuing
operating efficiencies through improved technology and is adding new products
and services to enhance its level of noninterest income.
6
<PAGE>
<TABLE>
<CAPTION>
Table 1. Comparative Statement Analysis
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
daily income(2) yield/ daily income(2) yield/ daily income(2) yield/
balance(1) / paid rate balance(1) / paid rate balance(1) / paid rate
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Interest-bearing
deposits in
other banks $ 461 $ 24 5.20% $ 182 $ 10 5.49% $ 483 $ 14 2.90%
- ---------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 7,460 457 6.13 10,802 439 4.06 13,229 403 3.05
- ---------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 1,252 82 6.55 3,398 251 7.39 7,280 594 8.16
- ---------------------------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable 131,254 8,730 6.65 146,741 9,335 6.36 138,551 9,370 6.76
Nontaxable 14,435 1,835 12.71 21,342 2,752 12.89 24,815 3,186 12.84
- ---------------------------------------------------------------------------------------------------------------------------------
Total invest-
ment securities 145,689 10,565 7.25 168,083 12,087 7.19 163,366 12,556 7.69
- ---------------------------------------------------------------------------------------------------------------------------------
Loans(3), net of
unearned income 336,883 31,480 9.34 274,948 23,563 8.57 236,981 20,052 8.46
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 491,745 42,608 8.66 457,413 36,350 7.95 421,339 33,619 7.98
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning
assets 36,930 30,842 27,614
Net effect of unrealized
gain (loss) on securities
available for sale (529) (947) -
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $528,146 $487,308 $448,953
==================================================================================================================================
Liabilities and
Stockholders' Equity
Interest-bearing
liabilities:
NOW/SuperNOW accounts $ 45,473 1,031 2.27% $ 44,582 953 2.14% $ 39,586 895 2.26%
Savings accounts 69,010 2,097 3.04 71,957 2,023 2.81 62,018 1,859 3.00
Money market accounts 69,146 2,371 3.43 74,443 2,267 3.05 69,316 2,127 3.07
Certificates of deposit
and other time deposits
less than $100,000 148,851 8,003 5.38 124,657 5,283 4.24 124,307 5,386 4.33
Certificates of deposit
and other time deposits
of $100,000 or more 39,361 2,173 5.52 30,725 1,310 4.26 29,714 1,221 4.11
Federal funds purchased
and securities sold
under agreements to
repurchase 18,928 1,122 5.93 29,592 1,247 4.21 20,080 617 3.07
Other short-term
borrowings 27,207 1,644 6.04 11,322 530 4.68 15,420 513 3.32
Long-term debt 1,670 136 8.14 - - - 140 9 6.43
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 419,646 18,577 4.43 387,278 13,613 3.52 360,581 12,627 3.50
- ---------------------------------------------------------------------------------------------------------------------------------
7
<PAGE>
Noninterest-bearing
deposits 58,746 55,369 46,517
Noninterest-bearing
liabilities 4,811 3,978 3,728
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 483,203 446,625 410,826
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 45,472 41,630 38,127
Net effect of unrealized
gain/(loss) on securities available
for sale (529) (947) -
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders'
equity 44,943 40,683 38,127
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and stockholders'
equity $528,146 $487,308 $448,953
=================================================================================================================================
Net interest income $24,031 $22,737 $20,992
=================================================================================================================================
Net interest spread 4.23% 4.43% 4.48%
Net interest margin 4.89% 4.97% 4.98%
=================================================================================================================================
<FN>
(1) The average daily balances for investment securities exclude the effects
of the adoption of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on
December 31, 1993.
(2) Presented on a taxable-equivalent basis using the statutory federal income
tax rate of 34%.
(3) Nonaccruing loans, which include impaired loans, are included in the
average balances. Net loan fees included in interest income totaled
$711,000, $360,000 and $207,000 for 1995, 1994 and 1993, respectively.
(4) The interest paid in 1995 includes $300,000 of capitalized construction
period interest.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Table 2
Rate/Volume Analysis
- ---------------------------------------------------------------------------------------------------------------------------------
1995 compared to 1994 1994 compared to 1993 1993 compared to 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Increase Increase Increase
(decrease) (decrease) (decrease)
due to Net due to Net due to Net
----------------- increase ----------------- increase ----------------- increase
Volume Rate(1) (decrease) Volume Rate(1) (decrease) Volume Rate(1) (decrease)
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Interest Income
Interest-earning assets:
Interest-bearing deposits
in other banks 15 (1) 14 $ (9) $ 5 $ (4) $ 8 $ (2) $ 6
Federal funds sold (136) 154 18 (74) 110 36 7 (77) (70)
Loans held for sale (159) (10) (169) (317) (26) (343) 35 (40) (5)
Investment securities
Taxable (985) 380 (605) 554 (589) (35) 1,776 (1,401) 375
Nontaxable(2) (891) (26) (917) (446) 12 (434) (115) (109) (224)
Loans(3) 5,308 2,609 7,917 3,213 298 3,511 263 (1,809) (1,546)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest
income 3,152 3,106 6,258 2,921 (190) 2,731 1,974 (3,438) (1,464)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Paid
Interest-bearing
liabilities:
Savings deposits(4) (202) 458 256 573 (212) 361 738 (1,028) (290)
Time deposits 1,392 2,191 3,583 58 (72) (14) (585) (1,487) (2,072)
Federal funds purchased and
securities sold under
agreements to repurchase (449) 324 (125) 292 338 630 64 (164) (100)
Other short-term
borrowings 744 370 1,114 (136) 154 18 108 (36) 72
Long-term debt 136 - 136 (9) - (9) (5) - (5)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest
paid 1,621 3,343 4,964 778 208 986 320 (2,715) (2,395)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $1,531 $ (237) $1,294 $2,143 $ (398) $ 1,745 $ 1,654 $ (723) $ 931
==================================================================================================================================
<FN>
(1) The volume/rate variance is allocated entirely to changes in rates.
(2) Taxable-equivalent adjustments of $624,000 for 1995, $936,000 for 1994,and
$1,083,000 for 1993 are included in the calculation of nontaxable
investment securities rate variances.
(3) Taxable-equivalent adjustments of $2,000 for 1995, $10,000 for 1994, and
$18,000 for 1993 are included in the calculation of loan rate variances.
(4) Savings deposits include NOW/SuperNOW, savings and money market accounts.
</FN>
</TABLE>
9
<PAGE>
Noninterest Income
Noninterest income increased by $975,000, or 36.2% in 1995. The Company engages
in the secondary mortgage market to enable it to satisfy customer demand for
fixed-rate mortgage loans. In past years, this product assisted the Company in
generating additional noninterest income. Gains realized from loan sales in the
secondary market were $315,000 in 1995, whereas during 1994 losses were realized
of $260,000. The losses incurred in 1994 were primarily caused by the rise in
market interest rates during the year. Noninterest income from gains realized on
the sale of mortgage loans is directly affected by the volume of mortgage loans
settled, which is significantly influenced by increases and decreases in the
level of interest rates. In periods of rising interest rates mortgage loan
production typically declines, whereas in periods of declining interest rates
mortgage loan production increases. As a result, this source of noninterest
income is highly influenced by the level and direction of future interest rate
changes. In 1995 and 1994, servicing fee income totaled $547,000 and $477,000,
respectively. Servicing income on mortgage loans originated and sold however, is
expected to make a smaller contribution to noninterest income since the Company
is currently not retaining servicing rights on mortgages sold. For an analysis
of securities gains and losses, see Note 4 to the consolidated financial
statements.
The increase in service fees on deposit accounts is attributable to increases in
account volume and activity since service charges per account have been kept
relatively constant.
The Company is adding new products and services to enhance its level of
noninterest income in an effort to mitigate the effect of its decreasing net
interest spread. Some of these products are fee-based and, accordingly, are less
sensitive to fluctuations in the level of interest rates. The Company has an
arrangement with Liberty Securities Corp, a third party provider of mutual funds
and annuities, to offer these products to its customers. The arrangement will
enable the Company in future years to earn commissions on the sale of mutual
funds and annuities while providing customers access to alternative investment
products. Additionally, revenue from service charges on deposit accounts will
continue to increase as the volume of accounts maintained expands.
The Company's management is committed to developing and offering innovative,
market-driven products and services that will generate additional sources of
noninterest income.
Noninterest Expenses
Noninterest expenses increased $1.49 million (9.1%) in 1995. A portion of this
increase is attributable to the additional costs of personnel associated with
operating the new Damascus branch acquired in December 1994 and the opening of
the new Brunswick branch in April 1995. Total salaries and employee benefits
increased $1.41 million (16.7%) in 1995. Of this total, salaries increased $1.11
million (15.5%) over 1994's level. This change reflects the increase in the
current year's average number of full-time equivalent employees. During 1995,
the Company employed 294 average full-time equivalent employees, an increase of
27 (10.1%) over 1994's average full-time employee census.
Net occupancy and equipment expenses increased $20,000 (1.3%) and $80,000
(6.5%), respectively, compared to those incurred during 1994. The small increase
in occupancy expenses has been positively impacted by a reduction in repair and
maintenance costs and a reprieve from the harsh winter weather which occurred
during early 1994. The increase in equipment expenses is primarily related to an
increase in computer repairs and maintenance costs and an increase in automated
teller machine costs.
Other operating expenses decreased $99,000 (2.0%) compared to the prior year.
The decrease was primarily due to a refund of its FDIC insurance charges, in the
amount of $237,000, along with a reduction in the assessment rate charged for
FDIC insurance after May 1995, and a reduction in the costs of holding
foreclosed properties. Increases in professional fees, of $135,000, primarily
related to consulting fees on various projects, served to offset many of the
cost reductions experienced in other areas. Provisions to recognize the decline
in value of foreclosed properties in 1995 and 1994 were $177,000 and $246,000,
respectively. See Note 13 to the consolidated financial statements for a
schedule showing a detailed breakdown of the Company's more significant other
operating expenses.
Income Taxes
Income tax expense increased to $3.07 million in 1995, compared to $2.39 million
in 1994,
10
<PAGE>
reflecting the higher level of pretax income in 1995. The Company's effective
tax rate was 34.8% in 1995, compared with 31.1% in 1994. The Company's income
tax expense differs from the amount computed at statutory rates primarily due to
tax-exempt interest from certain loans and investment securities. Note 12 to the
consolidated financial statements reconciles expected income taxes at statutory
rates for the past three years with income tax expense included in the
consolidated statements of income. During 1994, the Company established a
subsidiary in Delaware to manage a portion of the Company's investment
portfolio. This enabled the Company to obtain professional portfolio management
over these investment securities and to obtain a tax benefit, since the income
derived in this subsidiary is not subject to state income taxes.
Liquidity and Interest Rate Sensitivity
Asset/liability management involves the funding and investment strategies
necessary to maintain an appropriate balance between interest sensitive assets
and liabilities. It also involves providing adequate liquidity while sustaining
stable growth in net interest income. Regular review and analysis of deposit and
loan trends, cash flows in various categories of loans and monitoring of
interest spread relationships are vital to this process.
The conduct of our banking business requires that we maintain adequate liquidity
to meet changes in composition and volume of assets and liabilities due to
seasonal, cyclical or other reasons. Liquidity describes the ability of the
Company to meet financial obligations that arise during the normal course of
business. Liquidity is primarily needed to meet the borrowing and deposit
withdrawal requirements of the customers of the Company, as well as for meeting
current and future planned expenditures. This liquidity is typically provided by
the funds received through customer deposits, investment maturities, loan
repayments, borrowings, and income. Normally, this requires maintaining
prospective liquidity sufficient to meet our customers' demand for loans. In
1995, modest growth of deposits, coupled with very strong growth in loan demand,
led to the reduction in the investment securities portfolio.
The Company seeks to contain the risks associated with interest rate
fluctuations by managing the balance between interest sensitive assets and
liabilities. Managing to mitigate interest rate risk is, however, not an exact
science. Not only does the interval until repricing of interest rates on assets
and liabilities change from day to day as the assets and liabilities change, but
for some assets and liabilities, contractual maturity and the actual maturity
experienced are not the same. For example, mortgage-backed securities may have
contractual maturities well in excess of five years but, depending upon the
interest rate carried by the specific underlying mortgages and the then
currently prevailing rate of interest, these securities may be prepaid in a
shorter time period. Accordingly, the mortgage-backed securities and
collateralized mortgage obligations that have average stated maturities in
excess of five years, are evaluated as part of the asset/liability management
process using their expected average lives due to anticipated prepayments on the
underlying loans. Loans held for sale which have a contracted maturity of five
to thirty years are included in the one year or less time frame since they are
available to be sold at any time and are carried at the lower of cost or fair
value. Similarly, NOW/SuperNOW accounts, by contract, may be withdrawn in their
entirety upon demand and savings deposits may be withdrawn on seven days notice.
While these contracts are extremely short, it has been the Company's experience
that these accounts turnover at the rate of five percent (5%) per year. If all
of the Company's NOW/SuperNOW and savings accounts were treated as repricing in
one year or less, the cumulative negative gap at one year or less would be
$(131.20) million or (23.72%) of total assets. Due to their very liquid nature,
the entire balance of money market accounts is assumed to be repriced within one
year.
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of the Company's earning assets and
funding sources. An Asset/Liability Committee manages the interest rate
sensitivity position in order to maintain an appropriate balance between the
maturity and repricing characteristics of assets and liabilities that is
consistent with the Company's liquidity analysis, growth, and capital adequacy
goals. The Company sells fixed-rate real estate loans in the secondary mortgage
market. The Company believes that by selling certain loans rather than retaining
them in its portfolio, it is better able to match the maturities or repricing of
interest sensitive assets to interest sensitive liabilities. It is the objective
of the Asset/Liability Committee to maximize net interest margins during periods
of both volatile and stable interest rates, to attain earnings growth, and to
maintain sufficient liquidity to satisfy depositors' requirements and meet
credit needs of customers.
The following table summarizes, as of December 31, 1995, the anticipated
maturities or repricing of the Company's interest-earning assets and
interest-bearing liabilities, the Company's interest rate sensitivity gap
(interest-earning assets less interest-bearing liabilities), the Company's
cumulative interest rate sensitivity gap, and the Company's cumulative interest
sensitivity gap
11
<PAGE>
ratio (cumulative interest rate sensitivity gap divided by total assets). A
negative gap for any time period means that more interest-bearing liabilities
will reprice or mature during that time period than interest-earning assets.
During periods of rising interest rates, a negative gap position would generally
decrease earnings, and during periods of declining interest rates, a negative
gap position would generally increase earnings. The converse would be true for a
positive gap position. Therefore, a positive gap for any time period means that
more interest-earning assets will reprice or mature during that time period than
interest-bearing liabilities. During periods of rising interest rates, a
positive gap position would generally increase earnings, and during periods of
declining interest rates, a positive gap position would generally decrease
earnings.
In addition to the gap method of monitoring interest rate sensitivity, the
Company also employs computer model simulations. These simulations are run on a
monthly basis using a shock analysis technique to determine the effects on the
Company's net income assuming an immediate increase or decrease in interest
rates. The Company has an interest rate risk management policy that limits the
amount of deterioration in net income, associated with an assumed interest rate
shock of +/- 100 and +/- 200 basis point change in interest rates, to no more
than 10% and 20% of net income, respectively.
12
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis - December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity period
- ---------------------------------------------------------------------------------------------------------------------------------
After 1
3 or less 4 to 12 through After 5
months months 5 years years Total
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-bearing deposits
in other banks $ 188 $ -- $ -- $ -- $ 188
Federal funds sold 20,017 -- -- -- 20,017
Loans held for sale:
Fixed rate 2,362 -- -- -- 2,362
Investment securities:(1)
Fixed rate 6,611 5,623 93,725 6,617 112,576
Variable rate 9,104 -- -- -- 9,104
Loans:(2)
Fixed rate 22,925 52,549 113,018 40,938 229,430
Variable rate 122,609 -- -- -- 122,609
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $183,816 $58,172 $206,743 $47,555 $496,286
=================================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits:
NOW/SuperNOW accounts
and savings $ 1,498 $ 4,493 $ 23,962 $89,859 $119,812
Money market accounts 66,759 -- -- -- 66,759
Certificates of deposit and
other time deposits:
Fixed rate 36,178 78,400 53,169 7,726 175,473
Variable rate 20,894 -- -- -- 20,894
Federal funds purchased and securities
sold under agreements to
repurchase 20,719 324 -- -- 21,043
Other short-term borrowings:
Fixed rate 25,426 -- -- -- 25,426
Long-term debt:
Variable rate 4,680 -- -- -- 4,680
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $176,154 $83,217 $ 77,131 $97,585 $434,087
=================================================================================================================================
Interest-earning assets less
interest-bearing
liabilities ("Gap") $7,662 $(25,045) $129,612 $(50,030) $62,199
Cumulative Gap $7,662 $(17,383) $112,229 $ 62,199 $62,199
Cumulative Gap as a percentage of
total assets 1.38% (3.14)% 20.29% 11.24% 11.24%
- ------------------------
<FN>
(1) Excludes nonrate sensitive equity securities. Reflects fair value
adjustments for securities available for sale.
(2) Includes consumer loans net of unearned income, and excludes nonaccrual
and impaired loans.
</FN>
</TABLE>
13
<PAGE>
Investment Portfolio
Investment securities represent the second largest component of earning assets,
at 30% of average earning assets in 1995 and 37% in 1994. The investment
portfolio is used as a source of interest income, credit risk diversification
and liquidity, as well as to manage rate sensitivity and provide collateral for
secured public funds and repurchase agreements. The investment portfolio
averaged $145.69 million in 1995 compared to $168.08 million in 1994. The
average yield on the portfolio increased 6 basis points to 7.25% in 1995.
During 1995, the Company utilized the cash flow from the investment portfolio,
primarily from the paydowns on mortgage-backed pass-through agency securities
and calls of tax-exempt securities, to fund a portion of the increase in loan
portfolio. Mortgage-backed pass-through agency securities are popular
investments for banks because they are generally higher yielding than U.S.
Treasury securities, have little credit risk and have a lower risk-weighting
under the risk-based capital guidelines than many other investments.
As of December 31, 1995, the gross unrealized losses in the Company's investment
portfolio were $384,000 in the held-to-maturity investment portfolio and
$523,000 in the available-for-sale investment portfolio compared to $3.36
million and $3.67 million, respectively, as of December 31, 1994. The investment
portfolio had an average life of less than four years, with an estimated
tax-equivalent average yield of 6.74%, at December 31, 1995. Since the Company's
held-to-maturity investment portfolio includes fixed rate investment securities
that have below market interest rates, the future operating results of the
Company would be negatively impacted in an increasing rate environment. This
reduction in net interest income would result when the cost of funding the
Company's operations increases, while the income earned on the held-to-maturity
portfolio remains constant.
On December 29, 1995, the Company transferred $23,751,000 of securities at
amortized cost, having an unrealized gain of $336,000, from the held-to-maturity
portfolio into the available-for-sale portfolio. This transfer has been handled
in accordance with the special provisions related to the one-time transfer of
investment securities as allowed by the Financial Accounting Standards Board.
The Company took advantage of this opportunity to reposition its investment
portfolios to enhance its ability to react to changes in the securities market
and liquidity needs.
<TABLE>
<CAPTION>
Investment Portfolio Distribution-Book Value (Amortized cost)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995(1) 1994(1) 1993(1)
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury and other U.S. government
agencies and corporations $109,838 $133,260 $135,697
State and political subdivisions 8,929 17,955 24,394
Other securities 7,767 11,350 12,899
- -----------------------------------------------------------------------------------------------------------------------------------
Total $126,534 $162,565 $172,990
===================================================================================================================================
<FN>
(1) Reflects the cost of securities purchased, adjusted for premium
amortization and discount accretion, which differs from the amounts
reflected in the consolidated balance sheets due to fair value adjustments.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Analysis of Investment Portfolio (Held-to-Maturity) - December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
After 1 After 5
1 year through through After 10
Maturing in: or less 5 years 10 years years
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies
and corporations $4,907 5.38% $30,261 6.16% $ 330 7.34% $483 6.64%
State and political
subdivisions (1) 3,209 14.76 2,931 11.80 2,189 11.15 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $8,116 9.09% $33,192 6.66% $2,519 10.64% $483 6.64%
===================================================================================================================================
14
<PAGE>
<FN>
(1) Yields, calculated using amortized cost book values, are presented on a
fully taxable equivalent basis using the federal statutory rate of 34%. All
of the obligations of states and political subdivisions are rated A or
higher by either Moody's Investors Service, Inc. or Standard & Poor's
Corporation.
</FN>
</TABLE>
<TABLE>
Analysis of Investment Portfolio (Available-for-Sale) - December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
After 1 After 5
1 year through through After 10
Maturing in: or less 5 years 10 years years
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Amount(*) Yield Amount(*) Yield Amount(*) Yield Amount(*) Yield
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies
and corporations $3,751 5.97% $58,424 6.40% $10,214 6.84% $1,468 7.43%
State and political
subdivisions (1) 600 8.03 -- -- -- -- -- -
Other securities 45 8.01 1,511 7.55 -- -- 6,211 5.51
- -----------------------------------------------------------------------------------------------------------------------------------
Total $4,396 6.28% $59,935 6.43% $10,214 6.84% $7,679 5.87%
===================================================================================================================================
<FN>
* Reflects the cost of securities purchased, adjusted for premium amortization
and discount accretion, which differs from the amounts reflected in the
consolidated balance sheets due to fair value adjustments.
(1) Yields, calculated using amortized cost book values, are presented on a
fully taxable equivalent basis using the federal statutory rate of 34%. All
of the obligations of states and political subdivisions are rated A or
higher by either Moody's Investors Service, Inc. or Standard & Poor's
Corporation.
</FN>
</TABLE>
The Company had no investments that were obligations of the issuer, or payable
from or secured by a source of revenue or taxing authority of the issuer, whose
aggregate book value exceeded 10% of stockholders' equity at December 31, 1995.
Loan Portfolio
During 1995, the Company sold $23.16 million of conforming residential mortgage
loans to the Federal Home Loan Mortgage Corporation (FHLMC), Countrywide
Mortgage (Countrywide), the Federal National Mortgage Association (FNMA), and
other private investors, and held additional loans totaling $2.36 million at
December 31, 1995, whereas in 1994, the Company sold loans totalling $31.69
million to FHLMC and FNMA and held additional loans for sale totalling $1.02
million at December 31, 1994. The average balance of loans held for sale for
1995 was $1.25 million, and in 1994 was $3.40 million which generated average
yields of 6.55% and 7.39%, respectively.
The Company makes real estate construction, real estate mortgage, commercial and
agricultural, and consumer loans. The real estate construction loans are
generally secured by the construction project financed, and have a term of one
year or less. The real estate mortgage loans are generally secured by the
property and have a maximum loan to value ratio of 75% and a term of one to
seven years. The commercial and agricultural loans consist of secured and
unsecured loans. The unsecured commercial loans are made based on the financial
strength of the borrower and usually require personal guarantees from the
principals of the business. The collateral for the secured commercial loans may
be equipment, accounts receivable, marketable securities or deposits in the
subsidiary banks of the Company. These loans have a maximum loan to value ratio
of 75% and a term of one to five years. The consumer loan category consists of
secured and unsecured loans. The unsecured consumer loans are made based on the
financial strength of the individual borrower. The collateral for secured
consumer loans may be marketable securities, automobiles, recreational vehicles
or deposits in the Company's subsidiary banks. The usual term for these loans is
three to five years.
<TABLE>
<CAPTION>
Loan Distribution
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 % 1994 % 1993 % 1992 % 1991 %
- -------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction $ 26,372 8% $ 14,599 5% $ 8,911 4% $ 8,321 4% $ 20,329 8%
Real estate-mortgage(1) 227,478 64 201,891 66 171,937 68 161,451 70 158,086 66
Commercial and agricultural 47,278 13 42,049 14 37,254 15 31,393 13 30,272 13
Consumer 51,768 15 45,458 15 33,102 13 30,431 13 30,860 13
- -------------------------------------------------------------------------------------------------------------------------------
15
<PAGE>
Total loans, net of
unearned income 352,896 100% 303,997 100% 251,204 100% 231,596 100% 239,547 100%
Less: Allowance for
credit losses (4,112) (3,561) (3,160) (3,220) (3,087)
- -------------------------------------------------------------------------------------------------------------------------------
Net loans $348,784 $300,436 $248,044 $228,376 $236,460
================================================================================================================================
<FN>
(1) The real estate mortgage category contains 55.5%, 52.5%, 52.8%, 59.2%, and
63.1% of residential mortgage loans for 1995, 1994, 1993, 1992, and 1991,
respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Maturity and Interest Rate Sensitivity of Loans-December 31, 1995
- -------------------------------------------------------------------------------------------------------------------
1 year After 1
Maturing in: or less through 5 years After 5 years
- -------------------------------------------------------------------------------------------------------------------
Fixed Variable Fixed Variable Fixed Variable
interest interest interest interest interest interest
rates rates rates rates rates rates Total
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate -
construction $ 5,985 $11,880 $ 3,001 $ 615 $ -- $ -- $ 21,481
Real estate -
mortgage(1) 61,176 18,105 53,193 43,892 17,496 4,223 198,085
Commercial and
agricultural 2,251 9,506 11,939 9,216 671 1,151 34,734
Consumer 2,298 280 44,108 -- 2,051 -- 48,737
Other(2) 3,764 21,656 777 2,445 21,217 -- 49,859
- -------------------------------------------------------------------------------------------------------------------
Total $75,474 $61,427 $113,018 $56,168 $41,435 $5,374 $352,896
===================================================================================================================
<FN>
(1) The Company's customary business practice is to write real estate mortgage
loans, which will be retained in its loan portfolio, with repayment terms
normally not exceeding seven years. Most loans mature in one year with the
balance due at maturity. Assuming that credit standards are met at each
maturity, the Company customarily extends its loans for successive one
year periods. During 1994, the Company began to write some real estate
mortgage loans with terms up to 15 years. This volume is minimal as of
December 31, 1995.
(2) This category consists of the loans held by Elkridge Bank. It was
impractical to segregate this information by the appropriate loan types,
so this item reflects the information as it pertains to the loan portfolio
taken as a whole.
</FN>
</TABLE>
Allowance for Credit Losses
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 (Statement 114), "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures." It requires that impaired loans,
within its scope, be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Since the Company's allowance for credit losses was
considered adequate when this Statement was adopted, the impact on the Company's
financial condition and results of operations was not material.
Statement 114 excludes smaller balance and homogeneous loans from impairment
reporting. Therefore, the Company has designated consumer, credit card and
residential mortgage loans to be excluded for this purpose. From the remaining
loan portfolio, loans rated as doubtful, or worse, classified as nonaccrual, and
troubled debt restructurings may be considered to be impaired. Loans are placed
on nonaccrual when a loan is specifically determined to be impaired or when
principal or interest is delinquent for 90 days or more. Any unpaid interest
previously accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received. Up to this
point, slow payment on a loan is considered, by the Company, to only be a
minimum delay.
As of December 31, 1995, the Company had impaired loans totaling $407,000, for
which a specific allowance for credit losses of $204,000 has been provided and
other impaired loans of $218,000 for which no specific allowance for credit
losses is required. The average balance of these loans amounted to approximately
$1.02 million. Cash receipts on impaired loans applied to reduce the principal
balance and cash receipts recognized as interest income were $399,000 and
$118,000, respectively. The primary difference between the average balance for
the year and the balance as of December 31, 1995 is due to $1.04 million of
properties acquired through foreclosure. In addition, at December 31, 1995, the
Company had other nonaccrual loans of approximately $232,000 for which
impairment had not been recognized. If interest on these other nonaccrual loans
had been recognized at the original interest rates, interest income would have
increased approximately $5,000.
The Company maintains its allowance for credit losses at a level deemed
sufficient to provide for estimated potential losses inherent in the credit
extension process. Management reviews the adequacy of the allowance each
quarter, considering factors such as current and future economic conditions and
their anticipated impact on specific borrowers and industry groups, the growth
and composition of the loan portfolio, the level of classified and problem
assets, historical loss experience, and the collectibility of specific loans.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows.
16
<PAGE>
The provision for credit losses is charged to income in an amount necessary to
maintain the allowance at the level management believes is appropriate.
The allowance for credit losses was $4.11 million, or 1.17% of total loans, net
of unearned income, at December 31, 1995, compared to $3.56 million, or 1.17% as
of December 31, 1994. The allowance for credit losses to nonperforming loans was
420.0% and 253.3% as of December 31, 1995 and 1994, respectively.
Due to the growth of the loan portfolio in 1995, the Company's provision for
credit losses in 1995 was $710,000 compared to $450,000 in 1994. The provision
for credit losses in 1995 and 1994, exceeded net credit losses by $551,000 and
$401,000, respectively.
Total nonperforming assets as of December 31, 1995 totaled $2.46 million,
reflecting a $186,000 increase from the $2.27 million in nonperforming assets as
of December 31, 1994. Total nonperforming assets, including properties acquired
through foreclosure, represents .44% of total assets as of December 31, 1995 and
1994, respectively.
Nonperforming assets at December 31, 1995, included $857,000 of nonaccrual
loans. Of this total, $214,000 were secured by residential properties, and
$218,000 were secured by commercial properties. Past due loans amounted to
$122,000 and the remaining $1.48 million in nonperforming assets reflects the
fair value of foreclosed properties held, consisting principally of commercial
properties.
It is the Company's practice to continue the recognition of earnings on
delinquent consumer loans until the loans are charged-off after being 90 days
past due.
<TABLE>
<CAPTION>
Problem Assets
- -----------------------------------------------------------------------------------------
December 31, 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------
(dollars in thousands)
Nonperforming loans:
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans(1) $ 857 $1,253 $1,804 $3,142 $ 5,110
Restructured loans(2) - - - - -
Past due loans(3) 122 153 89 90 150
- -----------------------------------------------------------------------------------------
Total nonperforming loans 979 1,406 1,893 3,232 5,260
Foreclosed properties(4) 1,479 866 1,063 2,605 4,339
- -----------------------------------------------------------------------------------------
Total nonperforming
assets $2,458 $2,272 $2,956 $5,837 $9,599
=========================================================================================
Nonperforming assets to
total loans (net of
unearned income) and foreclosed
properties at period end .70% .75% 1.17% 2.49% 3.94%
Nonperforming assets to total
assets at period end .44% .44% .61% 1.33% 2.32%
Allowance for credit losses
to nonperforming loans at
period end 420.0% 253.3% 166.9% 99.6% 58.7%
- ------------------------
<FN>
(1) See discussion at "Allowance for Credit Losses" for nonaccrual and
impaired loans.
(2) Restructured loans are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15. Nonaccrual loans are
not included in these totals.
(3) Past due loans are loans that were contractually past due 90 days or more
as to principal or interest payments at the dates indicated. Nonaccrual
and restructured loans are not included in these totals.
(4) Foreclosed properties include properties that have been repossessed or
acquired in complete or partial satisfaction of debt. These properties,
which are held for resale, are carried at the lower of fair value (net of
estimated selling expenses) or the principal balance of the related loans.
</FN>
</TABLE>
17
<PAGE>
The Company has loans totaling $13.48 million that are now current for which
there are concerns as to the ability of the borrowers to comply with present
loan repayment terms. While management does not anticipate any loss not
previously provided for on these loans, changes in the financial condition of
these borrowers may necessitate future modifications in their loan repayment
terms.
At December 31, 1995, the Company had no concentrations of loans in any one
industry exceeding 10% of its total loan portfolio. An industry for this purpose
is defined as a group of counterparties that are engaged in similar activities
and have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.
There were no other interest-bearing assets at December 31, 1995, classifiable
as nonaccrual, past due, restructured or problem assets.
18
<PAGE>
<TABLE>
<CAPTION>
Allowance for Credit Losses
- --------------------------------------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average total loans out-
standing during year $336,883 $274,948 $236,981 $234,127 $233,781
==============================================================================================================
Allowance at beginning
of year $3,561 $3,160 $3,220 $3,087 $2,655
- --------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate-construction - - - 31 496
Real estate-mortgage 22 28 - 314 100
Commercial and agricultural 19 - 140 86 232
Consumer 168 129 127 135 58
- --------------------------------------------------------------------------------------------------------------
Total charge-offs 209 157 267 566 886
- --------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate-construction - - - - -
Real estate-mortgage 1 - 2 2 127
Commercial and agricultural - 38 8 11 88
Consumer 49 70 17 44 17
- --------------------------------------------------------------------------------------------------------------
Total recoveries 50 108 27 57 232
- --------------------------------------------------------------------------------------------------------------
Net charge-offs 159 49 240 509 654
- --------------------------------------------------------------------------------------------------------------
Additions to allowance charged
to operating expenses 710 450 180 642 1,086
- --------------------------------------------------------------------------------------------------------------
Allowance at end of year $4,112 $3,561 $3,160 $3,220 $3,087
==============================================================================================================
Ratio of net charge-offs
to average total loans .05% .02% .10% .22% .28%
==============================================================================================================
</TABLE>
The allocation of the Allowance, presented in the following table, is based
primarily on the factors discussed above in evaluating the adequacy of the
Allowance as a whole. Since all of those factors are subject to change, the
allocation is not necessarily indicative of the category of future loan losses.
19
<PAGE>
Allocation of Allowance for Credit Losses
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 %(1) 1994 %(1) 1993 %(1) 1992 %(1) 1991 %(1)
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction $ 206 8% $ 143 5% $ 118 4% $ 292 4% $ 520 8%
Real estate-mortgage 1,930 64 1,894 66 1,817 68 1,620 70 1,628 66
Commercial and agricultural 1,116 13 736 14 978 15 1,121 13 638 13
Consumer 436 15 304 15 247 13 187 13 301 13
Unallocated 424 -- 484 -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Allowance $4,112 100% $3,561 100% $3,160 100% $3,220 100% $3,087 100%
==============================================================================================================================
<FN>
(1) Percent of loans in each category to total loans, net of unearned income.
</FN>
</TABLE>
Deposits
<TABLE>
<CAPTION>
Average Deposits and Average Rates
- -------------------------------------------------------------------------------------------------------------------
Years ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Average Average Average
daily Average daily Average daily Average
balance Rate balance Rate balance Rate
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Noninterest-bearing
demand deposits $ 58,746 -% $ 55,369 -% $ 46,517 -%
Interest-bearing
demand deposits 114,619 2.97 119,025 2.71 108,902 2.77
Savings deposits 69,010 3.04 71,957 2.81 62,018 3.00
Certificates of deposit
and other time deposits 188,212 5.41 155,382 4.25 154,021 4.29
- -------------------------------------------------------------------------------------------------------------------
Total average deposits $430,587 3.64% $401,733 2.95% $371,458 3.09%
===================================================================================================================
</TABLE>
Maturities of Time Deposits-$100,000 or More
- -------------------------------------------------------------------------------
December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(dollars in thousands)
Maturing in:
3 months or less $ 9,504 $13,042 $11,165
Over 3 months through 6 months 8,583 6,253 9,271
Over 6 months though 12 months 6,963 12,688 3,571
Over 12 months 9,750 7,039 5,929
- -------------------------------------------------------------------------------
$34,800 $39,022 $29,936
===============================================================================
20
<PAGE>
<TABLE>
<CAPTION>
Short-term Borrowings
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
- -----------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Total outstanding at year-end(1) $21,043 $25,103 $32,304
=====================================================================================================
Average amount outstanding during the year $18,928 $29,592 $20,080
=====================================================================================================
Maximum amount outstanding at any month-end $28,237 $43,768 $35,184
=====================================================================================================
Weighted average interest rate at year-end 5.65% 5.93% 3.20%
=====================================================================================================
Weighted average interest rate during the year 5.93% 4.21% 3.07%
=====================================================================================================
<FN>
(1) Includes securities sold under agreements to repurchase with the Federal
Home Loan Bank of Atlanta, totaling $15 million. Securing this arrangement
are investment securities with book values of $23.96 million and fair
values of $23.60 million at December 31, 1995. These repurchase agreements
mature primarily within 30 days of December 31, 1995.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Other Short-term Borrowings(2)
- -------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Total outstanding at year-end $25,426 $19,089 $10,276
===================================================================================================================
Average amount outstanding during the year $27,207 $11,322 $15,420
===================================================================================================================
Maximum amount outstanding at any month-end $36,382 $22,887 $18,827
===================================================================================================================
Weighted average interest rate at year-end 5.69% 6.08% 3.29%
===================================================================================================================
Weighted average interest rate during the year 6.04% 4.68% 3.32%
===================================================================================================================
<FN>
(2) Primarily reflects the amounts borrowed under secured lending arrangements
with the Federal Home Loan Bank of Atlanta.
</FN>
</TABLE>
Long-term debt
On May 31, 1995, the Company entered into a secured lending arrangement with a
regional national bank, to finance the cost of its new corporate headquarters
facility in Frederick, Maryland (the "Facility"). Pursuant to the terms of this
arrangement, the Company will borrow $6,545,000. The loan is secured by a first
lien security interest on the Facility's land, improvements and fixtures and
equipment. The principal amount of the loan will be amortized with monthly
payments over a 15 year term commencing on the earlier of the first day of the
first month following the completion of the Facility, or November 1, 1996. Any
remaining unpaid balance on May 1, 2002 is due in full. The loan bears interest
at a fluctuating rate equal to the daily London Interbank Offering Rate for
one-month U.S. Dollar deposits (LIBOR), plus 1.35 percent, subject to a limited
upward adjustment if certain performance ratios are not maintained. The balance
outstanding as of December 31, 1995 was $4.68 million, bearing interest at a
rate of 7.32%.
Capital Resources
Adequate capital is vital to financial institutions. It is requisite to
sustaining growth, providing a measure of protection against unanticipated
declines in asset values and helping safeguard the funds of depositors. Capital
also provides a source of funds to meet loan demand and enables the Company to
manage its asset and liabilities effectively. The equity formation rate
(calculated as net income less dividends declared divided by average total
equity) was 8.60% in 1995 compared to 8.84% in 1994.
The Federal Reserve Board has stringent capital guidelines which are directly
related to a bank's risk-based capital ratios. By regulatory definition, a "well
capitalized" bank is one having a Tier 1 capital ratio of 6% or more, a total
risk-based capital ratio of 10% or more, and a leverage ratio of 5% or more.
These institutions supposedly face fewer regulatory hindrances in its operations
than institutions which are classified at the other end of the spectrum as
"critically undercapitalized." In addition, FDIC deposit insurance premium rates
are significantly lower for banks with higher capital levels as compared to
poorly capitalized banks.
21
<PAGE>
By bank regulation, the total risk-based capital ratio, the Tier 1 risk-based
capital ratio and the Tier 1 leverage ratio must be at least equal to 8%, 4% and
3% (with an additional cushion of at least 100 to 200 basis points for all but
the most highly rated banks for the Tier 1 leverage ratio), respectively. Tier 1
capital, as it relates to the Company, consists principally of total
stockholders' equity less ineligible intangible assets. Total capital, as it
relates to the Company, consists principally of Tier 1 capital and the allowance
for credit losses.
The capital amounts used for the risk-based capital calculations are different
than the capital amounts reported in the accompanying consolidated balance
sheets. This difference is due to the exclusion of the effects of Statement of
Financial Accounting Standards No. 115 (Statement 115), "Accounting for Certain
Investments in Debt and Equity Securities," for this purpose. The effects of the
net unrealized gain (loss) on securities available for sale were $530,000 and
($2.15 million) at December 31, 1995 and 1994, respectively.
The Federal Reserve Board has a current proposal to add an interest rate risk
component to the calculation of the risk-based capital ratios. It is
management's opinion, that the impact of this proposal, if enacted, would not
have a material impact on the Company's capital ratios.
- --------------------------------------------------------------------------------
Risk-based capital ratios Leverage ratio
- --------------------------------------------------------------------------------
Tier 1 Total capital
- --------------------------------------------------------------------------------
Actual 12.04% 13.09% 8.55%
Minimum 4.00 8.00 3.00
- --------------------------------------------------------------------------------
Excess 8.04% 5.09% 5.55%
================================================================================
Recent developments
- -------------------
There are currently being discussed certain proposals relating to the reform or
restructuring of the deposit insurance fund system. Currently, there are two
deposit insurance funds maintained by the FDIC, the Bank Insurance Fund ("BIF")
and the Savings Association Insurance Fund ("SAIF"). Deposits of SAIF insured
institutions assumed by BIF insured banks (plus the deemed growth in such
deposits) continue to be treated as SAIF insured deposits, unless "entrance and
exit fees" amounting to approximately 1.79% of the assumed deposits are paid.
The designation of deposits as "BIF insured" or "SAIF insured" determines the
level of the deposit insurance premiums paid by an institution, and the
allocation of such premiums between BIF and SAIF. As of December 31, 1995, the
Company had approximately $44.00 million in deposits designated as SAIF insured,
out of $448.92 million in total deposits. Deposit premium assessments for the
Company's BIF insured deposits have been reduced to .04% as of June 1, 1995,
down from .23% and have been eliminated for the first quarter of 1996. SAIF
deposit insurance premiums will remain at .23% until SAIF meets the mandated
level of 1.25% of insured deposits. Among the proposals to recapitalize SAIF and
allow the equalization at the lower BIF premium levels is one which would impose
a one-time assessment of .85% to .90% of SAIF insured deposits on all
institutions holding SAIF insured deposits. If a one-time assessment of .85% of
SAIF insured deposits were imposed on the Company as of December 31, 1995, and
the assessment were imposed utilizing the same formula for calculating the level
of the SAIF insured deposit base as that currently utilized for allocating
premiums between BIF and SAIF, then the Company would be required to pay
approximately $374,000 in connection with the assessment without reduction for
the effect of income taxes. With the acquisition of Laurel and the pending
acquisition of Harbor that would include approximately $110.0 million in SAIF
insured deposits, the Company's one-time assessment would increase by
approximately $935,000. There can be no assurance as to the enactment of any of
the current proposals, the form of any such proposals, the amount, tax treatment
or timing of any one-time assessment, or the means used to calculate the deposit
base subject to any such assessment.
22
<PAGE>
Financial Analysis 1994-1993
Earnings Summary:
Net income was $5.29 million in 1994 compared to $5.36 million for 1993.
Earnings per share were $1.30 in 1994 compared to $1.32 for 1993.
Return on average assets was 1.09% in 1994 compared to 1.19% for 1993. Return on
average stockholders' equity was 13.01% in 1994 compared to 14.06% in 1993.
Net Interest Income: On a fully taxable-equivalent basis, net interest income
increased $1.75 million, or 8.3% in 1994 and $931,000, or 4.6% in 1993.
In 1994, the net margin on average total interest-earning assets decreased to
4.97% from 4.98% in 1993 and from 5.07% in 1992. Changes in net interest income
between periods is affected principally by the volume of interest-earning assets
and the yield on those assets, and by the volume of interest-bearing deposits
and other liabilities and the rates paid on those deposits and liabilities.
Table 2 summarizes, on a fully taxable-equivalent basis, the impact of changes
in average balances and average rates on the Company's net interest income for
the periods indicated.
Noninterest Income: Noninterest income decreased by $508,000, or 15.9% in 1994
but increased by $1.52 million, or 89.9% in 1993.
The Company utilized the secondary mortgage market to satisfy its customers'
demand for long-term fixed-rate mortgage financing and, in so doing, incurred
losses in the amount of $260,000 from the sale of conforming mortgage loans but
generated $477,000 in related servicing fees in 1994. During 1993, the Company
realized gains from loan sales and servicing fees of $1.98 million and $275,000,
respectively, from its activity in this market.
The increased service fees on deposit accounts are attributed to increases in
both account volume and activity, since service charges per account and per
transaction remained relatively constant between the periods.
Noninterest Expenses: Noninterest expenses increased $1.12 million, or 7.3.% in
1994 and $1.59 million, or 11.6% in 1993.
Increases in salaries and employee benefits of $433,000, or 5.4% in 1994 and
$947,000, or 13.4% in 1993, primarily reflect the effects of an increase in the
number of Company personnel during these periods and an increase in health
insurance costs during 1993. The Company acquired one branch office in 1994, and
one branch office in 1993.
Other operating expenses increased $527,000, or 11.3% in 1994, and $499,000, or
12.0% in 1993. See Note 13 to the consolidated financial statements for a
schedule showing a detailed breakdown of the Company's more significant other
operating expenses.
Income Taxes: Income tax expense increased to $2.39 million in 1994, compared to
$2.32 million in 1993, reflecting the higher level of pretax income in 1994 and
the Company's higher effective tax rate of 31.1% in 1994 compared to 30.2% in
1993.
23
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning the
Company, as restated for the effects of its merger with ENB Financial
Corporation that was accounted for as a pooling of interests, and is qualified
in its entirety by the detailed information and financial statements, including
notes thereto, included elsewhere herein. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation have been included.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Total interest income $41,982 $35,405 $32,518 $33,898 $34,998
Total interest expense(1) 18,277 13,613 12,627 15,022 19,533
- ------------------------------------------------------------------------------------------------------------------
Net interest income 23,705 21,792 19,891 18,876 15,465
Provision for credit losses 710 450 180 642 1,086
- ------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 22,995 21,342 19,711 18,234 14,379
Net securities gains (losses) 123 375 (1,183) (1,576) (142)
Noninterest income (excluding net
securities gains (losses)) 3,544 2,317 4,383 3,261 2,102
Noninterest expenses 17,841 16,353 15,234 13,645 12,167
- ------------------------------------------------------------------------------------------------------------------
Income before provision for income
taxes and cumulative effect of
changes in accounting principles 8,821 7,681 7,677 6,274 4,172
Provision for income taxes 3,071 2,388 2,316 1,577 1,003
- ------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 5,750 5,293 5,361 4,697 3,169
Cumulative effect on prior years of
changes in accounting principles -- -- -- (129) --
- ------------------------------------------------------------------------------------------------------------------
Net income $5,750 $5,293 $5,361 $4,568 $3,169
==================================================================================================================
Per Share:(2)
Income before cumulative effect
of changes in accounting principles $ 1.41 $ 1.30 $1.32 $1.16 $0.78
Cumulative effect on prior years of
changes in accounting
principles -- -- -- (.03) --
Net income 1.41 1.30 1.32 1.13 0.78
Cash dividends declared(3) .46 .42 .35 .32 .22
Book value at year-end(4) 11.87 10.24 10.16 8.89 8.08
Average common shares
outstanding 4,069,879 4,068,329 4,058,137 4,051,318 4,046,446
Other Data (At Year-End):
Total loans, net of unearned income $352,896 $303,997 $251,204 $231,596 $239,547
Total assets 553,253 517,521 488,547 439,782 412,914
Total deposits 448,917 427,797 401,327 365,742 347,924
Federal funds purchased and securities
sold under agreements to repurchase 21,043 25,103 32,304 7,679 27,251
Other short-term borrowings 25,426 19,089 10,276 26,673 1,611
Long-term debt 4,680 - - - -
Total stockholders' equity 48,301 41,688 41,252 36,046 32,700
24
<PAGE>
Consolidated Ratios:
Return on average total assets(4) 1.09% 1.09% 1.19% 1.08% .84%
Return on average stockholders'
equity(4) 12.79 13.01 14.06 13.35 9.98
Average stockholders' equity
to average total assets(4) 8.51 8.35 8.49 8.10 8.44
Cash dividends declared to
net income 32.80 32.04 26.78 27.76 27.67
- ----------------------------
<FN>
(1) Net of $300,000 of capitalized construction period interest in 1995.
(2) The amounts shown have been adjusted retroactively, for a 3 for 2 stock
split effected in the form of a 50% stock dividend declared in April 1995.
(3) During 1991, the cash dividend declaration dates were changed to occur
after the end of each calendar quarter, causing a decrease in the cash
dividends declared in 1991.
(4) The 1995, 1994 and 1993 amounts and ratios shown include the effects of
the December 31, 1993 adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
</FN>
</TABLE>
25
<PAGE>
FCNB Corp and Subsidiaries
Consolidated Balance Sheets
December 31, 1995 and 1994
(Dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------
ASSETS 1995 1994
- -------------------------------------------------------------------------------
Cash and due from banks $ 22,848 $ 14,194
Interest-bearing deposits in other banks 188 426
Federal funds sold 20,017 18,734
- -------------------------------------------------------------------------------
Cash and cash equivalents 43,053 33,354
- -------------------------------------------------------------------------------
Loans held for sale 2,362 1,023
- -------------------------------------------------------------------------------
Investment securities held to maturity - fair value
of $45,059 in 1995 and $79,917 in 1994 44,310 82,058
- -------------------------------------------------------------------------------
Investment securities available for sale - at fair
value 83,062 77,234
- -------------------------------------------------------------------------------
Loans 353,826 306,160
Less: Allowance for credit losses (4,112) (3,561)
Unearned income (930) (2,163)
- -------------------------------------------------------------------------------
Net loans 348,784 300,436
- -------------------------------------------------------------------------------
Bank premises and equipment 19,846 12,150
- -------------------------------------------------------------------------------
Other assets 11,836 11,266
- -------------------------------------------------------------------------------
Total assets $553,253 $517,521
===============================================================================
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 65,979 $ 65,667
Interest-bearing deposits 382,938 362,130
- -------------------------------------------------------------------------------
Total deposits 448,917 427,797
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 21,043 25,103
Other short-term borrowings 25,426 19,089
Long-term debt 4,680 -
Accrued interest and other liabilities 4,886 3,844
- -------------------------------------------------------------------------------
Total liabilities 504,952 475,833
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 10 & 17)
- -------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, per share par value $1.00;
1,000,000 shares authorized; none outstanding -- --
Common stock, per share par value $1.00;
5,000,000 shares authorized; 4,069,879 in 1995
and 2,713,547 in 1994 shares issued
and outstanding 4,070 2,714
Surplus 22,615 22,535
Retained earnings 21,086 18,589
Net unrealized gain (loss) on securities
available for sale 530 (2,150)
- -------------------------------------------------------------------------------
Total stockholders' equity 48,301 41,688
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $553,253 $517,521
===============================================================================
See Notes to Consolidated Financial Statements.
26
<PAGE>
<TABLE>
<CAPTION>
FCNB Corp and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $31,560 $23,804 $20,628
Interest and dividends on investment
securities:
Taxable 8,384 9,119 9,226
Tax exempt 1,211 1,816 2,103
Dividends 346 217 144
Interest on federal funds sold 457 439 403
Other interest income 24 10 14
- --------------------------------------------------------------------------------------------------
Total interest income 41,982 35,405 32,518
- --------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 15,511 11,836 11,488
Interest on federal funds purchased and
securities sold under agreements
to repurchase 1,122 1,247 617
Interest on other short-term
borrowings 1,644 530 513
Interest on long-term debt -- -- 9
- --------------------------------------------------------------------------------------------------
Total interest expense 18,277 13,613 12,627
- --------------------------------------------------------------------------------------------------
Net interest income 23,705 21,792 19,891
Provision for credit losses 710 450 180
- --------------------------------------------------------------------------------------------------
Net interest income after provision
for credit losses 22,995 21,342 19,711
- --------------------------------------------------------------------------------------------------
Noninterest income:
Service fees 2,104 1,845 1,724
Net securities gains (losses) 123 375 (1,183)
Gain (loss) on sale of loans 315 (260) 1,975
Servicing fees on loans sold 547 477 275
Other operating income 578 255 409
- --------------------------------------------------------------------------------------------------
Total noninterest income 3,667 2,692 3,200
- --------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 9,859 8,448 8,015
Occupancy expenses, net 1,511 1,491 1,282
Equipment expenses 1,312 1,232 1,282
Merger related expenses 303 227 --
Other operating expenses 4,856 4,955 4,655
- --------------------------------------------------------------------------------------------------
Total noninterest expenses 17,841 16,353 15,234
- --------------------------------------------------------------------------------------------------
Income before provision for income taxes 8,821 7,681 7,677
Provision for income taxes 3,071 2,388 2,316
- --------------------------------------------------------------------------------------------------
Net income $ 5,750 $ 5,293 $ 5,361
==================================================================================================
Net income per share $1.41 $1.30 $1.32
==================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
<TABLE>
<CAPTION>
FCNB Corp and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1995, 1994 and 1993
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) Net
Unrealized
Gain (loss) Total
on Securities Stock-
Shares Common Retained Available holders'
Outstanding Stock Surplus Earnings for Sale Equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 2,141,072 $2,141 $13,952 $14,281 $ - $30,374
Effect of pooled
entity 342,831 343 3,541 1,789 - 5,673
Net income -- -- -- 5,361 - 5,361
Shares issued under dividend
reinvestment and stock purchase
plan 4,683 4 47 (6) - 45
Shares issued with
stock dividend 106,532 107 2,077 (2,184) - --
Stock options granted -- -- 100 -- -- 100
Cash dividends declared
($.35 per share) -- -- -- (1,436) - (1,436)
Fair value adjustment for securities
available for sale, net -- -- -- -- 1,135 1,135
- ------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993 2,595,118 2,595 19,717 17,805 1,135 41,252
Net income -- -- -- 5,293 -- 5,293
Shares issued under dividend
reinvestment and stock purchase
plan 3,764 4 51 (13) -- 42
Shares issued with
stock dividend 112,013 112 2,688 (2,800) -- --
Stock option
transactions 2,652 3 79 -- -- 82
Cash dividends declared
($.42 per share) -- -- -- (1,696) -- (1,696)
Fair value adjustment for securities
available for sale, net -- -- -- -- (3,285) (3,285)
- ------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 2,713,547 2,714 22,535 18,589 (2,150) 41,688
Net income -- -- -- 5,750 -- 5,750
Dividend reinvestment
and stock purchase plan -- -- -- (11) -- (11)
Shares issued with stock
split, effected in the form
of a 50% stock
dividend 1,356,332 1,356 -- (1,356) -- --
Stock options granted -- -- 80 -- -- 80
Cash dividends declared
($.46 per share) -- -- -- (1,886) -- (1,886)
Fair value adjustment for securities
available for sale, net -- -- -- -- 2,680 2,680
- ------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 4,069,879 $4,070 $22,615 $21,086 $530 $48,301
========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
<TABLE>
<CAPTION>
FCNB Corp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,750 $ 5,293 $ 5,361
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 977 965 962
Provision for credit losses 710 450 180
Provision for foreclosed properties 177 246 9
Provision for deferred income
taxes (benefits) (207) 25 546
Net premium amortization (discount accretion)
on investment securities (98) 114 181
Noncash charitable contribution - 31 -
Federal Home Loan Bank stock dividend - (26) (200)
Accretion of net loan origination fees (373) (108) (29)
Net securities (gains) losses (123) (375) 1,183
Net (gain) loss on sales of property (47) 16 (97)
Decrease (increase) in other assets (1,104) (1,106) (407)
Decrease (increase) in loans held for sale (1,339) 13,648 (5,136)
Increase (decrease) in accrued interest
and other liabilities 1,042 456 (63)
Other - net - - 412
- ---------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 5,365 19,629 2,902
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities - - 1,822
Proceeds from sales of investment securities
available for sale 21,618 4,080 -
Proceeds from maturities of investment securities
available for sale 6,820 26,160 -
Proceeds from maturities of investment securities
held to maturity 21,790 19,985 55,071
Purchases of investment securities available for sale (6,457) (26,484) -
Purchases of investment securities held to maturity (7,520) (13,054) (75,526)
Net increase in loans (49,722) (53,294) (19,571)
Purchases of bank premises and equipment (8,763) (1,786) (4,682)
Proceeds from dispositions of property 388 571 1,349
Investment in foreclosed property joint venture - (20) -
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (21,846) (43,842) (41,537)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
FCNB Corp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1995, 1994, and 1993
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in noninterest-
bearing deposits, NOW accounts, money
market accounts, and savings accounts (6,030) 11,456 40,279
Net increase (decrease) in time deposits 27,150 15,014 (4,694)
Net increase in short-term borrowings 2,277 1,611 8,229
Proceeds from (repayment of) long-term debt 4,680 - (192)
Dividend reinvestment plan (11) (13) (6)
Proceeds from issuance of common stock - 96 51
Dividends paid (1,886) (1,696) (1,436)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,180 26,468 42,231
- -----------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 9,699 2,255 3,596
Cash and cash equivalents-beginning of year 33,354 31,099 27,503
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents-end of year $43,053 $33,354 $31,099
=============================================================================================================================
Supplemental schedule of noncash investing and financing activities:
Foreclosed properties acquired
in settlement of loans $1,037 $560 $299
=============================================================================================================================
Seller financed disposition of property $- $- $603
=============================================================================================================================
Surplus from stock options granted $80 $41 $100
=============================================================================================================================
Book value of securities transferred to available
for sale from held to maturity $23,751 - -
=============================================================================================================================
Fair value adjustment for securities available
for sale, net of applicable deferred
income tax effects $2,680 $(3,285) $ 1,135
=============================================================================================================================
The Company paid interest of $18,390, $13,410 and $12,761 in 1995, 1994 and
1993, respectively.
Income taxes paid by the Company were $2,755, $1,847 and $2,813 in 1995, 1994
and 1993, respectively.
=============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
FCNB Corp and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of banking activities and significant accounting policies:
FCNB Corp (the "Parent Company") is a multi-bank holding company that provides
its customers with banking and bank related financial services through its
principal wholly-owned subsidiaries FCNB Bank and Elkridge Bank (the "Banks").
The Banks offer various loan, deposit and other financial service products to
its customers. The Banks' customers include individuals and commercial
enterprises located within the State of Maryland. Their principal market areas
encompass Frederick, Carroll, Howard, Prince George's, Anne Arundel and
Montgomery counties and portions of the adjacent counties within the State.
Additionally, the Banks maintain correspondent banking relationships and
transact daily federal funds sales on an unsecured basis with regional
correspondent banks.
The accounting and reporting policies and practices of the Parent Company and
its subsidiaries (collectively, the "Company") conform with generally accepted
accounting principles. The following is a summary of the Company's significant
accounting policies:
Basis of presentation:
The consolidated financial statements include the accounts of the Parent Company
and its wholly-owned subsidiaries, presented on the accrual basis of accounting,
after elimination of all inter-company accounts and transactions. In the Parent
Company's unconsolidated financial statements, investments in subsidiaries are
accounted for using the equity method of accounting.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Presentation of cash flows:
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks (including cash items in process of clearing) with
a maturity of 90 days or less, and federal funds sold. Generally, federal funds
are sold for one day periods.
Investment securities:
Effective December 31, 1993, the Company adopted Financial Accounting Standards
Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," which requires the use of fair value accounting for certain
investment categories.
Securities classified as held-to-maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed using the interest method over their contractual
lives.
Securities classified as available-for-sale are equity securities with readily
determinable fair values and those debt securities that the Company intends to
hold for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at fair value, with any unrealized gains or losses reported in
stockholders' equity, net of the related deferred tax effect.
Dividend and interest income, including amortization of premium and accretion of
discount arising at acquisition, from all categories of investment securities
are included in interest income in the consolidated statements of income. Gains
and losses realized on sales of investment securities, determined using the
adjusted cost basis of the specific securities sold, are included in noninterest
income in the consolidated statements of income. Additionally, declines in the
fair value of individual investment securities below their cost that are other
than temporary are reflected as realized losses in the consolidated statements
of income.
31
<PAGE>
Loans held for sale:
Loans held for sale are generally held for periods of ninety days or less and
are carried at the lower of aggregate cost or fair value.
Loans and allowance for credit losses:
On January 1, 1995, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 114, "Accounting by Creditors for Impairment of a Loan,"
(Statement 114) as amended by FASB Statement No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." Statement 114,
as amended, requires that the measurement of a loan's impairment be based on the
present value of the loan's expected future cash flows or, alternatively, the
observable market price of the loan or the fair value of the collateral. The
effect of adopting Statement 114 was not material.
Loans are carried at the amount of unpaid principal, adjusted for deferred loan
fees and origination costs. Interest on loans is accrued based on the principal
amounts outstanding. It is the Company's policy to discontinue the accrual of
interest when a loan is specifically determined to be impaired or when principal
or interest is delinquent for ninety days or more. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is reversed
against current period interest income. Interest income generally is not
recognized on specific impaired loans unless the likelihood of further loss is
remote. Cash collections on such loans are applied as reductions of the loan
principal balance and no interest income is recognized on those loans until the
principal balance has been collected. Interest income on other nonaccrual loans
is recognized only to the extent of interest payments received.
Nonrefundable loan fees and related direct costs are deferred and the net amount
is amortized to income as a yield adjustment over the life of the loan using the
interest method.
The allowance for credit losses is maintained at a level that, in management's
judgment, is adequate to absorb credit losses inherent in the credit extension
process. Management's evaluation of the loan portfolio, including off-balance
sheet credit exposures, considers current economic conditions, past loss
experience, specific impaired loans and such other factors as, in management's
best judgment, deserve recognition in estimating credit losses. Allowances for
impaired loans are generally based on collateral values or the present value of
estimated cash flows. Uncertainties inherent in the estimation process, might
cause management's estimate of credit losses in the loan portfolio and the
related allowance to change in the near term. The provisions for credit losses
included in the consolidated statements of income serve to maintain the
allowance at a level which management considers adequate.
Bank premises and equipment:
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. The provision for depreciation is computed using straight-line and
accelerated methods based on the estimated useful lives of the assets which
range from 5 to 75 years for bank premises and 5 to 25 years for equipment.
Leasehold improvements are amortized over the lesser of the terms of the leases
or their estimated useful lives. Expenditures for improvements which extend the
life of an asset are capitalized and depreciated over the asset's remaining
useful life. Gains or losses realized on the disposition of properties and
equipment are reflected in the consolidated statements of income. Expenditures
for repairs and maintenance are charged to operating expenses as incurred.
Foreclosed properties:
Foreclosed properties include properties that have been acquired in complete or
partial satisfaction of debt. These properties are recorded in other assets at
the lower of the outstanding loan balance or the estimated fair value of the
property on the date of acquisition. Any write-downs at the time of acquisition
are charged to the allowance for credit losses. Subsequent to acquisition, a
valuation allowance is established, if necessary, to report acquired assets held
for sale at the lower of (a) fair value minus estimated costs to sell or (b)
cost. Gains and losses realized on the sale, and any adjustments resulting from
periodic revaluation of this property are included in noninterest income or
expense, as appropriate. Net costs of maintaining and operating the properties
are expensed as incurred.
Income taxes:
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of non-taxable income such as interest on state
and municipal securities) and deferred taxes on temporary differences between
the amount of taxable income and pretax financial income and between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the financial
statements at
32
<PAGE>
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
33
<PAGE>
Net income per share:
Net income per share is based on 4,069,879 shares in 1995, 4,068,329 in 1994 and
4,058,137 in 1993, which are the weighted average number of shares outstanding
during each year, after giving retroactive effect to stock splits and stock
dividends. No material dilution results from the assumed exercise of stock
options.
Dividends per share:
Dividends per share reflect the dividends declared each year after giving
retroactive effect to stock splits and stock dividends.
Fair value of financial instruments:
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. When no market exists for the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage banking
operation, depositor relationships, deferred tax assets, and property, plant and
equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates. As a result,
the estimates are only indicative of individual financial instruments' values
and should not be considered an indication of the fair value of the combined
Company taken as a whole.
Postretirement benefits other than pensions:
The Company uses the accrual method of accounting for postretirement health care
and life insurance benefits based on actuarially determined costs to be
recognized over the period the employee provides services to the Company.
Reclassifications and restatements:
Certain reclassifications to prior year balances have been made in the
accompanying consolidated financial statements to make disclosures consistent
with those of the current year. The 1994 and 1993 financial statements,
including earnings per share data and other financial data, have been restated
to reflect the Company's acquisition of ENB Financial Corporation.
Note 2. Acquisitions:
On March 24, 1995, the Company completed its acquisition of ENB Financial
Corporation ("ENB"), the holding company for Elkridge Bank, headquartered in
Elkridge, Maryland, with additional branches in Columbia and Glen Burnie,
Maryland. A total of approximately 526,000 shares of the Company's common stock
was issued in the transaction, which was accounted for as a
pooling of interests.
The combined and separate results of operations for ENB and the Company
preceding the merger are as follows:
Total Net Net income
(Dollars in thousands, except per share data) income income per share
- -------------------------------------------------------------------------------
Three months ended March 31, 1995
The Company $ 9,083 $1,167 $0.33
Results of pooled entity 1,600 145
- -------------------------------------------------------------------------------
34
<PAGE>
Combined $10,683 $1,312 $0.32
===============================================================================
Year ended December 31, 1994
The Company $32,414 $5,157 $1.45
Results of pooled entity 5,683 136
- -------------------------------------------------------------------------------
Combined $38,097 $5,293 $1.30
===============================================================================
Year ended December 31, 1993
The Company $29,723 $4,762 $1.35
Results of pooled entity 5,995 599
- -------------------------------------------------------------------------------
Combined $35,718 $5,361 $1.32
===============================================================================
On January 26, 1996, the Company consummated its merger of Laurel Bancorp, Inc.
("Laurel"), the holding company for Laurel Federal Savings Bank, Laurel,
Maryland ("Laurel FSB"), with and into the Company. Pursuant to the terms of
this merger, Laurel FSB was merged with and into the Company's wholly-owned
subsidiary, Elkridge Bank, and the branch of Laurel FSB in Monrovia, Maryland
was transferred to FCNB Bank. A total of approximately 1,321,000 shares of the
Company's common stock was issued in the transaction, which will be accounted
for as a pooling of interests. Laurel had approximately $108 million in assets
at the time of the merger.
In connection with this merger, certain costs incurred to effect the
combination, accounted for as a pooling of interests, will be expenses of the
combined enterprise and, accordingly, will be charged to expense and deducted in
determining the results of operations of the combined entity. The specific
one-time costs associated with this merger that will be charged to the combined
entity's results of operations in the first quarter of 1996 following
consummation of the merger include: (1) income tax expense of approximately
$1.60 million associated with accumulated bad debt reserves for income tax
purposes in excess of those maintained for financial reporting purposes; (2)
salaries and employee benefits associated with change-in-control payments to
certain executive officers of Laurel totalling approximately $1.20 million; and
(3) other operating expenses of approximately $300,000 associated with a
consulting fee payable to Laurel's financial advisor.
The following supplemental unaudited financial data assumes the Laurel merger
occurred on January 1, 1993 and includes Laurel information for the twelve month
periods ended November 30, 1995, 1994 and 1993.
- --------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Total assets $660,947 $627,050 $603,497
Total interest income 51,126 43,892 41,691
Net interest income 28,367 26,882 25,637
Noninterest income 3,918 2,878 3,314
Noninterest expenses 20,599 19,192 18,013
Net income 7,057 6,772 6,872
Net income per share 1.32 1.26 1.29
On December 22, 1995, the Company entered into an Agreement and Plan of Merger
to acquire all of the common stock of Harbor Investment Corporation ("Harbor"),
the parent company of Odenton Federal Savings and Loan Association ("Odenton"),
Odenton, Maryland. At December 31, 1995, Harbor had total assets and
stockholders' equity of approximately $35 million and $4 million, respectively.
Pursuant to the terms of the agreement the aggregate consideration paid to the
stockholders of Harbor shall not exceed $6.72 million. The proposed acquisition
is subject to regulatory and shareholder approval, and is anticipated to be
completed in the second quarter of 1996 associated with a branch office located
in Damascus, Maryland.
On December 9, 1994, the Company consummated a purchase and assumption
transaction, in which it acquired certain assets and assumed certain liabilities
of The Bank of Baltimore, Baltimore, Maryland, a Maryland state chartered
commercial bank. In this acquisition, accounted for under the purchase method of
accounting, the Company assumed approximately $7.6 million in deposits and
purchased selected assets consisting of equipment, loans, and intangibles of
$10,000, $21,000 and $229,000, respectively.
Note 3. Compensating balances:
Compensating balance arrangements exist with various correspondent banks. These
noninterest- bearing deposits are maintained in lieu of cash payments for
standard bank services. The required balance amounted to $74,000 at December 31,
1995 and $99,000 at December 31, 1994. In addition, for the reserve maintenance
period in effect at December 31, 1995 and 1994, the Banks were required to
maintain average daily balances totaling $4,074,000 and $3,792,000 respectively,
with the Federal Reserve Bank.
Note 4. Investments:
The amortized cost and estimated fair value of securities classified as
held-to-maturity at December 31, 1995 are as follows:
35
<PAGE>
<TABLE>
<CAPTION>
Held-to-maturity portfolio
- -------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- -------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $ 8,907 $ 35 $ 19 $8,923
State and political subdivisions 8,329 681 - 9,010
Mortgage-backed debt securities 27,074 417 365 27,126
- -------------------------------------------------------------------------------------
$44,310 $1,133 $384 $45,059
=====================================================================================
</TABLE>
The amortized cost and estimated fair value of securities classified as
available-for-sale at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Available-for-sale portfolio
- --------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- --------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $12,423 $ 53 $116 $12,360
State and political subdivisions 600 5 - 605
Mortgage-backed debt securities 62,991 1,046 407 63,630
Equity securities 6,210 257 - 6,467
- --------------------------------------------------------------------------------------
$82,224 $1,361 $523 $83,062
======================================================================================
</TABLE>
The amortized cost and estimated fair value of securities classified as
held-to-maturity and available-for-sale at December 31, 1995 by contractual
maturity, are as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
- -----------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 6,716 $ 6,793 $ 1,601 $ 1,606
Due after one through five years 7,805 8,045 10,422 10,406
Due after five years through ten years 2,362 2,734 1,000 953
Due after ten years 353 361 -- --
Mortgage-backed debt securities 27,074 27,126 62,991 63,630
Equity securities -- -- 6,210 6,467
- -----------------------------------------------------------------------------------------------------------
$44,310 $45,059 $82,224 $83,062
===========================================================================================================
</TABLE>
Actual maturities may differ from the contractual maturities reflected in the
preceding table because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Mortgage-backed securities
have no stated maturity and primarily reflect investments in various
Pass-through and Participation Certificates issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation,
respectively,. Repayment of mortgage-backed securities is affected by the
contractual repayment terms of the underlying mortgages collateralizing these
obligations and the current level of interest rates.
Included in the investment portfolio at December 31, 1995 are securities carried
at $51,144,000 which are pledged to secure public deposits, securities sold
under agreements to repurchase and for other purposes as required and permitted
by law.
On December 29, 1995, the Company transferred $23,751,000 of securities at
amortized cost, having an unrealized gain of $336,000, from the held-to-maturity
portfolio into the available-for-sale portfolio. This transfer has been handled
in accordance with the special provisions related to the one-time transfer of
investment securities as allowed by the Financial Accounting Standards
36
<PAGE>
Board. The Company took advantage of this opportunity to reposition its
investment portfolios to be enhance its ability to react to changes in the
securities market and its liquidity needs.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Held-to-maturity portfolio
- ----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1994 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $10,509 $ - $ 481 $10,028
State and political subdivisions 16,854 959 29 17,784
Mortgage-backed debt securities 54,695 260 2,850 52,105
- ----------------------------------------------------------------------------------------------
$82,058 $1,219 $3,360 $79,917
==============================================================================================
</TABLE>
The amortized cost and estimated fair value of securities classified as
available-for-sale at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Available-for-sale portfolio
- ----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1994 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $12,251 $ 7 $ 343 $11,915
State and political subdivisions 1,101 10 5 1,106
Mortgage-backed debt securities 62,194 26 3,320 58,900
Equity securities 4,961 352 -- 5,313
- ----------------------------------------------------------------------------------------------
$80,507 $395 $3,668 $77,234
==============================================================================================
</TABLE>
Included in the investment portfolio at December 31, 1994 are securities carried
at $63,715,000 which are pledged to secure public deposits, securities sold
under agreements to repurchase and for other purposes as required and permitted
by law.
Gross gains of $214,000 in 1995, $471,000 in 1994 and $54,000 in 1993 were
realized on securities sold. In addition, gross losses of $91,000 in 1995,
$96,000 in 1994 and $277,000 in 1993 were realized on securities sold.
Additional security losses of $960,000 were recognized in 1993 for the impaired
value of certain mortgage-backed debt securities.
37
<PAGE>
Note 5. Loans and allowance for credit losses:
Loans are as follows:
- -------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------
(dollars in thousands)
Real estate loans:
Construction and land development $ 26,372 $ 14,599
- -------------------------------------------------------------------------------
Mortgage loans:
Secured by farmland 4,129 4,106
Secured by 1 to 4 family residential
properties 118,031 100,373
Secured by multi-family (5 or more)
residential properties 8,214 5,530
Secured by commercial properties 97,104 91,882
- -------------------------------------------------------------------------------
Total mortgage loans 227,478 201,891
- -------------------------------------------------------------------------------
Total loans secured by real estate 253,850 216,490
Commercial and industrial loans 46,436 41,451
Industrial revenue bonds 81 196
Loans to farmers 761 402
Loans to individuals for household, family
and other personal expenditures 52,698 47,621
- -------------------------------------------------------------------------------
$353,826 $306,160
===============================================================================
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was $131,497,000 and $141,435,000 at December 31, 1995 and
1994, respectively.
Transactions in the allowance for credit losses are summarized as follows:
- -------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of year $3,561 $3,160 $3,220
Provision for credit losses 710 450 180
Recoveries 50 108 27
- -------------------------------------------------------------------------------
4,321 3,718 3,427
Credits charged-off (209) (157) (267)
- -------------------------------------------------------------------------------
Balance at end of year $4,112 $3,561 $3,160
===============================================================================
As of December 31, 1995, the Company had impaired loans totaling $407,000, for
which a specific allowance for credit losses of $204,000 has been provided and
other impaired loans of $218,000 for which no specific allowance for credit
losses is required. The average balance of these loans amounted to approximately
$1.02 million. Cash receipts on impaired loans applied to reduce the principal
balance and cash receipts recognized as interest income were $399,000 and
$118,000, respectively. The primary difference between the average balance for
the year and the balance as of December 31, 1995 is due to $1.04 million of
properties acquired through foreclosure. In addition, at December 31, 1995, the
Company had other smaller homongeneous nonaccrual loans of approximately
$232,000 that were not required to be evaluated for impairment. If interest on
these other nonaccrual loans had been recognized at the original interest rates,
interest income would have increased approximately $5,000.
38
<PAGE>
Note 6. Bank premises and equipment:
Bank premises and equipment consist of the following:
- -------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------
(dollars in thousands)
Bank premises and leasehold improvements $20,825 $13,041
Equipment 6,500 5,723
- -------------------------------------------------------------------------------
27,325 18,764
Less accumulated depreciation and amortization 7,479 6,614
- -------------------------------------------------------------------------------
$19,846 $12,150
===============================================================================
Depreciation and amortization charged to operations amounted to $977,000 for
1995, $965,000 for 1994 and $962,000 for 1993.
Note 7. Deposits:
Certificates of deposit and other time deposits issued in denominations of
$100,000 or more totaled $34,800,000 and $39,022,000 at December 31, 1995 and
1994, respectively, and are included in interest-bearing deposits in the
consolidated balance sheets.
At December 31, 1995, the amount outstanding and maturity distribution of
certificates of deposit issued in denominations of $100,000 or more are
presented in the following table:
- --------------------------------------------------------------------------------
Certificates
of Deposits
- --------------------------------------------------------------------------------
(dollars in thousands)
Maturing:
Three months or less $ 9,504
Over three months through six months 8,583
Over six months through twelve months 6,963
Over twelve months 9,750
- -------------------------------------------------------------------------------
$34,800
================================================================================
Interest on deposits consists of the following:
- -------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(dollars in thousands)
NOW and SuperNOW accounts $ 1,031 $ 953 $ 895
Savings accounts 2,097 2,023 1,859
Money market accounts 2,371 2,267 2,127
Certificates of deposit and other time
deposits less than $100,000 8,003 5,283 5,386
Certificates of deposit and other time
deposits of $100,000 or more 2,173 1,310 1,221
- -------------------------------------------------------------------------------
15,675 11,836 11,488
Less capitalized construction period interest 164 -- --
- -------------------------------------------------------------------------------
$15,511 $11,836 $11,488
===============================================================================
Note 8. Short-term borrowings:
The Company purchases federal funds and enters into sales of securities under
agreements to
39
<PAGE>
repurchase the same securities, which generally mature within one to ninety days
from the transaction date. Securities pledged as collateral for securities sold
under agreements to repurchase include various debt securities having an
aggregate amortized cost book value of $33,800,000 and $40,606,000 at December
31, 1995 and 1994, respectively.
Other short-term borrowings primarily reflect the amount borrowed under a
secured lending arrangement with the Federal Home Loan Bank of Atlanta, which is
secured by a blanket lien on all real estate mortgage loans secured by 1 to 4
family residential properties.
The Company's unused lines of credit for short-term borrowings totaled
$86,675,000 at December 31, 1995.
Selected information on short-term borrowings is as follows:
- ------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------
(dollars in thousands)
Federal funds purchased and securities sold under agreement to repurchase:
Total outstanding at year-end $21,043 $25,103
==============================================================================
Average amount outstanding during year $18,928 $29,592
==============================================================================
Maximum amount outstanding at any month-end $28,237 $43,768
==============================================================================
Weighted average interest rate at year-end 5.65% 5.93%
==============================================================================
Weighted average interest rate for the year 5.93% 4.21%
==============================================================================
- ------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------
(dollars in thousands)
Other short-term borrowings:
Total outstanding at year-end $25,426 $19,089
==============================================================================
Average amount outstanding during year $27,207 $11,322
==============================================================================
Maximum amount outstanding at any month-end $36,382 $22,887
==============================================================================
Weighted average interest rate at year-end 5.69% 6.08%
==============================================================================
Weighted average interest rate for the year 6.04% 4.68%
==============================================================================
Note 9. Long-term debt:
On May 31, 1995, the Company entered into a secured lending arrangement with a
regional national bank, to finance the cost of its new corporate headquarters
facility in Frederick, Maryland (the "Facility"). Pursuant to the terms of this
arrangement, the Company will borrow $6,545,000. The Loan is secured by a first
lien security interest on the Facility's land, improvements and fixtures and
equipment. The principal amount of the loan will be amortized with monthly
payments over a 15 year term commencing on the earlier of the first day of the
first month following the completion of the Facility, or November 1, 1996. Any
remaining unpaid balance on May 1, 2002 is due in full. The loan bears interest
at a fluctuating rate equal to the daily London Interbank Offering Rate for
one-month U.S. Dollar deposits (LIBOR), plus 1.35 percent, subject to a limited
upward adjustment if certain performance ratios are not maintained. The balance
outstanding as of December 31, 1995 was $4,680,000, bearing interest at a rate
of 7.32%. The interest paid on this loan totaled $136,000 in 1995 and was
capitalized as part of the cost of the Facility.
Assuming the total amount borrowed is $6,545,000, payments begin in June 1996,
and using the current interest rate of 7.32%, principal payments for the next
five years will be as follows:
40
<PAGE>
- --------------------------------------------------------------------------------
Years ending December 31, (dollars in thousands)
1996 $ 122
1997 258
1998 278
1999 300
2000 322
Later years 5,265
- --------------------------------------------------------------------------------
$6,545
================================================================================
Note 10. Leasing arrangements:
The Company leases branch office facilities under noncancellable operating lease
arrangements whose terms do not extend beyond November 2009. These leases
contain options which enable the Company to renew the leases at fair rental
value for periods of 5 to 10 years. In addition to minimum rentals, certain
leases have escalation clauses based upon various price indices and include
provisions for additional payments to cover taxes, insurance and maintenance.
The total minimum rental commitment, including renewal periods under these
leases at December 31, 1995 is outlined below:
- --------------------------------------------------------------------------------
Years ending December 31, (dollars in thousands)
1996 $ 347
1997 290
1998 260
1999 198
2000 198
Later years 2,390
- --------------------------------------------------------------------------------
$3,683
================================================================================
Rent expense included in occupancy expenses amounted to $429,000 for 1995,
$390,000 for 1994 and $379,000 for 1993.
Note 11. Employee benefit plans:
401(k) profit sharing plan:
The Company has a Section 401(k) profit sharing plan covering employees meeting
certain eligibility requirements as to minimum age and years of service.
Employees may make voluntary contributions to the Plan through payroll
deductions on either a pre-tax or after-tax basis. The Company makes
discretionary contributions to the Plan based on the Company's earnings. The
Company's contributions are subject to a vesting period based upon the
completion of five years of service with the Company, at which time they are
fully vested. A participant's account under the Plan, together with investment
earnings thereon, is normally distributable, following retirement, death,
disability or other termination of employment, in a single lump-sum payment.
The Company's annual contribution to the Plan totaled $241,000 in 1995, $206,000
in 1994 and $196,000 in 1993.
Deferred compensation plan:
The Company maintains a deferred compensation plan for certain key executives.
This Plan supplements the Company's section 401(k) profit sharing plan and
provides for a maximum ten year period of supplemental retirement income for the
Plan's participants. Amounts to be paid by the Company under this Plan will be
recovered through life insurance policies purchased on the lives of the
participants. The expense for this deferred compensation plan is included in the
consolidated statements of income and totaled $40,000, $39,000 and $71,000 for
1995, 1994 and 1993, respectively.
Stock option plan:
The Company has a stock option plan for key employees. This Plan provides that
413,438 shares
41
<PAGE>
of the Company's common stock will be reserved for the granting of both
incentive stock options (ISO) and non-qualified stock options (NQSO) to purchase
these shares. At December 31, 1995, reserved shares remaining for future grants
under this plan totaled 322,338. The exercise price per share for incentive
stock options and non-qualified stock options shall be not less than the fair
market value of a share of common stock on the date on which such ISO or NQSO is
granted, subject to adjustments for the effects of any stock splits or stock
dividends, and may be exercised commencing after one year from the date of
grant.
In connection with the stock options granted under this Plan, additional
restricted stock grants for 12,314 shares at December 31, 1995, may be awarded
at no additional cost to the Plan's participants. Restricted stock, subject to a
three year restriction period and certain other conditions, is awarded to the
Plan's participants following their purchase of the shares granted under the
stock option plan. Compensation expense, reflecting the fair value of the
restricted shares on the date the stock options were initially granted, is
recognized ratably over a four year period, commencing on the date the stock
options were granted and ending with the expiration of the three year
restriction period. Compensation expense recognized under this Plan for the
years ended December 31, 1995, 1994 and 1993 totaled $35,000, $19,000 and
$12,000, respectively.
The following is a summary of transactions during the three years ended December
31, 1995, 1994 and 1993:
- -------------------------------------------------------------------------------
Options issued
and outstanding Price
- -------------------------------------------------------------------------------
Balance at December 31, 1992 23,760 $11.49 to $12.65
- -------------------------------------------------------------------------------
Exercised -- --
Granted 24,612 6.58 to 15.24
- -------------------------------------------------------------------------------
Balance at December 31, 1993 48,372 6.58 to 15.24
- -------------------------------------------------------------------------------
Exercised (3,482) 11.49
Terminated (6,362) 11.49 to 15.24
Granted 17,059 8.10 to 20.17
- -------------------------------------------------------------------------------
Balance at December 31, 1994 55,587 6.58 to 20.17
- -------------------------------------------------------------------------------
Exercised -- --
Granted 19,021 21.00
- -------------------------------------------------------------------------------
Balance at December 31, 1995 74,608 $6.58 to $21.00
===============================================================================
At December 31, 1995 there were 55,587 options exercisable ranging from $6.58 to
$20.17.
Postretirement benefits other than pensions:
The Company provides retiree health care and life insurance benefits for certain
employees and current retirees. Employees are generally eligible for benefits
upon retirement and completion of a specified number of years of creditable
service. The Company does not pre-fund these benefits and has the right to
modify or terminate certain of these plans in the future. The Company's
obligation for benefits expected to be provided is being accrued during the
service lives of employees.
For measurement purposes, a 9.5% annual rate of increase in the per capita costs
of covered benefits for pre-65 individuals and 8.0% for post-65 individuals was
assumed for 1995, with such annual rates of increase declining .4% and .25% per
year, respectively, to an ultimate level of 5.5% in 2005 for both groups. For
1994, the assumption was a 12.0% annual rate of increase in the per capita costs
of covered benefits, with such annual rate of increase declining .5% per year to
an ultimate level of 5.5% in 2007. A 1% increase in this annual trend rate would
have increased the accumulated postretirement benefit obligation by $18,000 at
December 31, 1995 and 1994 with an immaterial effect on postretirement benefit
expense for each of these years. The weighted average discount rates used to
estimate the accumulated postretirement benefit obligation were 7.00% in 1995
and 8.75% in 1994.
The components of periodic expense for postretirement benefits for the years
ended December 31,
42
<PAGE>
1995, 1994 and 1993 were as follows:
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(dollars in thousands)
Service cost of benefits earned $ 3 $ 4 $12
Interest cost on accumulated
postretirement benefit obligation 26 29 55
Other amortization and deferrals (26) (20) 2
- -------------------------------------------------------------------------------
Net postretirement benefit cost $ 3 $13 $69
===============================================================================
The accumulated postretirement benefit obligation, at December 31, 1995 and 1994
is comprised of the following components:
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
(dollars in thousands)
Retirees $233 $276
Fully eligible active plan
participants 93 44
Other active plan participants 65 53
Unrecognized prior service cost 309 335
Unrecognized net loss (61) (64)
- -------------------------------------------------------------------------------
Accrued postretirement benefit obligation $639 $644
===============================================================================
Note 12. Income taxes:
Significant components of the Company's deferred tax assets and liabilities are
as follows:
- -------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------
(dollars in thousands)
Deferred tax assets:
Provision for credit losses $1,224 $1,015
Net securities losses 250 250
Income from CMO residual interests 46 70
Deferred compensation 393 360
Postretirement benefits 248 251
Unrealized loss on securities available for sale -- 1,123
Provision for foreclosed properties 86 38
Other 437 538
- -------------------------------------------------------------------------------
Total deferred tax assets 2,684 3,645
Valuation allowance for deferred tax assets -- --
- -------------------------------------------------------------------------------
Deferred tax assets after valuation allowance 2,684 3,645
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities available for sale 307 --
Other 119 164
- -------------------------------------------------------------------------------
Total deferred tax liabilities 426 164
- -------------------------------------------------------------------------------
Net deferred tax assets $2,258 $3,481
===============================================================================
A reconciliation of the maximum statutory income tax to the provision for income
taxes attributable to continuing operations included in the consolidated
statements of income, is as follows:
43
<PAGE>
- -------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(dollars in thousands)
Income before income tax $8,821 $7,681 $7,677
Tax rate 35% 35% 35%
- -------------------------------------------------------------------------------
Income tax at statutory rate 3,087 2,688 2,687
Increases (decreases)
in tax resulting from:
Tax-exempt interest income (394) (605) (702)
State income taxes, net of federal
income tax benefit 266 231 347
Benefit of federal surtax exemption (73) (58) (55)
Other 185 132 39
- -------------------------------------------------------------------------------
$3,071 $2,388 $2,316
===============================================================================
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
- -------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(dollars in thousands)
Taxes currently payable:
Federal $2,779 $1,999 $1,308
State 499 364 462
- -------------------------------------------------------------------------------
Total taxes currently payable 3,278 2,363 1,770
- -------------------------------------------------------------------------------
Deferred tax liabilities (benefits):
Federal (170) 32 462
State (37) (7) 84
- -------------------------------------------------------------------------------
Total deferred tax
liabilities (benefits) (207) 25 546
- -------------------------------------------------------------------------------
$3,071 $2,388 $2,316
===============================================================================
Included in the above amounts are income taxes of $48,000 in 1994 and $145,000
in 1993 related to net security gains and (savings) of $(457,000) in 1993
related to net security losses.
The components of the provision for deferred tax liabilities (benefits) are as
follows:
- --------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
(dollars in thousands)
Provision for credit losses $(209) $(155) $ 24
Net securities losses -- 23 325
Provision for foreclosed properties (48) 1 249
Income from CMO residual interests 24 205 107
Other 26 (49) (159)
- --------------------------------------------------------------------------------
$(207) $ 25 $546
================================================================================
Note 13. Other operating expenses:
Other operating expenses in the consolidated statements of income include the
following:
- --------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
(dollars in thousands)
FDIC and general insurance $ 658 $1,043 $1,004
Professional and directors fees 817 682 708
44
<PAGE>
Advertising and public relations 613 561 726
Credit and collection expense 113 125 201
Postage and supplies 860 775 814
Net loss on foreclosed properties 177 332 42
Other 1,618 1,437 1,160
- --------------------------------------------------------------------------------
$4,856 $4,955 $4,655
================================================================================
45
<PAGE>
Changes in the allowance for foreclosed properties are summarized as follows:
- --------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of year $ 98 $100 $715
Provision charged to income 177 246 9
Losses charged to the allowance (52) (248) (624)
- --------------------------------------------------------------------------------
Balance at end of year $223 $ 98 $100
================================================================================
Note 14. Stockholders' equity:
Dividends:
The approval of the Federal Reserve Board is required to pay dividends which
exceed the Banks' net profits for the current year plus its retained net profits
for the preceding two years. Net profits for 1996, plus $885,000 (representing
the Banks' retained net profits in 1995 and 1994, less all required transfers to
permanent capital) will be available for the payment of dividends in 1996
without prior regulatory approval.
Preferred stock:
The Board of Directors has the authority to issue preferred stock in one or more
classes or series, with such designations, voting powers, preferences,
participation, redemption, sinking fund, conversion, dividend and other optional
or special rights, and such restrictions, limitations and qualifications as the
Board of Directors may determine.
Common stock:
On January 26, 1996, the Company's stockholders approved an amendment to the
Articles of Incorporation of the Company to increase the number of authorized
shares of the Company's Common Stock from 5,000,000 to 20,000,000 shares.
Capital:
The Company is required to maintain minimum amounts of capital to total
"risk-weighted" assets, as defined by the banking regulators. The Company is
currently required to maintain minimum Tier 1 and Total capital ratios of 4.0%
and 8.0%, respectively. The Company's actual Tier 1 and Total capital ratios at
December 31, 1995 were 12.04% and 13.09%, respectively. The Company's leverage
ratio at December 31, 1995 was 8.55%, with a minimum of 3.00% required.
Dividend reinvestment plan:
The Company maintains a Dividend Reinvestment and Stock Purchase Plan for all
stockholders of the Company. This Plan provides that 165,375 shares of the
Company's common stock will be reserved for issuance under the Plan. At December
31, 1995, reserved shares remaining for future issuance under this plan totaled
106,182. The terms of this Plan allow participating stockholders to purchase
additional shares of common stock in the Company by reinvesting the dividends
paid on shares registered in their name, by making optional cash payments, or
both. Shares purchased under the Plan with reinvested dividends can be acquired
at 97% of current market prices. Shares purchased under the optional cash
payment method can be purchased at current market prices. Optional cash payments
to this Plan are limited and may not exceed $2,500 in any calendar quarter.
Contributions to the Plan will be used by a designated agent to acquire common
shares of the Company at current market prices. The Company reserves the right
to amend, modify, suspend or terminate this Plan at any time at its discretion.
46
<PAGE>
Note 15. Fair value of financial instruments:
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards No. 107, the estimated fair values of the Company's
financial instruments are as follows:
- --------------------------------------------------------------------------------
December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents $ 43,053 $ 43,053 $ 33,354 $ 33,354
Loans held for sale 2,362 2,362 1,023 1,023
Investment securities 127,372 128,121 159,292 157,151
Net loans 348,784 352,528 300,436 301,920
- --------------------------------------------------------------------------------
Total financial assets $521,571 $526,064 $494,105 $493,448
================================================================================
FINANCIAL LIABILITIES
Deposits $448,917 $450,077 $427,797 $427,255
Short-term borrowings 46,469 46,323 44,192 43,916
Long-term debt 4,680 4,680 -- --
- --------------------------------------------------------------------------------
Total financial liabilities $500,066 $501,080 $471,989 $471,171
================================================================================
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments as of December 31, 1995 and 1994:
Cash and cash equivalents:
The fair value of cash and cash equivalents is estimated to approximate the
carrying amounts.
Loans held for sale:
Fair value is estimated to equal the carrying amount due to their anticipated
short holding period.
Investment securities:
Fair values are based on quoted market prices.
Loans:
Fair values are estimated for portfolios of loans with similar financial
characteristics. Each portfolio is further segmented into fixed and adjustable
rate interest terms by performing and nonperforming categories.
The fair value of performing loans with original maturities greater than one
year is calculated by discounting estimated cash flows using current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. The estimated cash flows do not anticipate
prepayments. The fair value of performing loans with original maturities of one
year or less is considered equal to the carrying amount.
Fair value for nonperforming loans is based on estimated cash flows which are
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount rates
are judgmentally determined using available market information and specific
borrower information.
47
<PAGE>
Management has made estimates of fair value discount rates that it believes to
be reasonable. However, because there is no market for many of these financial
instruments, management has no basis to determine whether the fair value
presented for loans would be indicative of the value negotiated in an actual
sale.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW accounts and money market accounts, is equal to
the amount payable on demand at the reporting date (that is, their carrying
amounts). The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
Short-term borrowings:
The fair value of short-term borrowings is determined using rates currently
available to the Company for debt with similar terms and remaining maturities.
Long-term debt:
The fair value of long-term debt is considered to be the same as the carrying
amount since it is an adjustable interest rate instrument.
Note 16. Transactions with related parties:
In the normal course of banking business, loans are made to officers and
directors of the Company, as well as to their associates. Such loans are made in
the ordinary course of business with substantially the same terms (including
interest rates and collateral) as those prevailing at the time for comparable
transactions with other persons. They do not involve more than normal risk of
collectibility or present other unfavorable features. An analysis of the
activity during 1994 is as follows:
- -----------------------------------------------------------------------------
(dollars in thousands)
Balance at December 31, 1994 $8,261
New loans 1,757
Repayments (1,239)
- -----------------------------------------------------------------------------
Balance at December 31, 1995 $8,779
=============================================================================
A Director of the Company, is president and a principal stockholder of a
construction firm which is serving as construction manager in connection with
the development of the Company's new headquarters project, presently under
construction. It is anticipated that this firm will receive approximately
$300,000 to $400,000 in total compensation for its services on the project,
which has an estimated total cost of $8.2 million.
Note 17. Commitments and Contingencies:
Financial instruments:
The Company is a party to financial instruments 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, which
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the consolidated financial statements.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
48
<PAGE>
A summary of the contract amounts of the Company's exposure under commitments to
extend credit, and standby letters of credit are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
December 31, 1995 1994
- ----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Financial instruments whose amounts represent credit risk:
Commitments to extend credit $66,700 $70,234
Standby letters of credit 8,061 5,988
========================================================================================
</TABLE>
The fair value at December 31, 1995 and 1994 of commitments to extend credit
equalled $83,000 and $60,000, respectively, and is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value at December 31, 1995 and 1994 of standby letters of credit equalled
$40,000 and $28,000, respectively, and is based on fees currently charged for
similar agreements or on the estimated cost to terminate, or otherwise settle
the obligations with the counterparties. The fair value of each of these types
of financial instruments is estimated to equal their carrying amounts,
representing the deferred income arising from these unrecognized financial
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. Certain
commitments have fixed expiration dates, or other termination clauses, and may
require payment of a fee. Many of the commitments are expected to expire without
being drawn upon, accordingly, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral or other
security obtained, if deemed necessary by the Company upon extension of credit,
is based on management's credit evaluation. Collateral held varies but may
include deposits held in financial institutions; U.S. Treasury securities; other
marketable securities; accounts receivable; inventory; property and equipment;
personal residences; income-producing commercial properties and land under
development. Personal guarantees are also obtained to provide added security for
certain commitments.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to guarantee the installation of real property improvements and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company holds collateral and obtains personal guarantees supporting those
commitments for which collateral or other security is deemed necessary.
Legal Proceedings:
The Company is subject to various legal proceedings which are incidental to the
ordinary course of business. In the opinion of the management of the Company,
there are no material pending legal proceedings to which the Company is a party
or which involves any of its property.
Construction:
The Company has a contractual commitment in the amount of $8.2 million for the
construction of its corporate headquarters project. As of December 31, 1995,
$6.6 million has been paid to the construction manager under this arrangement.
49
<PAGE>
Note 18. FCNB Corp (Parent Company) condensed financial information:
<TABLE>
<CAPTION>
FCNB Corp (Parent Company)
Balance Sheets
- --------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
<S> <C> <C>
Cash $ 1,013 $ 648
Receivable from subsidiary banks 450 1,708
Investment securities available for sale-at fair value 855 798
Investment in subsidiaries 46,278 38,528
Other assets 155 277
- --------------------------------------------------------------------------------------------------------------
Total assets $48,751 $41,959
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 450 $ 271
- --------------------------------------------------------------------------------------------------------------
Common stock 4,070 2,714
Surplus 22,615 22,535
Retained earnings 21,086 18,589
Net unrealized gain (loss) on securities available for sale 530 (2,150)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 48,301 41,688
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $48,751 $41,959
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FCNB Corp (Parent Company)
Statements of Income
- --------------------------------------------------------------------------------------------------------------
For the Years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $3,382 $3,517 $1,979
Net securities gains 47 308 --
Other income, principally interest 53 52 33
- --------------------------------------------------------------------------------------------------------------
Total income 3,482 3,877 2,012
Expenses 508 473 187
- --------------------------------------------------------------------------------------------------------------
Income before provision for income taxes
and equity in undistributed
earnings of subsidiaries 2,974 3,404 1,825
Provision for income taxes (benefits) (49) 2 (31)
- --------------------------------------------------------------------------------------------------------------
Income before equity in
undistributed earnings of subsidiaries 3,023 3,402 1,856
Equity in undistributed earnings
of subsidiaries 2,727 1,891 3,505
- --------------------------------------------------------------------------------------------------------------
Net income $5,750 $5,293 $5,361
==============================================================================================================
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
FCNB Corp (Parent Company)
Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------
For the Years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $5,750 $5,293 $5,361
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed
earnings of subsidiaries (2,727) (1,891) (3,505)
Noncash charitable contribution -- 31 --
Net securities gains (47) (308) --
Decrease (increase) in receivable from
subsidiary banks 1,258 (1,525) 51
Decrease (increase) in other assets 202 349 (478)
Increase (decrease) in other liabilities 215 116 (227)
Other -- 10 (1)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,651 2,075 1,201
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of investment securities
available for sale 68 414 --
Purchase of investment securities
available for sale (173) (310) --
Investment in subsidiary (2,284) (500) --
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (2,389) (396) --
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in short-term borrowings -- 6 --
Repayment of long-term debt -- -- (191)
Dividend reinvestment plan (11) (13) (6)
Proceeds from issuance of common stock -- 96 51
Cash dividends paid (1,886) (1,696) (1,436)
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (1,897) (1,607) (1,582)
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 365 72 (381)
Beginning cash 648 576 957
- ------------------------------------------------------------------------------------------------------------
Ending cash $1,013 $ 648 $ 576
============================================================================================================
Supplemental schedule of noncash investing and financing activities:
Surplus from stock options granted $80 $41 $100
============================================================================================================
Fair value adjustment for securities available
for sale, net of applicable deferred income tax effects $(58) $(293) $509
============================================================================================================
Fair value adjustment for securities available
for sale held in subsidiary banks,
net of deferred income tax effects $2,738 $(2,992) $626
============================================================================================================
</TABLE>
51
<PAGE>
Note 19. Current accounting developments:
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (Statement
121), which will become effective for fiscal years beginning after December 15,
1995. This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability, is evaluated based upon the estimated
future cash flows expected to result from the use of the asset and its eventual
disposition. If expected cash flows are less than the carrying amount of the
asset, an impairment loss is recognized. Additionally, this Statement requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
impact of adopting this Statement is not expected to be material to the
Company's consolidated financial statements.
In May 1995, the FASB issued Statement No. 122, "Accounting for Mortgage
Servicing Rights" (Statement 122), which will become effective, on a prospective
basis, for years beginning after December 15, 1995. This Statement requires
mortgage banking enterprises to recognize as separate assets rights to service
mortgage loans, however those servicing rights are acquired. When mortgage
loans, acquired either through a purchase transaction or by origination, are
sold or securitized with servicing rights retained an allocation of the total
cost of the mortgage loans should be made between the mortgage servicing rights
and the loans based on their relative fair values. In subsequent periods, all
mortgage servicing rights capitalized must be periodically evaluated for
impairment based on the fair value of those rights, and any impairments
recognized through a valuation allowance. The impact of adopting this Statement
is not expected to be material to the Company's consolidated financial
statements.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" (Statement 123), which will become effective for transactions
entered into in fiscal years that begin after December 15, 1995, though it may
be adopted on issuance. This Statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. This Statement
uses a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting in Opinion 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value based method of accounting
defined in this Statement had been applied. The Company has decided to disclose
the effects of adopting Statement 123 in the footnotes to the 1996 consolidated
financial statements rather than record the effects in the consolidated
financial statements.
52
<PAGE>
Note 20. Quarterly results of operations (unaudited):
The following is a summary of the Company's unaudited quarterly results of
operations.
- --------------------------------------------------------------------------------
Three months ended
-------------------------------------------
1995 December 31 September 30 June 30 March 31
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Interest income $10,612 $10,815 $10,542 $10,013
Net interest income 6,033 6,246 5,712 5,714
Provision for credit losses 432 23 112 143
Net securities gains (losses) 59 8 42 14
Income before income taxes 2,107 2,816 2,004 1,894
Net income 1,297 1,790 1,351 1,312
Earnings per share .32 .44 .33 .32(1)
- --------------------------------------------------------------------------------
Three months ended
-------------------------------------------
1994 December 31 September 30 June 30 March 31
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Interest income $9,546 $8,955 $8,796 $8,108
Net interest income 5,759 5,531 5,547 4,955
Provision for credit losses 165 202 57 26
Net securities losses (79) 2 248 204
Income before income taxes 1,792 2,131 2,023 1,735
Net income 1,111 1,521 1,444 1,217
Earnings per share(1) .27 .38 .35 .30
- --------------------------------------------------------------------------------
(1) The amounts shown have been adjusted retroactively, for a 3 for 2 stock
split effected in the form of a 50% stock dividend declared in April 1995.
INDEPENDENT Auditor's Report
KELLER BRUNER & COMPANY, L.L.C.
Certified Public Accountants - Management Consultants
To the Board of Directors and Stockholders
FCNB Corp
Frederick, Maryland
We have audited the accompanying consolidated balance sheets of FCNB Corp and
its subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FCNB Corp and its
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As explained in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investment securities in 1993.
Keller Bruner & Company L.L.C.
Frederick, Maryland
January 26, 1996
53
<PAGE>
Market For Registrant's Common Equity And Related Stockholder Matters
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
Quarterly stock prices and dividends(1) Price Range Dividend
High Low Declared
- --------------------------------------------------------------------------------
First Quarter $20.50 $18.77 $.12
Second Quarter 21.00 18.50 .11
Third Quarter 21.50 19.50 .11
Fourth Quarter 22.00 19.75 .12
- --------------------------------------------------------------------------------
1994
- --------------------------------------------------------------------------------
Quarterly stock prices and dividends(1) Price Range Dividend
High Low Declared
- --------------------------------------------------------------------------------
First Quarter $15.71 $14.92 $.13
Second Quarter 16.50 15.67 .09
Third Quarter 19.67 16.67 .11
Fourth Quarter 22.33 19.00 .09
- --------------------------------------------------------------------------------
(1) The amounts shown have been adjusted retroactively, for a 3 for 2 stock
split effected in the form of a 50% stock dividend declared in April 1995.
The stock prices for 1994 through the third quarter are the high and low bid
prices obtained from a local market maker. On August 30, 1994, the Company began
to trade on the NASDAQ National Market under the symbol FCNB. For the fourth
quarter of 1994, the stock prices are the high and low sales prices as recorded
by the NASDAQ National Market.
- --------------------------------------------------------------------------------
Number of shareholders of record, December 31, 1995 1,782
Annual Meeting of Stockholders
Tuesday, April 16, 1996 - 7:00 p.m.
7200 FCNB Court
Frederick, Maryland 21703
Transfer Agent
Wachovia Bank of North Carolina, N.A.
Corporate Trust Department
301 N. Church Street
Winston-Salem, NC 27101
Financial Information
Mark A. Severson
Senior Vice President and Treasurer
Phone (301) 662-2191
Stockholder Relations
Kristen Howes
Phone (301) 662-2191
Availability of 10-K Report
The annual report on Form 10-K filed with the Securities and Exchange Commission
is available without charge upon written request to:
Mark A. Severson, Vice President and Treasurer, FCNB CORP, 7200 FCNB Court,
Frederick, Maryland 21703.
54
<PAGE>
Profile
FCNB CORP is a two bank holding company organized under the laws of the State of
Maryland. FCNB Bank, a state-chartered commercial bank under the laws of the
State of Maryland was converted from a national bank was converted from a
national bank in June 1993, and was originally chartered in 1818. Elkridge Bank,
a state-chartered commercial bank under the laws of the State of Maryland was
converted from a national bank in March 1995, and was originally chartered in
1961. The Banks are engaged in a general commercial and retail banking business
serving individuals and businesses in Frederick, Carroll, Howard, Prince
George's, Anne Arundel and Montgomery counties located in Maryland. The deposits
of the Banks are insured by the FDIC.
The following brokers are registered as market makers of FCNB Corp.
Common Stock:
Ferris, Baker, Watts & Co.
365 West Patrick Street
Frederick, MD 21701
(301) 662-6488
Legg Mason Wood Walker, Inc.
30 West Patrick Street
Frederick, MD 21701
(301) 663-8833
Ryan, Beck & Co.
3 Parkway
Philadelphia, PA 19102
(800) 342-2325
Wheat First Securities, Inc.
18 West Patrick Street
Frederick, MD 21701
(301) 662-0002
(800) 456-7801
55
<PAGE>
Corporate Headquarters
FCNB Corp (MD)
7200 FCNB Court
Frederick, Maryland 21703
(301) 662-2191
Subsidiaries
FCNB Bank (MD)*
7200 FCNB Court
Frederick, Maryland 21703
(301) 662-2191
Elkridge Bank (MD)*
6810 Deerpath Road
Suite #325
Elkridge, Maryland 21227
(410) 579-5800
FCNB Realty, Inc. (MD)
7200 FCNB Court
Frederick, Maryland 21703
(301) 662-2191
* The Banks are the principal subsidiaries of FCNB Corp as of December 31, 1995.
The voting securities of the Banks are owned entirely by FCNB Corp.
56
<PAGE>
Exhibit 23
Keller Bruner & Company, L.L.C.
Certified Public Accountants
The Board of Directors
FCNB Corp
We consent to incorporation by reference of our report dated January
26, 1996 relating to the consolidated balance sheets of FCNB Corp and
its subsidiaries of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three year period ended
December 31, 1995, which report appears on page 43 of the 1995 FCNB
Corp Annual Report and Form 10-K, in the following Registration
Statements of FCNB Corp: Number 33-63092 on Form S-8 and Number
33-55040 on Form S-3.
Keller Bruner & Company, L.L.C.
Frederick, Maryland
March 26, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 22,848
<INT-BEARING-DEPOSITS> 188
<FED-FUNDS-SOLD> 20,017
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,062
<INVESTMENTS-CARRYING> 44,310
<INVESTMENTS-MARKET> 45,059
<LOANS> 352,896
<ALLOWANCE> 4,112
<TOTAL-ASSETS> 553,253
<DEPOSITS> 448,917
<SHORT-TERM> 46,469
<LIABILITIES-OTHER> 4,886
<LONG-TERM> 4,680
<COMMON> 4,070
0
0
<OTHER-SE> 44,231
<TOTAL-LIABILITIES-AND-EQUITY> 553,253
<INTEREST-LOAN> 31,560
<INTEREST-INVEST> 9,941
<INTEREST-OTHER> 481
<INTEREST-TOTAL> 41,982
<INTEREST-DEPOSIT> 15,511
<INTEREST-EXPENSE> 18,277
<INTEREST-INCOME-NET> 23,705
<LOAN-LOSSES> 710
<SECURITIES-GAINS> 123
<EXPENSE-OTHER> 17,841
<INCOME-PRETAX> 8,821
<INCOME-PRE-EXTRAORDINARY> 8,821
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,750
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
<YIELD-ACTUAL> 4.89
<LOANS-NON> 857
<LOANS-PAST> 122
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13,480
<ALLOWANCE-OPEN> 3,561
<CHARGE-OFFS> 209
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 3,688
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 424
</TABLE>
