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
March 31, 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, 5,358,560 shares outstanding as of April 30, 1997.
<PAGE>
PART I FINANCIAL INFORMATION Item 1. Financial Statements
<TABLE>
<CAPTION>
FCNB CORP AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited) (Unaudited)
(Dollars in thousands, except per share amounts) March 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 24,057 $ 31,023
Interest-bearing deposits in other banks 3,632 1,065
Federal funds sold 14,885 12,438
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 42,574 44,526
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Loans held for sale 332 3,162
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Investment securities held to maturity at amortized cost-
fair value of $32,277 in 1997 and
$33,740 in 1996 32,243 33,525
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Investment securities available for sale -
at fair value 167,097 162,860
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Loans 513,421 498,391
Less: Allowance for credit losses (5,513) (5,123)
Unearned income (281) (396)
- -----------------------------------------------------------------------------------------------------------
Net loans 507,627 492,872
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Bank premises and equipment 22,912 22,691
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Other assets 34,547 19,533
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Total Assets $807,332 $779,169
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 73,950 $ 76,365
Interest-bearing deposits 521,949 510,709
- -----------------------------------------------------------------------------------------------------------
Total deposits 595,899 587,074
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Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 46,414 40,739
Other short-term borrowings 89,213 76,516
Accrued interest and other liabilities 6,847 5,730
- -----------------------------------------------------------------------------------------------------------
Total liabilities 738,373 710,059
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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; 5,358,560
shares issued and outstanding in 1997
and 5,364,560 in 1996 5,359 5,365
Surplus 26,526 26,652
Retained earnings 37,638 36,589
Net unrealized gain (loss) on securities
available for sale (564) 504
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 68,959 69,110
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $807,332 $779,169
===========================================================================================================
</TABLE>
2
<PAGE>
FCNB CORP AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, 1997 and 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
For Three Months
Ended March 31,
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $11,350 $10,769
Interest and dividends on investments:
Taxable 2,956 2,104
Tax exempt 94 149
Dividends 149 120
Interest on federal funds 152 280
Other interest income 33 77
- ------------------------------------------------------------------------------------------------------------
Total interest income 14,734 13,499
- ------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 5,267 5,225
Interest on federal funds purchased and
securities sold under agreements to
repurchase 668 290
Interest on other short-term borrowings 1,021 461
Interest on long-term debt -- 18
- ------------------------------------------------------------------------------------------------------------
Total interest expense(1) 6,956 5,994
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Net interest income 7,778 7,505
Provision for credit losses 231 72
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Net interest income after provision
for credit losses 7,547 7,433
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Noninterest income:
Service fees 627 566
Net securities gains 87 65
Gain on sale of loans 148 89
Other operating income 431 293
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 1,293 1,013
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Noninterest expenses:
Salaries and employee benefits 3,103 2,821
Occupancy expenses 620 602
Equipment expenses 523 368
Merger related expenses 351 1,874
Other operating expenses 1,621 1,413
- ------------------------------------------------------------------------------------------------------------
Total noninterest expenses 6,218 7,078
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Income before provision for income taxes 2,622 1,368
- ------------------------------------------------------------------------------------------------------------
Provision for income taxes:
Income tax expense 772 576
Deferred income tax effect of pre-1988 thrift
Reserve for credit losses -- 1,601
- ------------------------------------------------------------------------------------------------------------
Provision for income taxes 772 2,177
- ------------------------------------------------------------------------------------------------------------
Net Income (loss) $1,850 $(809)
============================================================================================================
Net income (loss) per share $0.34 ($0.15)
============================================================================================================
Dividends declared per share $0.15 $0.12
============================================================================================================
Weighted average number
of shares outstanding 5,361,625 5,360,010
============================================================================================================
</TABLE>
(1) Total interest expense has been reduced by $96,000 for capitalized
construction period interest during the three month period ended March 31,
1996, while no adjustment was required for the three month period ended
March 31, 1997.
3
<PAGE>
FCNB CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,850 ($809)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 402 288
Provision for credit losses 231 72
Provision for deferred income taxes (benefits) (62) (511)
Net premium amortization (discount accretion)
on investment securities 84 15
Accretion of net loan origination fees (105) (169)
Net securities gains (87) (65)
Net loss on disposition of bank
premises and equipment -- 10
Net gain on sale of foreclosed properties -- (10)
Decrease (Increase) in other assets (14,061) 4,272
Decrease (Increase) in loans held for sale(1) 2,830 (4,107)
Increase (Decrease) in accrued interest and other liabilities 1,117 (294)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (7,801) (1,308)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities - available for sale 24,377 949
Proceeds from maturities of investment securities - available for sale 6,439 3,978
Proceeds from maturities of investment securities - held to maturity 1,326 8,010
Purchases of investment securities - available for sale (36,762) (17,370)
Net decrease (increase) in loans (15,038) 395
Purchases of bank premises and equipment (588) (1,892)
Purchase of foreclosed properties (183) --
Investment in foreclosed properties -- (316)
Proceeds from dispositions of foreclosed properties 70 78
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (20,359) (6,168)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase and (decrease) in noninterest-bearing
deposits, NOW accounts, money market accounts, and
savings accounts (8,304) 4,532
Net increase in time deposits 17,129 2,532
Net increase (decrease) in short-term borrowings 18,372 4,130
Proceeds from long-term debt -- 500
Proceeds from sale of stock 26 423
Repurchase of common stock (213) --
Dividend reinvestment plan -- (3)
Dividends paid (802) (663)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,208 11,451
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,952) 3,975
Cash and cash equivalents:
Beginning of period 44,526 46,363
- ---------------------------------------------------------------------------------------------------------------------------
End of period $42,574 $50,338
===========================================================================================================================
</TABLE>
(CONTINUED)
4
<PAGE>
FCNB CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
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<S> <C> <C>
Supplemental disclosures:
Interest paid $5,978 $5,952
- ---------------------------------------------------------------------------------------------------------------------------
Income taxes paid (refunds) ($357) $720
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing and
financing activities:
Foreclosed properties acquired in settlement of loans $157 $106
- ---------------------------------------------------------------------------------------------------------------------------
Bank premises transferred to other assets -- $1,235
- ---------------------------------------------------------------------------------------------------------------------------
Surplus from stock option transactions $55 --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 period ended March 31, 1996 contained in these unaudited consolidated
financial statements includes the effects of the pooling-of-interest transaction
with Laurel Bancorp, Inc. ("Laurel"). The period ended March 31, 1996 includes
the results of operations from Laurel for the period December 1, 1995 to January
1, 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 loss. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
Note 2 - 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 three month period ended March
31, 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 $661,000, 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 March 31, 1996 Company Harbor Combined
- ----------------------------------------- ------- ------ --------
Total income $14,512 $778 $15,290
Net income (loss) (809) 67 (742)
Net income (loss) per share (0.15) (0.14)
Note 3 - Investments: Using the criteria specified in Statement 115, the Company
classifies its investments in debt and equity securities at March 31, 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 other 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.
As of March 31, 1997, the gross unrealized losses in the Company's investment
portfolio were $555,000 in the held-to-maturity investment portfolio and $1.62
million in the available-for-sale investment portfolio compared to $472,000 and
$714,000, respectively, as of December 31, 1996. The increase in the gross
unrealized losses in the total investment portfolio is principally the result of
an increase in market interest rates in early 1997. Since the
6
<PAGE>
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 operations 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 March 31, 1997 are as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31,1997 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $ 4,896 $ -- $ 26 $ 4,870
State and political subdivisions 4,898 432 -- 5,330
Mortgage-backed debt securities 22,449 157 529 22,077
- -------------------------------------------------------------------------------------------------------------------------
$32,243 $589 $555 $32,277
=========================================================================================================================
</TABLE>
The amortized cost and estimated fair value of securities classified as
available-for-sale at March 31,1997 are as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31,1997 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $ 41,969 $ 36 $ 233 $ 41,772
Corporate bonds 9,850 6 213 9,643
Mortgage-backed debt securities 101,865 338 1,162 101,041
Equity securities 14,268 386 13 14,641
- ---------------------------------------------------------------------------------------------------------------------------
$167,952 $766 $1,621 $167,097
===========================================================================================================================
</TABLE>
The gross realized gains on securities sold from the available-for-sale
portfolio for the first three months of 1997 and 1996 are $182,000 and $72,000,
respectively. The gross realized losses on securities sold from the
available-for-sale portfolio for the same periods are $95,000 and $7,000,
respectively.
The amortized cost and estimated fair value of securities classified as
held-to-maturity and available-for-sale at March 31, 1997 summarized by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
- ---------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
March 31, 1997 Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 817 $ 838 $ 17,198 $ 17,081
Due after one through five years 7,155 7,345 24,452 24,317
Due after five through ten years 1,722 1,916 9,229 9,103
Due after ten years 100 101 940 914
Mortgage-backed debt securities 22,449 22,077 101,865 101,041
Equity securities -- -- 14,268 14,641
- ---------------------------------------------------------------------------------------------------------------------------
$32,243 $32,277 $167,952 $167,097
===========================================================================================================================
</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
===========================================================================================================================
<CAPTION>
The amortized cost and estimated fair value of securities classified as
available-for-sale at December 31, 1996 are as follows:
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 4 - Recent Accounting Pronouncements: The FASB has issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" in February 1997
with an effective date of December 15, 1997. The Company has determined that the
adoption of this Statement 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 three
months, the Company reported earnings of $1.85 million in 1997 and a loss of
$809,000 in 1996. However, net income before specific one-time
8
<PAGE>
merger related costs was $2.07 million in 1997 compared to $2.08 million for the
same period in 1996. The financial results for the first quarter of 1996 were
unfavorably impacted by the deferred income tax effect totaling $1.60 million on
the pre-1988 thrift reserves for credit losses.
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 three months ended March 31, 1997 was .94%, and 1.05% before specific
one-time merger related costs, compared to annualized rates of (0.49%) and
1.27%, 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 three months ended March 31, 1997 was 10.72%, and 11.96%
before specific one-time merger related costs, compared to annualized rates of
(4.94%) and 12.68%, respectively for the three months ended March 31, 1996.
9
<PAGE>
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 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%, 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 three months of 1997
totaled $7.83 million, increasing 10.4% from the $7.09 million recorded for the
same period in 1996. The Company's average interest-earning assets increased
19.1% to $724.41 million from March 31, 1996. This increase was primarily funded
with a 22.2% increase in the Company's average interest-bearing liabilities, and
a 15.1% increase in its average noninterest-bearing deposits for the same
period.
The Company's net interest margin (taxable equivalent net interest income as
a percent of average interest-earning assets) was 4.32% and 4.66% for the first
quarter 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 24 basis points in the
first quarter of 1997 when compared to the same period in the prior year. The
yield on earning assets decreased 27 basis points to 8.16%, while the rates paid
on interest-bearing liabilities decreased by only 3 basis points to 4.35%.
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 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.
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 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
seeks to limit 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.
Noninterest Income
- ------------------
Noninterest income increased $280,000 (27.6%) for the three months ended
March 31, 1997, when compared to the same period in 1996. This increase was
partially attributable to the increase in service fee income of $61,000 which
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
$148,000 compared to the $89,000 recognized during 1996. Security gains
increased in 1997 to $87,000 from the $65,000 realized in 1996. The increase in
other operating income of $138,000 was primarily attributable to the Company
implementing a Bank Owned Life Insurance program.
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 has an arrangement with BankMark, a third party
provider of mutual funds and annuities, to offer these products to its
customers. The arrangement enables the Company to earn commissions on the sale
of mutual funds and annuities while providing customers access to alternative
investment products. In January 1997, the Company began to offer asset
management and trust services. Additionally, revenue from service charges on
deposit accounts will continue to increase as the volume of accounts maintained
expands.
10
<PAGE>
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. 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.
Noninterest Expenses
- --------------------
Noninterest expenses, excluding merger related expenses, increased $663,000
(12.7%) for the first three months of 1997, when compared to the first three
months of 1996.
Total salaries and employee benefits increased $282,000 (10.0%) over the
first three 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 increased $18,000(3.0%) while equipment expenses increased
$155,000 (42.1%) over the first three months of 1996. The increase in occupancy
and equipment expenses is primarily associated with the increased costs of
maintaining the new corporate headquarters facility. These costs include
additional depreciation, utility expenses and real estate taxes. Equipment
expenses have also increased due to higher ATM expenses.
Other operating expenses increased $208,000 (14.7%) compared to the first
quarter of 1996. The increase in operating expenses is primarily caused by the
new data processing outsourcing arrangement which was put into place in November
1996. The Company has an arrangement which allows the Company to grow
substantially over the next five years with little increase in the data
processing costs over that time period.
Income Taxes
- ------------
The Company's effective tax rates for the first three months of 1997and 1996
were 29.4% and 159.1%, respectively. The Company's income tax expense differs
from the amount computed at statutory rates primarily due to the tax-exempt
earnings from certain loans, investment securities and the Bank Owned Life
Insurance program.
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.
11
<PAGE>
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
March 31, 1997 1997 1996
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Impaired loans with specific allocation of allowance for credit losses $2,020 $3,030
Specific allocation of allowance for credit losses 393 690
Other impaired loans 753 512
Average recorded investment in impaired loans 2,774 3,560
Interest income recognized on impaired loans based on cash
payments received 28 15
- -------------------------------------------------------------------------------------------------------------
Additional information concerning the Company's recorded investment in
nonaccrual loans, for which impairment had not been recognized are as follows:
March 31,
- -------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------------------------------------
Nonaccrual loans $307 $756
Interest income not recognized due to loans in nonaccrual status 6 36
- -------------------------------------------------------------------------------------------------------------
</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 is 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 $5.51 million, or 1.07% of total loans,
net of unearned income, at March 31, 1997, compared to $5.25 million, or 1.20%
as of March 31, 1996, and $5.12 million, or 1.03% as of December 31, 1996. The
allowance for credit losses to nonperforming loans was 93.7%, 113.5% and 71.5%
as of March 31, 1997, March 31, 1996 and December 31, 1996, respectively.
Total nonperforming assets as of March 31, 1997 were $9.23 million, a $1.04
million increase from the level of nonperforming assets as of March 31, 1996,
and a $1.07 million decrease from the level as of December 31, 1996. Total
nonperforming assets as of March 31, 1997, including properties acquired through
foreclosure, represent 1.14% of total assets, compared to 1.22% and 1.32% as of
March 31, 1996 and December 31, 1996, respectively.
Nonperforming assets at March 31, 1997 included $3.08 million of nonaccrual
loans, $2.80 million of loans past due 90 days or more, $1.60 million of
foreclosed commercial properties, $556,000 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
- ----------------------------------------------------------------------------------------------------------------
Three months
ended Year ended
March 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average total loans outstanding during period $505,418 $464,440
- ----------------------------------------------------------------------------------------------------------------
Allowance at beginning of year $5,123 $5,242
- ----------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate - construction -- --
Real estate - mortgage -- 136
Commercial and agricultural 91 570
Consumer 22 293
- ----------------------------------------------------------------------------------------------------------------
Total charge-offs 113 999
- ----------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate - construction -- --
Real estate - mortgage -- --
Commercial and agricultural 248 20
Consumer 24 80
- ----------------------------------------------------------------------------------------------------------------
Total recoveries 272 100
- ----------------------------------------------------------------------------------------------------------------
Net charge-offs(recoveries) (159) 899
- ----------------------------------------------------------------------------------------------------------------
Additions to allowance charged to operating expenses 231 318
- ----------------------------------------------------------------------------------------------------------------
Other transfers and allowance
on loans acquired with purchased entity -- 462
- ----------------------------------------------------------------------------------------------------------------
Allowance at end of period $5,513 $5,123
- ----------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average total loans (0.03)% 0.19%
- ----------------------------------------------------------------------------------------------------------------
Allocation of Allowance for Credit Losses
- ----------------------------------------------------------------------------------------------------------------
March 31, 1997 December 31, 1996
(1) (1)
- ----------------------------------------------------------------------------------------------------------------
Real estate - construction $ 518 11% $ 1,059 11%
Real estate - mortgage 3,412 67 2,300 67
Commercial and agricultural 805 11 855 11
Consumer 447 11 534 11
Unallocated 331 -- 375 --
- ----------------------------------------------------------------------------------------------------------------
Total Allowance $5,513 100% $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
of 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 March 31, 1997, the Company had loans totaling $14.78 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.
At March 31, 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 activities
13
<PAGE>
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 March 31, 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>
Three months ended
March 31,
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Average Interest Average Average Interest Average
daily Income1/ yield/ daily income1/ yield/
balance paid rate balance paid rate
----------------------------------------------------------------------------
Assets (dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $3,831 $ 33 3.45% $3,461 $ 57 6.59%
- ------------------------------------------------------------------------------------------------------------------------
Federal funds sold 11,386 152 5.34% 21,334 280 5.25%
- ------------------------------------------------------------------------------------------------------------------------
Loans held for sale 1,839 30 6.53% 3,719 66 7.10%
- ------------------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable 196,860 3,105 6.31% 132,049 2,150 6.51%
Tax exempt 5,074 142 11.23% 7,891 226 11.44%
- ------------------------------------------------------------------------------------------------------------------------
Total investment securities 201,934 3,247 6.43% 139,940 2,376 6.79%
- ------------------------------------------------------------------------------------------------------------------------
Loans 2 505,418 11,321 8.96% 439,557 10,042 9.14%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 724,408 14,783 8.16% 608,011 12,821 8.43%
Noninterest-earning assets 59,140 47,329
Net effect of SFAS 115 407 502
- ------------------------------------------------------------------------------------------------------------------------
Total assets $783,955 $655,842
- ------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits 3 $509,868 5,267 4.13% $467,693 4,950 4.23%
Long-term debt 4 -- -- -- 5,833 66 4.53%
Other short-term borrowings 129,306 1,689 5.22% 49,685 716 5.76%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 639,174 6,956 4.35% 523,211 5,732 4.38%
- ------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 69,464 60,328
Noninterest-bearing liabilities 6,275 6,797
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 714,913 590,336
- ------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 68,635 65,004
Net effect of unrealized
gain (loss) on securities 407 502
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 69,042 65,506
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $783,955 $655,842
- ------------------------------------------------------------------------------------------------------------------------
Net interest income $7,827 $7,089
- ------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.81% 4.05%
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.32% 4.66%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Taxable equivalent adjustments of $49,000 for 1997 and $77,000 for 1996 are
included in the interest income for total interest-earning assets. The
statement of income for the three month period ended March 31, 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
$283,000 in 1997 and in 1996.
3 The interest paid on interest-bearing deposits in 1996 includes $42,000 of
capitalized construction period interest.
15
<PAGE>
4 The interest paid on long-term debt in 1996 includes $54,000 of capitalized
construction period interest while none was paid in 1997.
Capital Resources
- -----------------
The following table shows the risk-based capital and the leverage ratios for
the Company as of March 31, 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 March 31, 1997:
- ---------------------
<S> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $71,499 12.81% $44,652 8.0% N/A N/A
FCNB Bank $58,077 10.46% $44,403 8.0% $55,504 10.0%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $65,986 11.82% $22,326 4.0% N/A N/A
FCNB Bank $52,564 9.47% $22,201 4.0% $33,302 6.0%
Tier I Capital
(To Average Assets):
FCNB Corp $65,986 8.46% $23,399 3.0% N/A N/A
FCNB Bank $52,564 8.35% $18,884 3.0% $31,474 5.0%
</TABLE>
16
<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
(b) Report on Form 8-K. None filed during the first quarter of 1997.
17
<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)
May 9, 1997 BY: /s/ Patrick Linton
-----------------------------------------
A. Patrick Linton, President,
Chief Executive Officer and
Director
May 9, 1997 BY: /s/ Mark A. Severson
-----------------------------------------
Mark A. Severson, Senior Vice President and
Treasurer
18
Exhibit No. 11
Statement Regarding the Computation of Per Share Earnings
1997 1996
---- ----
Earnings (loss) per Common Share:
Primary $0.34 ($0.15)
Primary-before one-time
merger costs $0.38 $0.39
Primary average shares
outstanding 5,392,147 5,383,349
Fully diluted $0.34 ($0.15)
Fully diluted-before one-time
merger costs $0.38 $0.39
Fully diluted average shares
outstanding 5,392,461 5,383,397
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 24,057
<INT-BEARING-DEPOSITS> 3,632
<FED-FUNDS-SOLD> 14,885
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 167,097
<INVESTMENTS-CARRYING> 32,243
<INVESTMENTS-MARKET> 32,277
<LOANS> 513,140
<ALLOWANCE> 5,513
<TOTAL-ASSETS> 807,332
<DEPOSITS> 595,899
<SHORT-TERM> 135,627
<LIABILITIES-OTHER> 6,847
<LONG-TERM> 0
5,359
0
<COMMON> 0
<OTHER-SE> 63,600
<TOTAL-LIABILITIES-AND-EQUITY> 807,332
<INTEREST-LOAN> 11,350
<INTEREST-INVEST> 3,199
<INTEREST-OTHER> 185
<INTEREST-TOTAL> 14,734
<INTEREST-DEPOSIT> 5,267
<INTEREST-EXPENSE> 6,956
<INTEREST-INCOME-NET> 7,778
<LOAN-LOSSES> 231
<SECURITIES-GAINS> 87
<EXPENSE-OTHER> 6,218
<INCOME-PRETAX> 2,622
<INCOME-PRE-EXTRAORDINARY> 2,622
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,850
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 4.32
<LOANS-NON> 3,080
<LOANS-PAST> 2,800
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 14,780
<ALLOWANCE-OPEN> 5,123
<CHARGE-OFFS> 113
<RECOVERIES> 272
<ALLOWANCE-CLOSE> 5,513
<ALLOWANCE-DOMESTIC> 5,513
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
