SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission file number
September 30, 1997 0-15645
FCNB Corp
(Exact name of registrant as specified in its charter)
MARYLAND 52-1479635
(State or other jurisdiction of (I.R.S. Employer
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
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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, $1 par value
per share, 5,911,040 shares outstanding as of October 31, 1997.
1
<PAGE>
PART I FINANCIAL INFORMATION Item 1. Financial Statements
FCNB CORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Balance Sheets (Unaudited) (Unaudited)
(Dollars in thousands, except per share amounts) September 30, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ................................. $24,583 $31,023
Interest-bearing deposits in other banks ................ 9,803 1,065
Federal funds sold ...................................... 15,493 12,438
-------- --------
Cash and cash equivalents .......................... 49,879 44,526
-------- --------
Loans held for sale ..................................... 515 3,162
-------- --------
Investment securities held to maturity at amortized cost-
fair value of $54,119 in 1997 and
$33,740 in 1996 ...................................... 53,775 33,525
-------- --------
Investment securities available for sale -
at fair value ........................................ 174,750 162,860
-------- --------
Loans ................................................... 561,540 498,391
Less: Allowance for credit losses ...................... (5,360) (5,123)
Unearned income ............................... (143) (396)
-------- --------
Net loans .......................................... 556,037 492,872
-------- --------
Bank premises and equipment ............................. 23,001 22,691
Other assets ............................................ 36,303 19,533
-------- --------
Total Assets ....................................... $894,260 $779,169
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits .......................... $79,934 $76,365
Interest-bearing deposits ............................. 523,490 510,709
-------- --------
Total deposits ..................................... 603,424 587,074
-------- --------
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase ................. 66,143 40,739
Other short-term borrowings ........................... 143,139 76,516
Accrued interest and other liabilities .................. 6,217 5,730
-------- --------
Total liabilities .................................. 818,923 710,059
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, per share par value $1.00;
1,000,000 shares authorized; none outstanding ......... -- --
Common stock, per share par value $1.00;
20,000,000 shares authorized; 5,911,040
shares issued and outstanding in 1997
and 5,364,560 in 1996 ................................. 5,911 5,365
Surplus ................................................. 43,318 26,652
Retained earnings ....................................... 23,369 36,589
Net unrealized gain on securities
available for sale .................................... 2,739 504
-------- --------
Total shareholders' equity ......................... 75,337 69,110
-------- --------
Total liabilities and shareholders'
equity ........................................ $894,260 $779,169
======== ========
</TABLE>
2
<PAGE>
FCNB CORP AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the Three and Nine Months Ended September 30, 1997 and 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
For Three Months For Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans .......................... $12,477 $10,821 $35,658 $31,994
Interest and dividends on investments:
Taxable ........................................... 3,486 2,587 9,692 6,878
Tax exempt ........................................ 90 123 274 407
Dividends ......................................... 151 130 441 388
Interest on federal funds ........................... 70 137 319 597
Other interest income ............................... 8 34 79 146
--------- --------- --------- ---------
Total interest income ................................. 16,282 13,832 46,463 40,410
--------- --------- --------- ---------
Interest expense:
Interest on deposits ................................ 5,586 5,163 16,334 15,333
Interest on federal funds purchased and
securities sold under agreements to
repurchase ........................................ 673 266 1,894 773
Interest on other short-term borrowings .............. 1,891 871 4,264 1,912
Interest on long-term debt ........................... -- 108 -- 254
--------- --------- --------- ---------
Total interest expense(1) ............................. 8,150 6,408 22,492 18,272
--------- --------- --------- ---------
Net interest income ................................... 8,132 7,424 23,971 22,138
Provision for credit losses ........................... 452 72 914 216
--------- --------- --------- ---------
Net interest income after provision
for credit losses .................................... 7,680 7,352 23,057 21,922
--------- --------- --------- ---------
Noninterest income:
Service fees ........................................ 742 642 2,084 1,818
Net securities gains ................................ 214 10 358 171
Gain on sale of loans ............................... 63 24 299 246
Other operating income .............................. 644 312 1,667 941
--------- --------- --------- ---------
Total noninterest income .............................. 1,663 988 4,408 3,176
--------- --------- --------- ---------
Noninterest expenses:
Salaries and employee benefits ...................... 3,230 3,050 9,467 8,709
Occupancy expenses .................................. 656 642 1,800 1,887
Equipment expenses .................................. 518 455 1,519 1,255
Merger related expenses ............................. -- 113 460 2,013
Other operating expenses ............................ 1,412 2,130 4,652 5,061
--------- --------- --------- ---------
Total noninterest expenses ............................ 5,816 6,390 17,898 18,925
--------- --------- --------- ---------
Income before provision for income taxes .............. 3,527 1,950 9,567 6,173
--------- --------- --------- ---------
Provision for income taxes:
Income tax expense .................................. 1,160 630 3,143 2,208
Deferred income tax effect of pre-1988 thrift
Reserve for credit losses ......................... -- (1,601) -- --
--------- --------- --------- ---------
Provision for income taxes............................. 1,160 (971) 3,143 2,208
Net Income ............................................ $2,367 $2,921 $6,424 $3,965
Net income per share Note 2 .......................... $0.40 $0.49 $1.09 $0.67
Dividends declared per share Note 2 ................... $0.15 $0.13 $0.42 $0.36
Weighted average number
of shares outstanding Note 2 ........................ 5,910,213 5,918,491 5,901,383 5,924,996
========= ========= ========= =========
</TABLE>
(1) Total interest expense has been reduced by $108,000 for capitalized
construction period interest for the nine month period ended September 30, 1996,
while no adjustment was required for the three and nine month periods ended
September 30, 1997and the three month period ended September 30, 1996.
3
<PAGE>
FCNB CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $6,424 $3,965
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................................. 1,192 1,183
Provision for credit losses ................................... 914 216
Provision for foreclosed properties ........................... 9 --
Provision for deferred income taxes (benefits) ................ (91) 42
Net premium amortization (discount accretion)
on investment securities ..................................... (63) 15
Accretion of net loan origination fees ........................ (522) (374)
Net securities gains .......................................... (358) (171)
Net loss on disposition of bank
premises and equipment ....................................... -- 34
Net gain on sale of foreclosed properties ..................... 4 (19)
Decrease (Increase) in other assets ........................... (17,791) (2,847)
Decrease (Increase) in loans held for sale(1) ................. 2,647 (1,001)
Increase (Decrease) in accrued interest and other liabilities . 487 113
-------- -------
Net cash provided by (used in) operating activities ... (7,148) 1,156
-------- -------
Cash flows from investing activities:
Proceeds from sales of investment securities - available for sale .... 54,032 1,219
Proceeds from sales of investment securities - held to maturity ...... -- --
Proceeds from maturities of investment securities - available for sale 42,984 10,129
Proceeds from maturities of investment securities - held to maturity . 6,860 13,930
Purchases of investment securities - available for sale .............. (110,947) (72,418)
Purchases of investment securities - held to maturity ................ (21,031) (2,493)
Net decrease (increase) in loans ..................................... (63,781) (39,985)
Purchases of bank premises and equipment ............................. (1,413) (4,552)
Investment in foreclosed properties .................................. (183) (867)
Proceeds from dispositions of foreclosed properties .................. 66 591
-------- -------
Net cash (used in) investing activities ............... (93,413) (94,446)
-------- -------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing
deposits, NOW accounts, money market accounts, and
savings accounts ................................................. (10,956) 10,227
Net increase in time deposits ........................................ 27,306 29,406
Net increase (decrease) in short-term borrowings ..................... 92,027 46,726
Proceeds from long-term debt ......................................... -- 500
Proceeds from sale of stock .......................................... 226 423
Repurchase of common stock ........................................... (213) (280)
Dividend reinvestment plan ........................................... (8) (13)
Dividends paid ....................................................... (2,468) (2,171)
-------- -------
Net cash provided by financing activities ............ 105,914 84,818
-------- -------
Increase (decrease) in cash and cash equivalents ....................... 5,353 (8,472)
Cash and cash equivalents:
Beginning of period .................................................. 44,526 46,363
-------- -------
End of period ......................................... $49,879 $37,891
======= =======
</TABLE>
(continued)
4
<PAGE>
FCNB CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
(Dollars in thousands)
(Unaudited) Unaudited)
================================================================================
1997 1996
- --------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid $21,843 $18,085
- --------------------------------------------------------------------------------
Income taxes paid $2,980 $ 4,812
- --------------------------------------------------------------------------------
Supplemental schedule of noncash investing and
financing activities:
Foreclosed properties acqired in settlement of loans $224 $ 106
- --------------------------------------------------------------------------------
Bank premises transferred to other assets -- $ 1,190
================================================================================
(1) Loans held for sale are generally held for periods of ninety days or less.
5
<PAGE>
FCNB CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - The accompanying unaudited consolidated financial statements for FCNB
Corp (the "Company") have been prepared in accordance with the instructions for
Form 10-Q and, therefore, do not include all information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial statements have been prepared utilizing the interim basis
of reporting and, as such, reflect all adjustments which are normal and
recurring in nature and are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented. The financial data for
the nine month period ended September 30, 1996 contained in these unaudited
consolidated financial statements includes the effects of the
pooling-of-interest transaction with Laurel Bancorp, Inc. ("Laurel"). The
nine-month period ended September 30, 1996 includes the results of operations
from Laurel for the period December 1, 1995 to January 26, 1996, the effective
date of the merger The net income for Laurel for the month ended December 31,
1995 was $124,000 and is not considered to be a material amount relative to the
consolidated net income. The results of operations for the interim periods are
not necessarily indicative of the results for the full year.
Note 2 - Stock Dividend: The Company declared a 10% stock dividend on October
14, 1997 to be paid October 31, to shareholders of record on October 24. The
financial statements have been adjusted to reflect this dividend. The weighted
average shares outstanding, earnings per share, and dividends per share have all
been recalculated.
Note 3 - Merger and Acquisitions: On March 7, 1997, the Company merged its two
wholly owned banking subsidiaries, FCNB Bank and Elkridge Bank, with FCNB Bank
surviving.
On April 30, 1996, the Company consummated its merger of Harbor Investment
Corporation ("Harbor"), the holding company for Odenton Federal Savings and Loan
Association, Odenton, Maryland, with and into the Company. This transaction
included approximately $35.0 million in assets, the assumption of approximately
$31.4 million in liabilities at a purchase price of $6.67 million. This
transaction was accounted for as a purchase and $3.21 million of goodwill was
recorded. The Company has decided to amortize the goodwill, using the
straight-line method over a 25 year period. The Company's results of operations
reflect earnings from Harbor only since the date of the acquisition. The pro
forma combined information for the Harbor transaction is disclosed in the table
below.
The results of operations for the Company in the nine month period ended
September 30, 1996 include total income and net income of Laurel for the period
December 1, 1995 to January 26, 1996, the effective date of the merger totaling
$1,510,000 and $261,000, respectively. The results of operations for the Company
and the pro forma combined information related to the Harbor merger as if its
acquisition had occurred on January 1, 1996 are as follows:
Pro forma
For the Three Months Ended September 30, 1996 Company Harbor Combined
- --------------------------------------------- ------- ------ ---------
Total income $14,820 -- 14,820
Net income 2,921 -- 2,921
Net income per share 0.49 0.49
For the Nine Months Ended September 30, 1996
- --------------------------------------------
Total income $43,586 $1,037 $44,623
Net income 3,965 89 4,054
Net income per share 0.67 0.68
Note 4 - Investments: Using the criteria specified in Statement 115, the Company
classifies its investments in debt and equity securities at September 30, 1997
and December 31, 1996 into two categories: held-to-maturity and
available-for-sale.
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 othe similar factors. These securities
are carried at fair value with any unrealized gains or losses reported in
shareholders' equity, net of the related deferred tax effect.
6
<PAGE>
As of September 30, 1997, the gross unrealized losses in the Company's
investment portfolio were $282,000 in the held-to-maturity investment portfolio
and $266,000 in the available-for-sale investment portfolio compared to $472,000
and $714,000, respectively, as of December 31, 1996. Since the Company's
held-to-maturity investment portfolio includes fixed rate investment securities
that have below current 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 earning assets increases, while the income earned on the
held-to-maturity portfolio remains constant.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY PORTFOLIO
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30,1997 Cost Gains Losses Value
---------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $28,524 $60 $64 $28,520
State and political subdivisions ....... 4,855 401 -- 5,256
Mortgage-backed debt securities ........ 20,396 165 218 20,343
------- ------- ------- -------
$53,775 $626 $282 $54,119
======= ==== ==== =======
</TABLE>
The amortized cost and estimated fair value of securities classified as
available-for-sale at September 30,1997 are as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE PORTFOLIO
-----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30,1997 Cost Gains Losses Value
-----------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $47,330 $515 $ -- $47,845
Corporate bonds ........................ 15,145 173 13 15,305
Mortgage-backed debt securities ........ 90,696 1,336 253 91,779
Equity securities ...................... 17,153 2,668 -- 19,821
-------- -------- -------- --------
$170,324 $4,692 $266 $174,750
======== ====== ==== ========
</TABLE>
The gross realized gains on securities sold from the available-for-sale
portfolio for the first nine months of 1997 and 1996 are $545,000 and $218,000,
respectively. The gross realized losses on securities sold from the
available-for-sale portfolio for the same periods are $187,000 and $47,000,
respectively.
The amortized cost and estimated fair value of securities classified as
held-to-maturity and available-for-sale at September 30, 1997 summarized by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
---------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
September 30, 1997 Cost Value Cost Value
---------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Due in one year or less ............ $1,228 $1,228 $10,436 $10,488
Due after one through five years ... 30,927 31,212 40,471 40,872
Due after five through ten years ... 1,224 1,336 11,568 11,790
Mortgage-backed debt securities .... 20,396 20,343 90,696 91,779
Equity securities .................. -- -- 17,153 19,821
-------- -------- -------- --------
$53,775 $54,119 $170,324 $174,750
======= ======= ======== ========
</TABLE>
7
<PAGE>
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 dependent on the
contractual repayment terms of the underlying mortgages collateralizing these
obligations and the current level of interest rates.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY PORTFOLIO
---------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
---------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $5,114 $17 $5 $5,126
State and political subdivisions ....... 5,138 480 -- 5,618
Mortgage-backed debt securities ........ 23,273 190 467 22,996
------- ---- ---- -------
$33,525 $687 $472 $33,740
======= ==== ==== =======
</TABLE>
The amortized cost and estimated fair value of securities classified as
available-for-sale at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE PORTFOLIO
----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $34,300 $379 $42 $34,637
Corporate Bonds ........................ 6,925 56 32 6,949
Mortgage-backed debt securities ........ 107,741 636 628 107,749
Equity securities ...................... 13,080 457 12 13,525
-------- ------ ---- --------
$162,046 $1,528 $714 $162,860
======== ====== ==== ========
</TABLE>
Note 5 - Recent Accounting Pronouncements: The FASB has issued Statements of
Financial Accounting Standards No. 128 "Earnings Per Share" in February 1997 for
years ending on or after December 15, 1997, and No. 130 "Reporting Comprehensive
Income" in June 1997, and No. 131 "Disclosures about Segments of an Enterprise
and Related Information" in June 1997, with effective dates for years beginning
after December 15, 1997 for each pronouncement. The Company has determined that
the adoption of these Statements will not have a material effect on its
disclosures.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
- --------
This section of the report contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to the Company's beliefs, expectations, anticipations and
plans regarding, among other things, general economic trends, interest rates,
product expansions and other matters. Such statements are subject to numerous
uncertainties, such as federal monetary policy, inflation, employment,
profitability and consumer confidence levels, both nationally and in the
Company's market area, the health of the real estate and construction market in
the Company's market area, the Company's ability to develop and market new
products and to enter new markets, competitive challenges in the Company's
market, legislative changes and other factors, and as such, there can be no
assurance that future events will develop in accordance with the forward looking
statements contained herein.
The following discussion and related financial data for the Company provides
an overview of the financial condition and results of operations of the Company
and its wholly-owned subsidiaries, which is presented on a consolidated basis.
The principal subsidiary of the Company is FCNB Bank. For the first nine months,
the Company reported earnings of $6.42 million in 1997 and $3.97 million in
1996. However, net income before merger related costs were $6.71 million in 1997
compared to $5.85 million for the same period in 1996. The financial results
8
<PAGE>
for the first nine months of 1996 were unfavorably impacted by $2.01 million in
merger related expenses, whereas the results for the third quarter of 1996 were
favorably impacted with the reversal of the $1.60 million in tax effects
associated with recapture of pre-1988 thrift reserve for credit losses that was
recorded in the first quarter of 1996.
Return on average assets and return on average 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 annualized for
the nine months ended September 30, 1997 was 1.05%, and 1.10% before merger
related costs, compared to annualized rates of .77% and 1.14%, respectively, for
the same period in 1996. The annualized return on average shareholders' equity,
which measures the income earned on the capital invested, for the nine months
ended September 30, 1997 was 12.12%, and 12.66% before merger related costs,
compared to annualized rates of 8.13% and 11.98%, respectively for the nine
months ended September, 1996.
The annualized return on average assets for the third quarter of 1997 was
1.11%, which had no merger related costs, compared to 1.06% and 1.63% before and
after one time merger related costs, respectively, for the same period in 1996.
The annualized return on average shareholders' equity was 12.94%, which had no
merger related costs, compared to 11.67% and 17.91% before and after one-time
merger related costs, respectively, for the same period in 1996.
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, by acquisition of existing branches, by merger with
other institutions, and by de novo branching, both within the Company's existing
market, and in new markets. There can be no assurance that any growth or
expansion will have a positive impact on the Company's earnings, dividends, book
value or market value.
Net Interest Income
- -------------------
Net interest income represents the Company's gross profit from lending and
investment activities, and is the most significant component of the Company's
earnings. Net interest income is the difference between interest and related fee
income on earning assets (primarily loans and investment securities) and the
cost of funds (primarily deposits and short-term borrowings) supporting them. To
facilitate the analysis of net interest income, the table on page 15 is
presented on a taxable equivalent basis t adjust for the tax-exempt status of
certain loans and investment securities. This adjustment, based on the statutory
federal income tax rate of 34%, increases the tax-exempt income to an amount
representing an estimate of what would have been earned if that income were
fully taxable.
Taxable equivalent net interest income for the first nine months of 1997
totaled $24.15 million, increasing 10.6% from the $21.85 million recorded for
the same period in 1996. The Company's average interest-earning assets increased
18.2% to $751.01 million from September 30, 1996. This increase was primarily
funded with a 21.3% increase in the Company's average interest-bearing
liabilities, and an 11.2% increase in its average noninterest-bearing deposits
for the same period.
For the third quarter of 1997, the net interest income totaled $8.20 million,
increasing by 9.5% from the $7.49 million realized in the same period in 1996.
The Company's net interest margin (taxable equivalent net interest income as a
percent of average interest-earning assets) was 4.29% and 4.58% for the first
nine months of 1997 and 1996, respectively. The net interest margin is impacted
by the change in the spread between yields on earning assets and rates paid on
interest-bearing liabilities. This spread decreased by 20 basis points in the
first nine months of 1997 when compared to the same period in the prior year.
The yield on earning assets decreased 8 basis points to 8.28%, while the rates
paid on interest-bearing liabilities increased 12 basis points to 4.50%,
primarily from the increased volume of other borrowings.
For the third quarter of 1997, the net interest margin was 4.18% compared to
4.50% in 1996. The spread during the period decreased 25 basis points which was
principally caused by the increase in rates paid on interest-bearing liabilities
being greater than the increase in the yields earned on the investment and loan
portfolios. The yield on earning assets was unchanged at 8.32% while the rates
paid on interest-bearing liabilities increased by 22 basis points to 4.66%.
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 late 1996 and
early 1997 for both loans and the funding sources needed to satisfy loan demand
within the Company's market area and transactions related to leveraging the
Company's capital position 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 during 1997.
Therefore, the Company is currently pursuing operating efficiencies through
improved technology and is evaluating new products and services in an effort to
enhance its level of noninterest income. There can be no assurance that these
benefits will be realized.
9
<PAGE>
Management of the Company employs extensive computer simulations to model the
impact of rising and falling interest rates. These simulations are based on
numerous assumptions management determines from their strategic planning process
and are run on a monthly basis using a rate ramping technique to determine the
effects on the Company's net income assuming a gradual increase or decrease in
interest rates. The Company has an interest rate risk management policy that
seeks to limit the amount of deterioration in net income, associated with an
assumed gradual change in interest rates of +/- 100 and +/- 200 basis point
change in interest rates, to no more than 10% and 20% of net income,
respectively.
Noninterest Income
- ------------------
Noninterest income increased $1.23 million (38.8%) for the nine months ended
September 30, 1997, when compared to the same period in 1996. This increase was
partially attributable to the increase in service fee income of $266,000 that
was due to an increase in the volume of deposit accounts maintained. The gains
recognized on sales of loans into the secondary mortgage market in 1997 totaled
$299,000 compared to the $246,000 recognized during 1996. Security gains
increased in 1997 to $358,000 from the $171,000 realized in 1996. The increase
in other operating income of $726,000 was primarily attributable to the Company
implementing a Bank Owned Life Insurance program.
For the third quarter of 1997, noninterest income increased by $675,000. This
increase was primarily caused by the $183,000 of income generated from the Bank
Owned Life Insurance program, an increase in security gains of $204,000 along
with the increase in service fee income of $100,000.
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, the
income from these products is less sensitive to fluctuations in the level of
interest rates. The Company offers asset management and trust services, along
with mutual funds and annuities to its customers. Additionally, revenue from
service charges on deposit accounts will continu to increase as the volume of
accounts maintained expands.
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 rat changes. 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.
The Company's management is committed to developing and offering innovative,
market-driven products and services that will generate additional sources of
noninterest income. However, the future results of any of these products or
services cannot be predicted at this time.
Noninterest Expenses
- --------------------
Noninterest expenses, excluding merger related expenses, increased $526,000
(3.1%) for the first nine months of 1997, when compared to the first nine months
of 1996.
Total salaries and employee benefits increased $758,000 (8.7%) over the first
nine months of 1996. The increase in salaries and employee benefits is
attributable to the increased wages of the employees, the increased costs of
health and pension benefits, and the additional staffing for the Odenton branch
acquired in April 1996, the opening of the headquarters branch in March 1996 and
the opening of the Asset Management and Trust Division in January 1997.
Occupancy expenses decreased $87,000 (4.6%) while equipment expenses increased
$264,000 (21.0%) over the first nine months of 1996. The decrease in occupancy
expenses primarily relates to the reclassification of the Company's Operations
Center to other real estate owned when the operations were relocated to the new
headquarters facility. The increase in equipment expenses is primarily
associated with increased depreciation, and higher ATM and communication
expenses.
Other operating expenses decreased $409,000 (8.1%) compared to the first nine
months of 1996. The primary reason for the decrease was associated with the
special FDIC assessment related to SAIF insured deposits owned by the Company's
subsidiary banks. The Company incurred an $813,000 expense for this one-time fee
in September 1996.
10
<PAGE>
For the third quarter of 1997, salaries and benefits increased $180,000
(5.9%), occupancy expenses increased $14,000 (2.2%), equipment expenses
increased $63,000 (13.8%), and other operating expenses decreased $718,000
(33.7%). The increase in salaries and benefits costs is primarily related to the
increased number of employees, which increased by 21 from 330 as of September
30, 1996. The decrease in other operating expenses was primarily due to the
special FDIC assessment, which the Company paid in September 1996, as mentioned
above.
Income Taxes
- ------------
The Company's effective tax rates for the first nine months of 1997 and 1996
were 32.9% and 35.8%, respectively. The effective tax rate for 1996 is higher
than the effective tax rate experienced in 1997 due to the nondeductibility of
certain merger related costs. The Company's income tax expense also differs from
the amount computed at statutory rates primarily due to tax-exempt interest from
certain loans and investment securities and the Bank Owned Life Insurance
program.
For the third quarter of 1997 and 1996, the effective tax rates were 32.9% and
(49.8%), respectively. The effective tax rate for 1996 is considerably lower
than the effective tax rate experienced in 1997 due to the reversal of the tax
effects associated with recapture of the pre-1988 thrift reserves for credit
losses recorded in the first quarter of 1996.
Allowance for Credit Losses and Problem Assets
- ----------------------------------------------
The Company follows the guidance of Statement of Financial Accounting
Standards No. 114 (SFAS 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.
SFAS 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 are 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. The Company has identified commercial real estate and commercial
and industrial type loans as the major risk classifications to be used in the
application of SFAS 114.
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------------
1997 1996
----------------------
(dollars in thousands)
<S> <C> <C>
Impaired loans with specific allocation of allowance for credit losses $ 925 $ 4,300
Specific allocation of allowance for credit losses ................... 242 935
Other impaired loans ................................................. 695 2,100
Average recorded investment in impaired loans ........................ 1,682 6,540
Interest income recognized on impaired loans based on cash
payments received ................................................. 24 188
------ -------
</TABLE>
11
<PAGE>
Additional information concerning the Company's recorded investment in
nonaccrual loans, for which impairment had not been recognized are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------
1997 1996
----------------------
(dollars in thousands)
<S> <C> <C>
Nonaccrual loans ................................................. $971 $808
Interest income not recognized due to loans in nonaccrual status . 20 50
---- ----
</TABLE>
The Company maintains its allowance for credit losses at a level deemed
sufficient to provide for estimated potential losses 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 collectability of specific loans. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows.
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 $5.36 million, or 0.95% of total loans, net
of unearned income, at September 30,1997, compared to $5.43 million, or 1.13% as
of September 30,1996, and $5.12 million, or 1.03% as of December 31,1996. The
allowance for credit losses to nonperforming loans was 147.6%, 75.7% and 71.5%
as of September 30, 1997, September 30, 1996 and December 31,1996, respectively.
Total nonperforming assets as of September 30, 1997 were $6.79 million, a $3.53
million decrease from the level of nonperforming assets as of September 30,
1996, and a $3.50 million decrease from the level as of December 31, 1996. Total
nonperforming assets as of September 30, 1997, including properties acquired
through foreclosure, represent 0.76% of total assets, compared to 1.38% and
1.32% as of September 30, 1996 and December 31, 1996, respectively.
Nonperforming assets at September 30, 1997 included $2.59 million of nonaccrual
loans, $1.04 million of loans past due 90 days or more, $1.33 million of
foreclosed commercial properties, $644,000 of foreclosed residential properties
and $1.19 million for the Company's vacated Operations Center transferred to
other real estate owned.
12
<PAGE>
<TABLE>
<CAPTION>
Allowance for Credit Losses
- ------------------------------------------------------------------------------------------------------
Nine months
ended Year ended
September 30, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average total loans outstanding during period ............... $525,177 $464,440
Allowance at beginning of year .............................. $5,123 $5,242
-------- --------
Charge-offs:
Real estate - construction- ................................ -- --
Real estate - mortgage ..................................... 588 136
Commercial and agricultural ................................ 306 570
Consumer ................................................... 203 293
-------- --------
Total charge-offs ....................................... 1,097 999
-------- --------
Recoveries:
Real estate - construction ................................. -- --
Real estate - mortgage ..................................... 4 --
Commercial and agricultural ................................ 364 20
Consumer ................................................... 52 80
-------- --------
Total recoveries ........................................ 420 100
-------- --------
Net charge-offs(recoveries) ................................. 677 899
-------- --------
Additions to allowance charged to operating expenses ........ 914 318
-------- --------
Other transfers and allowance
on loans acquired with purchased entity .................... -- 462
-------- --------
Allowance at end of period .................................. $5,360 $5,123
-------- --------
Ratio of net charge-offs to average total loans ............. 0.13% 0.19%
-------- --------
</TABLE>
<TABLE>
<CAPTION>
Allocation of Allowance for Credit Losses
- -------------------------------------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996
(1) (1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate - construction .................................. $ 496 13% $1,059 11%
Real estate - mortgage ...................................... 3,182 67 2,300 67
Commercial and agricultural ................................. 562 10 855 11
Consumer .................................................... 437 10 534 11
Unallocated ................................................. 683 -- 375 --
------ --- ------ ---
Total Allowance ............................................. $5,360 100% $5,123 100%
====== === ====== ===
</TABLE>
(1) Percent of loans in each category to total loans, net of unearned income.
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 and have a term of one year or
less. The real estate-mortgage loans are generally secured by the property with
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 on the financial strength
o the individual borrower. The collateral for the secured consumer loans may be
marketable securities, automobile, recreational vehicles or deposits in the
subsidiary banks of the Company. The usual term for these loans is three to five
years.
As of September 30, 1997, the Company had loans totaling $16.61 million that
were current but as to which there are concerns as to the ability of the
borrowers to comply with present loan repayment terms. While management of the
Company 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 and/or additional loan loss
provisions.
At September 30, 1997, 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 counterparts that are engaged in similar
13
<PAGE>
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 September 30, 1997,
classifiable as nonaccrual, past due, restructured or problem assets.
14
<PAGE>
Distribution of Assets, Liabilities and Shareholders' Equity;
- ------------------------------------------------------------
Interest Rates and Interest Differentials
- -----------------------------------------
The following table shows average balances of asset and liability
categories, interest income and paid, and average yields and rates for the
periods indicated:
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------
Average Interest Average Average Interest Average
daily Income1/ yield/ daily income1/ yield/
balance paid rate balance paid rate
--------------------------------------------------------------------
Assets (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits ........ $2,248 $79 4.68% $2,761 $146 7.05%
Federal funds sold ............... 7,870 319 5.40% 15,640 577 4.92%
------- -------- ----- ------- ------- -----
Loans held for sale .............. 1,031 58 7.50% 3,371 188 7.44%
------- -------- ----- ------- ------- -----
Investment securities:
Taxable ......................... 209,729 10,133 6.44% 149,699 7,192 6.41%
Tax exempt ...................... 4,950 415 11.18% 7,152 617 11.50%
------- -------- ----- ------- ------- -----
Total investment securities ....... 214,679 10,548 6.55% 156,851 7,809 6.64%
------- -------- ----- ------- ------- -----
Loans 2 .......................... 525,177 35,642 9.05% 456,893 31,147 9.09%
------- -------- ----- ------- ------- -----
Total interest-earning assets ...... 751,005 46,646 8.28% 635,516 39,867 8.36%
------- -------- ----- ------- ------- -----
Noninterest-earning assets ......... 63,012 49,630
Net effect of SFAS 115 ............. 744 (108)
------- -------- ----- ------- ------- -----
Total assets ................. $814,761 $685,038
------- -------- ----- ------- ------- -----
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposit 3 ....... $516,910 16,334 4.21% $481,291 15,058 4.17%
Long-term debt 4 ................. -- -- -- 6,073 314 6.89%
Other short-term borrowings ...... 148,850 6,158 5.52% 61,667 2,650 5.73%
------- -------- ----- ------- ------- -----
Total interest-bearing
liabilities ....................... 665,760 22,492 4.50% 549,031 18,022 4.38%
------- -------- ----- ------- ------- -----
Noninterest-bearing deposits ....... 72,250 64,995
Noninterest-bearing liabilities .... 6,096 5,971
------- -------- ----- ------- ------- -----
Total liabilities ............ 744,106 619,997
------- -------- ----- ------- ------- -----
Shareholders' equity ............... 69,911 65,149
Net effect of unrealized
gain (loss) on securities ......... 744 (108)
------- -------- ----- ------- ------- -----
Total shareholders' equity ... 70,655 65,041
------- -------- ----- ------- ------- -----
Total liabilities and
shareholders' equity ....... $814,761 $685,038
------- -------- ----- ------- ------- -----
Net interest income ................ $ 24,154 $21,845
-------- -------
Net interest spread .............. 3.78% 3.98%
----- -----
Net interest margin .............. 4.29% 4.58%
----- -----
</TABLE>
15
<PAGE>
1 Taxable equivalent adjustments of $183,000 for 1997 and $212,000 for 1996
are included in the interest income for total interest-earning assets. The
statement of income for the nine month period ended September 30, 1996
includes the results of operations for Laurel for the period from December
1, 1995 to January 26, 1996, the effective date of the merger. To facilitate
an analysis of this table, the effects of interest income and interest
expense in the amounts of $755,000 and $358,000, respectively, for Laurel
during the month of December 1995 have been eliminated from the above
analysis.
2 Nonaccruing loans, which include impaired loans, are included in the average
balances. Net loan fees included in interest income totaled $1.02 million in
1997 and $910,000 in 1996.
3 The interest paid on interest-bearing deposits in 1996 includes $42,000 of
capitalized construction period interest.
4 The interest paid on long-term debt in 1996 includes $66,000 of capitalized
construction period interest while none was paid in 1997.
16
<PAGE>
Capital Resources
- -----------------
The following table shows the risk-based capital and the leverage ratios for
the Company as of September 30, 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------
As of September 30, 1997:
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $74,536 11.86% $50,285 8.0% N/A N/A
FCNB Bank $60,601 9.72% $49,881 8.0% $62,352 10.0%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $69,176 11.01% $25,142 4.0% N/A N/A
FCNB Bank $55,241 8.86% $24,941 4.0% $37,411 6.0%
Tier I Capital
(To Average Assets):
FCNB Corp $69,176 8.53% $24,340 3.0% N/A N/A
FCNB Bank $55,241 7.30% $22,708 3.0% $37,847 5.0%
</TABLE>
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
No. 11 Statement Regarding Computation of Per Share Earnings
No. 27 Financial Data Schedule
(b) Report on Form 8-K. None filed during the third quarter of 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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)
November 5, 1997 BY: /s/ A. Patrick Linton
---------------------------------------------
A. Patrick Linton, President,
Chief Executive Officer and
Director
November 5, 1997 BY: /s/ Mark A. Severson
---------------------------------------------
Mark A. Severson, Senior Vice President and
Treasurer
Exhibit No. 11
Statement Regarding the Computation of Per Share Earnings
1997 1996
---- ----
Earnings per Common Share:
Primary $1.08 $0.67
Primary-before merger costs $1.14 $0.98
Primary average shares
outstanding 5,921,271 5,950,263
Fully diluted $1.08 $0.67
Fully diluted-before merger costs $1.13 $0.98
Fully diluted average shares
outstanding 5,928,030 5,951,113
See Note 2 to consolidated financial statements.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 24,583
<INT-BEARING-DEPOSITS> 9,803
<FED-FUNDS-SOLD> 15,493
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 174,750
<INVESTMENTS-CARRYING> 53,775
<INVESTMENTS-MARKET> 54,119
<LOANS> 561,397
<ALLOWANCE> 5,360
<TOTAL-ASSETS> 894,260
<DEPOSITS> 603,424
<SHORT-TERM> 209,282
<LIABILITIES-OTHER> 6,217
<LONG-TERM> 0
0
0
<COMMON> 5,375
<OTHER-SE> 69,962
<TOTAL-LIABILITIES-AND-EQUITY> 894,260
<INTEREST-LOAN> 35,658
<INTEREST-INVEST> 10,407
<INTEREST-OTHER> 398
<INTEREST-TOTAL> 46,463
<INTEREST-DEPOSIT> 16,334
<INTEREST-EXPENSE> 22,492
<INTEREST-INCOME-NET> 23,971
<LOAN-LOSSES> 914
<SECURITIES-GAINS> 358
<EXPENSE-OTHER> 17,898
<INCOME-PRETAX> 9,567
<INCOME-PRE-EXTRAORDINARY> 9,567
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,424
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 8.28
<LOANS-NON> 2,590
<LOANS-PAST> 1,040
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 16,610
<ALLOWANCE-OPEN> 5,123
<CHARGE-OFFS> 1,097
<RECOVERIES> 420
<ALLOWANCE-CLOSE> 5,360
<ALLOWANCE-DOMESTIC> 5,360
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
