UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-15645
FCNB Corp
(Exact name of registrant as specified in its charter)
MARYLAND 52-1479635
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification Number)
7200 FCNB Court, Frederick, Maryland 21703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 662-2191
Securities registered pursuant to Section 12(b) of
the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, par value $1.00 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period of time that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock (based on $20.50 per share) held by
nonaffiliates on February 20, 1997 was approximately $98,561,397.
As of March 1, 1997, there were 5,363,560 shares of Common Stock, par value
$1.00 per share, of FCNB Corp issued and outstanding.
Documents Incorporated by Reference
Portions of the 1996 Annual Report to
Shareholders for the year ended December 31,
1996-PARTS I, II, & IV
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PART I
Item 1. Business.
General
FCNB Corp (the "Registrant" or "Company") is a bank holding company organized
under the laws of the State of Maryland and serves as the holding company for
FCNB Bank (the "Bank"). On March 7, 1997, the Company merged Elkridge Bank
("Elkridge"), Elkridge, Maryland, its second wholly owned bank subsidiary, with
and into the Bank, with the Bank surviving.
The information related to the Company's acquisitions during the year is
contained on page 12 of the Company's 1996 Annual Report to Shareholders. Such
information is incorporated herein by reference to the Annual Report.
The Bank
The Bank, a state-chartered commercial bank under the laws of the State of
Maryland was converted from a national bank in June 1993, and was originally
chartered in 1818. The Bank is engaged in a general commercial and retail
banking business serving individuals and businesses in Frederick, Carroll and
Montgomery counties in Maryland. At December 31, 1996, the Bank operated eight
banking offices located in Frederick, Maryland and one office each in Brunswick,
Damascus, Eldersburg, Middletown, Monrovia, Mount Airy, Walkersville, and
Westminster, Maryland. At December 31, 1996, the Bank had total loans, net of
unearned income, of approximately $330.83 million, total assets of approximately
$554.94 million, total deposits of approximately $416.40 million, and a legal
lending limit of approximately $6.10 million to any one borrower. The deposits
of the Bank are insured by the FDIC.
The Bank's primary market area consists of the City of Frederick (with a
population of approximately 35,000 people) and the surrounding area. Frederick
is the county seat of Frederick County, Maryland and is located approximately 49
miles west of Baltimore, Maryland and 46 miles northwest of Washington, D.C.
Elkridge
Elkridge, a state-chartered commercial bank under the laws of the State of
Maryland was converted from a national bank in March 1995, was originally
chartered in 1961, and was merged into the Bank on March 7, 1997. Elkridge
engaged in a general commercial and retail banking business serving individuals
and businesses in Howard, Prince George's and Anne Arundel counties in Maryland.
Elkridge operated one banking office each in Columbia, Elkridge, Glen Burnie,
Laurel and Odenton, Maryland. Following the merger of Elkridge into the Bank,
the Bank continues to operate the offices and business of Elkridge. At December
31, 1996, Elkridge had total loans, net of unearned income, of approximately
$167.17 million, total assets of
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approximately $222.09 million, total deposits of approximately $177.16 million,
and a legal lending limit of approximately $3.26 million to any one borrower.
The deposits of Elkridge are insured by the FDIC.
Elkridge's primary market area consisted of the territory immediately south of
the City of Baltimore, Maryland.
COMMERCIAL BANKING AND RELATED SERVICES. The Bank is engaged in the financing of
commerce and industry, providing credit facilities and related services
principally for businesses located in their market areas. The Bank offers all
forms of commercial lending, including lines of credit, revolving credits, term
loans, accounts receivable financing, real estate loans, and other forms of
secured financing.
PERSONAL BANKING SERVICES. A wide range of personal banking services are
provided to individuals at each of the Bank's offices. Among the services
provided at most locations are checking accounts, savings accounts, various
savings programs, installment and other personal loans, credit card lines
("VISA"), home improvement loans, personal lines of credit, automobile and other
consumer financing, safe deposit services, and mortgage loans. The Bank also has
automatic teller machines and is a member of the MOST and CIRRUS networks.
COMPETITION. The Bank faces strong competition in all areas of its operations.
This competition comes from entities principally operating in the Bank's
marketing area and includes branches of some of the largest banks in Maryland.
Its most direct competition for deposits historically has come from other
commercial banks, savings banks, savings and loan associations and credit unions
operating in Frederick, Carroll, Howard, Prince George's, Anne Arundel and
Montgomery counties, Maryland. The Bank also competes for deposits and
investment dollars with money market mutual funds and public debt and equity
markets. The Bank competes with banking entities, mortgage banking companies,
and other institutional lenders for loans. The competition for loans varies from
time to time depending on certain factors. These factors include, among others,
the general availability of lendable funds and credit, general and local
economic conditions, current interest rate levels, and conditions in the
mortgage market. As a result of recently enacted Federal and State legislation
allowing interstate banking, branching and mergers, additional competitors not
currently in the Bank's market may enter into the Bank's market.
Supervision and Regulation
HOLDING COMPANY REGULATION. The Company is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended (the BHCA"), and as such
it is subject to regulation, supervision and examination by, and reporting to,
the Board of Governors of the Federal Reserve System (the "Federal Reserve"). A
discussion related to the capital adequacy of the Company is contained on pages
38 and 39 of the Company's 1996 Annual Report to Shareholders. Such information
is incorporated herein by reference to the Annual Report.
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BHCA - ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than banking or managing or controlling
banks. Under the BHCA, the Federal Reserve is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve has determined to be so closely related to banking or
to managing or controlling banks as to be a proper incident thereto. In making
such determinations, the Federal Reserve is required to weigh the expected
benefit to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
The Federal Reserve has by regulation determined that certain activities are
closely related to banking within the meaning of the BHCA. These activities
include: making or servicing loans such as would be made by a mortgage company,
consumer finance company, credit card company, or factoring company; performing
trust company functions; performing certain data processing operations;
providing limited securities brokerage services; acting as an investment or
financial advisor; ownership or operation of a savings association; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; providing tax planning and
preparation services; operating a collection agency; and providing certain
courier services. The Federal Reserve also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
COMMITMENTS TO SUBSIDIARY BANK. Under Federal Reserve policy, the Company is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances when it might not do so absent
such policy.
LIMITATIONS OF ACQUISITIONS OF COMMON STOCK. The federal Change in Bank Control
Act prohibits a person or group from acquiring "control" of a bank holding
company unless the Federal Reserve has been given 60 days' prior written notice
of such proposed acquisition and within that time period the Federal Reserve has
not issued a notice disapproving the proposed acquisition or extending for up to
another 30 days the period during which such a disapproval may be issued. An
acquisition may be made prior to expiration of the disapproval period if the
Federal Reserve issues written notice of its intent not to disapprove the
action. Under a rebuttable presumption established by the Federal Reserve, the
acquisition of 10% or more of a class of voting stock of a bank holding company
with a class of securities registered under
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Section 12 of the Exchange Act would, under the circumstances set forth in the
presumption, constitute the acquisition of control.
In addition, with limited exceptions, any "company" would be required to obtain
the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in
the case of an acquiror that is a bank holding company) or more of the
outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquiror registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.
BANK REGULATION. The Bank is a commercial bank chartered by the State of
Maryland which is a member of the Federal Reserve System, and as such, is
subject to extensive regulation and examination by the Division of Financial
Regulation of the Department of Labor, Licensing and Regulation (the "Banking
Commissioner"), the FDIC, which insures its deposits to the maximum extent
permitted by law, and by the Federal Reserve. The federal laws and regulations
which are applicable to banks regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of collateral for
certain loans. The laws and regulations governing the Bank generally have been
promulgated to protect depositors and not for the purpose of protecting
shareholders.
FDIC INSURANCE PREMIUMS. Institutions are assigned to one of three capital
groups based solely on the level of the institution's capital - "well
capitalized," "adequately capitalized" and "undercapitalized" - which would be
defined in the same manner as the regulations establishing the prompt corrective
action system under Section 38 of the FDIA, as discussed below. These three
groups are then divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates ranging from
0.00% for well capitalized, healthy institutions, to 0.31% for undercapitalized
institutions with substantial supervisory concerns.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, each federal banking
agency is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt corrective
action established by Section 38 of the FDIA, which became effective on December
19, 1992. Under the regulations, a bank shall be deemed to be: (i) "well
capitalized" if it has a Total Risk Based Capital Ratio of 10.0% or more, a Tier
1 Risk Based Capital Ratio of 6.0% or more, a Leverage Capital Ratio of 5.0% or
more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a Total Risk Based Capital Ratio of 8.0% or
more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a Tier 1 Leverage
Capital Ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized;" (iii) "undercapitalized" if it has a
Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk Based
Capital Ratio that is less than 4.0% or a Leverage Capital Ratio that is less
than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
6.0%, a Tier 1 Risk Based Capital
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Ratio that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0%;
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount equal
to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guarantee shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guarantee, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in conservatorship
or receivership within 90 days unless the FDIC formally determines that
forbearance from such action would better protect the deposit insurance fund.
Unless the FDIC or other appropriate federal banking regulatory agency makes
specific further findings and certifies that the institution is viable and is
not expected to fail, an institution that remains critically undercapitalized on
average during the fourth calendar quarter after the date it becomes critically
undercapitalized must be placed in receivership. The general rule is that the
FDIC will be appointed as receiver within 90 days after a bank becomes
critically undercapitalized unless extremely good cause is shown and an
extension is agreed to by the federal regulators.
Immediately upon becoming undercapitalized, an institution shall become subject
to the provisions of Section 38 of the FDIA (i) restricting payment of capital
distributions and management fees, (ii) requiring that the appropriate federal
banking agency monitor the condition of the institution and its efforts to
restore its capital, (iii) requiring submission of a capital restoration plan,
(iv) restricting the growth of the institution's assets and (v) requiring prior
approval of certain expansion proposals. The appropriate federal banking agency
for an
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undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions are
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include: requiring
the institution to raise additional capital; restricting transactions with
affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, as amended by the FDICIA, a
conservator or receiver may be appointed for an institution where: (i) an
institution's obligations exceed its assets; (ii) there is substantial
dissipation of the institution's assets or earnings as a result of any violation
of law or any unsafe or unsound practice; (iii) the institution is in an unsafe
or unsound condition; (iv) there is a wilful violation of a cease and desist
order; (v) the institution is unable to pay its obligations in the ordinary
course of business; (vi) losses or threatened losses deplete all or
substantially all of an institution's capital, and there is no reasonable
prospect of becoming "adequately capitalized" without assistance; (vii) there is
any violation of law or unsafe or unsound practice or condition that is likely
to cause insolvency or substantial dissipation of assets or earnings, weaken the
institution's condition, or otherwise seriously prejudice the interests of
depositors or the insurance fund; (viii) an institution ceases to be insured;
(ix) the institution is undercapitalized and has no reasonable prospect that it
will become adequately capitalized, fails to become adequately capitalized when
required to do so, or fails to submit or materially implement a capital
restoration plan; or (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital.
At December 31, 1996 the Bank would be deemed to be a "well capitalized"
institution for purposes of Section 38 of the FDIA. Also at December 31, 1996,
the Company and the Bank were in compliance with all minimum federal regulatory
capital requirements which are generally applicable to banks.
REGULATORY ENFORCEMENT AUTHORITY. The Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA") included substantial enhancement to the
enforcement powers available to federal banking regulators. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined in FIRREA. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities. FIRREA significantly increased the amount of and grounds for civil
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money penalties and requires, except under certain circumstances, public
disclosure of final enforcement actions by the federal banking agencies.
The foregoing references to laws and regulations which are applicable to the
Company and the Bank are brief summaries thereof which do not purport to be
complete and which are qualified in their entirety by reference to such laws and
regulations.
FCNB Investment Holdings, Inc.
FCNB Investment Holdings, Inc., a Delaware corporation, is a wholly-owned
subsidiary of the Bank that was organized on April 21, 1994. This subsidiary was
established to manage a portion of the investment portfolio of the Bank.
First Choice Insurance Agency, Inc.
First Choice Insurance Agency, Inc., a Maryland corporation, is a wholly-owned
subsidiary of the Bank that was organized on June 13, 1994. This subsidiary was
established to enable FCNB to sell insurance products.
Monocacy Management Company
Monocacy Management Company, a Maryland corporation, is a wholly-owned
subsidiary of the Bank that was organized on January 6, 1992. This subsidiary
was established to purchase troubled assets from the Bank.
Governmental Monetary Policies and Economic Controls
The Bank is affected by monetary policies of regulatory authorities, including
the Federal Reserve Board, which regulates the national money supply in order to
mitigate recessionary and inflationary pressures. Among the techniques available
to the Federal Reserve Board are engaging in open market transactions in United
States Government securities, changing the discount rate on bank borrowings and
changing reserve requirements against bank deposits. These techniques are used
in varying combinations to influence the overall growth of bank loans,
investments and deposits. Their use may also affect interest rates charged on
loans or paid on deposits. The effect of governmental policies on the earnings
of the Bank or the Company for any future periods cannot be predicted.
Employees
At December 31, 1996, the Company had approximately 355 employees of which 6
were executive officers, 75 were other officers, 223 were full-time employees
and 51 were part-time employees.
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Item 2. Properties.
The Company owns the property on which the principal office of the Company and
the main office of the Bank are located at 7200 FCNB Court, Frederick, Maryland.
The Bank also owns the properties which house the Square Corner Branch at 1
North Market Street, the Rosemont Branch at 1602 Rosemont Avenue, the East
Frederick Branch at 1303 East Patrick Street, the Route 85 Branch at 5602
Buckeystown Pike, the Walkersville Branch at 100 Commerce Drive, Walkersville,
Maryland, the Eldersburg Branch at 6229 Sykesville Road, Eldersburg, Maryland,
the Elkridge Branch at 7290 Montgomery Road, Elkridge, Maryland, the Laurel
Branch at 380 Main Street, Laurel, Maryland, the Odenton Branch at 1219
Annapolis Boulevard, Odenton, Maryland and the Middletown Branch at 819 East
Main Street, Middletown, Maryland. The land upon which the Middletown Branch
office is located is leased pursuant to a twenty-year lease, with an expiration
date of November 2009 and contains provisions to extend the initial lease term
for three ten-year periods. The lease also contains an option to purchase the
land at fair market value at the end of the initial lease term or at the end of
any extension term.
The Bank leases the following properties: the Antietam Branch at 1595
Opossumtown Pike, the 40 West Branch at 1100 West Patrick Street, the FSK Mall
Branch at 5500 Buckeystown Pike, the Brunswick Branch at 94 Souder Road,
Brunswick, Maryland, the Damascus Branch at 9815 Main Street, Damascus,
Maryland, the Green Valley Branch at 11801 Fingerboard Road, Monrovia, Maryland,
the Mount Airy Branch at 400 Ridgeville Boulevard, Mount Airy, Maryland, and the
Englar Road Branch at Route 140 and Englar Road, Westminster, Maryland, the
Columbia Branch at 5585 Twin Knolls Road, Columbia, Maryland, the Glen Burnie
Branch at 7381 Baltimore-Annapolis Blvd., Glen Burnie, Maryland and
Administrative Offices at 6810 Deerpath Road, Elkridge, Maryland. Facilities are
leased at 15 East Main Street, Westminster, Maryland, and 8101 Sandy Springs
Road, in Laurel, Maryland for loan production offices.
The Bank also owns a 12,000 square foot building that is adjacent to its East
Frederick Branch office, which was previously used as the Bank's operations
center and was vacated upon completion of the new headquarters facility.
However, the Company is pursuing leasing opportunities for the vacated
facilities.
Item 3. Legal Proceedings.
The Company and the Bank are subject to various legal proceedings which are
incidental to their business. In the opinion of management, the liabilities (if
any) resulting from such legal proceedings will not have a material effect on
the consolidated financial statements or consolidated ratios of the Company and
the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters that were submitted to a vote of the security holders
during the fourth quarter of 1996.
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information required by this item is contained on page 44 of the Company's
1996 Annual Report to Shareholders. Such information is incorporated herein by
reference to the Annual Report.
Dividend Limitations and Certain Other Restrictions
The payment of dividends by the Company depends largely upon the ability of the
Bank to declare and pay dividends to the Company because the principal source of
the Company's revenue is dividends paid by the Bank. Future dividends will
depend primarily upon the Bank's earnings, financial condition, and need for
funds, as well as governmental policies and regulations applicable to the
Company and the Bank.
A discussion related to dividend limitations is contained on page 38 of the
Company's 1996 Annual Report to Shareholders. Such information is incorporated
herein by reference to the Annual Report.
The Federal Reserve has established guidelines with respect to the maintenance
of appropriate levels of capital by registered bank holding companies.
Compliance with such standards, as presently in effect, or as they may be
amended from time to time, could possibly limit the amount of dividends that the
Company may pay in the future. In 1985, the Federal Reserve issued a policy
statement on the payment of cash dividends by bank holding companies. In the
statement, the Federal Reserve expressed its view that a holding company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income or which could only be funded in ways that weakened the holding company's
financial health, such as by borrowing.
As a depository institution, deposits of which are insured by The Federal
Deposit Insurance Corporation ("FDIC"), the Bank may not pay dividends or
distribute any of its capital assets while it remains in default on any
assessment due the FDIC. The Bank currently is not in default under any of their
obligations to the FDIC.
Item 6. Selected Financial Data.
The information required by this item is contained on page 24 of the Company's
1996 Annual Report to Shareholders. Such information is incorporated herein by
reference to the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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The information required by this item is contained on pages 12 to 23 of the
Company's 1996 Annual Report to Shareholders. Such information is incorporated
herein by reference to the Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is contained in the Consolidated Financial
Statements and Notes to Consolidated Financial Statements appearing on pages 25
to 43 of the Company's 1996 Annual Report to Shareholders. Such information is
incorporated herein by reference to the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Board of Directors has set the number of directors that constitute the Board
of Directors at fourteen. The Articles of Incorporation of the Company provide
that the directors shall be classified with respect to the time for which they
severally hold office into three classes. Each year all of the directors in one
class are elected to serve for a term of three years. The shareholders will vote
at this Annual Meeting for the election of four directors for a three year term
expiring at the Annual Meeting of Shareholders in 2000, or at such time as their
respective successors have been elected and qualified.
The following table sets forth as to each director of the Company, his or her
name, age, the year he or she first became a director of the Company and the
number of shares of Common Stock beneficially owned at February 11, 1997.
<TABLE>
<CAPTION>
Year Shares of
First Year Common Stock Percent
Elected Term Beneficially of
Name Age(1) Director Expires Owned (2) Class
- ---- ------ ---------- ------- --------------------- ------
BOARD NOMINEES
<S> <C> <C> <C> <C> <C>
George B. Callan Jr. 65 1986 2000 10,159 0.19
Clyde C. Crum 61 1986 2000 41,635(3) 0.78
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Frank L. Hewitt, III 55 1996(4) 2000 123,657 2.31
DeWalt J. Willard, Jr. 65 1986 2000 43,773 0.82
DIRECTORS CONTINUING IN OFFICE
Miles M. Circo 50 1986 1998 3,022 .06
James S. Grimes 57 1989 1998 5,343 .10
Gail T. Guyton 56 1986 1998 57,300(5) 1.07
A. Patrick Linton 47 1991 1998 66,931(6) 1.24
Jacob R. Ramsburg, Jr. 60 1986 1998 90,681(7) 1.69
Bernard L. Grove, Jr. 63 1988 1999 12,771(8) .24
Ramona C. Remsberg 68 1987 1999 48,000(9) .90
Kenneth W. Rice 53 1988 1999 11,222 .21
Rand D. Weinberg 40 1996(10) 1999 3,500(10) .07
</TABLE>
- ---------------
(1) At February 11, 1997.
(2) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Common Stock with respect to which he or she has sole or
shared voting and/or investment. The table includes shares owned by
spouses, other immediate family members in trust, shares held in
retirement accounts or funds for the benefit of the named individuals,
and other forms of ownership, over which shares the persons named in
the table possess voting and investment power. Except as otherwise
noted, each person has sole voting and investment power with respect to
all shares beneficially owned.
(3) The shares attributed to Mr. Crum include 6,603 shares owned by Mr.
Crum's wife, as to which Mr. Crum disclaims beneficial ownership.
(4) Mr. Hewitt was elected to the Board of Directors as a member of the
Class of 1997 in connection with the Company's acquisition of Laurel
Bancorp, Inc. ("Laurel"). The shares attributed to Mr. Hewitt include
22,153 shares as to which he shares voting and investment power with
his wife, 11,114 shares owned by Mr. Hewitt's children, as to which he
has
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voting and investment power, 1,531 shares held in trust as to which he
has shared voting and investment power and 2,697 shares owned by Mr.
Hewitt's wife.
(5) The shares attributed to Mr. Guyton include 2,455 shares owned by Mr.
Guyton's wife, as to which Mr. Guyton disclaims beneficial ownership
and 3,645 shares held in trust by a corporation controlled by Mr.
Guyton, as to which he has shared voting and investment power.
(6) The shares attributed to Mr. Linton include 30,307 shares as to which
he shares voting and investment power with his wife, 3,236 shares owned
by Mr. Linton's children, as to which he has voting and investment
power and 400 shares owned by Mr. Linton's wife . Mr. Linton also has
options to purchase 35,435 shares, of which 28,484 are presently
exercisable and are included in the total shares beneficially owned. In
addition, Mr. Linton will also receive 5,697 shares of restricted stock
when the underlying stock options are exercised.
(7) The shares attributed to Mr. Ramsburg include 4,906 shares owned by Mr.
Ramsburg's wife, and 4,833 shares owned jointly by Mr. Ramsburg's wife
and son, as to which Mr. Ramsburg disclaims beneficial ownership, and
22,766 shares owned by two corporations controlled by Mr. Ramsburg, as
to which he holds voting and investment power.
(8) The shares attributed to Mr. Grove include 7,699 shares held in his
wife's revocable, convertible trust.
(9) The shares attributed to Ms. Remsberg include 2,100 shares held in a
trust as to which she has shared voting and investment power.
(10) Mr. Weinberg was elected to the Board of Directors to fill a vacancy in
the Class of 1999. The shares attributed to Mr. Weinberg include 1,000
shares as to which Mr. Weinberg shares voting and investment power with
his wife, and 2,500 shares invested in a pension trust as to which he
has voting and investment power.
Set forth below is certain information with respect to the nominees for director
and the continuing directors of the Company. Unless otherwise indicated, the
principal occupation listed for each person below has been his or her occupation
for the past five years.
GEORGE B. CALLAN, JR. is president of Associates in Management, a company that
specializes in historic preservation, museum management and automotive sales.
CLYDE C. CRUM, chairman of the board of the Bank and the Company since January
1995, is president of Clyde C. Crum and Son, Inc., a dairy farm operation.
13
<PAGE>
FRANK L. HEWITT, III is retired after being president of Laurel and Laurel
Federal Savings Bank until the merger of Laurel with and into the Company and
the merger of Laurel Federal Savings Bank with and into Elkridge Bank in January
1996.
DEWALT J. WILLARD, JR. is president of Ideal Buick-GMC, an automobile
dealership.
MILES M. CIRCO is general manager of Patapsco Designs, Inc., an electronic
design and manufacturing firm.
JAMES S. GRIMES has been Mayor of the City of Frederick, Maryland since 1994 and
is president of James S. Grimes, Inc., a full service truck transportation
service operation.
GAIL T. GUYTON, vice chairman of the board of both the Bank and the Company
since January 1995, is president of Morgan-Keller, Inc., a commercial/industrial
construction firm.
A. PATRICK LINTON has been president and chief executive officer of the Bank and
the Company since January 1991. During 1990, he served as executive vice
president of the Company and executive vice president and chief operating
officer of the Bank. Mr. Linton has been an executive officer of the Bank since
1982 and of the Company since 1986, with principal responsibilities in the areas
of finance and administration.
JACOB R. RAMSBURG, JR. is president of Frederick Underwriters, Inc., a general
insurance agency.
BERNARD L. GROVE, JR. is an advisor to Genstar Stone Products, Inc. since
January 1996, after having been president since January 1, 1992, and having
previously served as executive vice president of that company.
RAMONA C. REMSBERG is the former vice chairman of the board of both the Bank and
of the Company, having retired from the Bank and the Company in September 1993.
Ms. Remsberg served as president of each entity from December 1987 to January
1991.
KENNETH W. RICE is president of Donald B. Rice Tire Co., Inc., a tire
distribution firm.
RAND D. WEINBERG is a partner with Weinberg & Weinberg, a law firm in Frederick,
Maryland.
BOARD AND COMMITTEE MEETINGS
The Board of Directors of the Company has standing audit and compensation
committees, but does not have a standing nominating committee.
14
<PAGE>
The Audit Committee, comprised of Directors Circo, Hewitt, Ramsburg and Willard,
assists the Board of Directors of the Bank in exercising its fiduciary
responsibilities for oversight of audit and related matters, including corporate
accounting, internal controls and regulatory compliance. Its duties include:
monitoring the Bank's internal controls and procedures; meeting with the
internal auditors and reviewing their reports; recommending the selection of
independent auditors; reviewing the scope of audits conducted by the independent
auditors, as well as the results of their audits; and reviewing policies
relating to compliance with applicable banking and other laws.
The Compensation Committee, comprised of Directors Callan, Grove, and Rice,
reviews and recommends to the Board of Directors the overall compensation policy
for the Company. The Board of Directors of the Bank follows this policy
specifically related to the salaries and other benefits for senior management
thereof.
The Board of Directors of the Company held nineteen meetings during 1996, and
the Audit and the Compensation Committees each held seven meetings during 1996.
Each of the directors of the Company attended at least 75% of the meetings of
the Board of Directors and all committees on which they served during 1996.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission, and
to provide the Company with copies of all Forms 3, 4, and 5 they file.
Based solely upon the Company's review of the copies of the forms which it has
received and written representations from the Company's directors and executive
officers, the Company is not aware of any failure to comply with the
requirements of Section 16(a) except that Clyde C. Crum and Kenneth W. Rice each
failed to file reports required by Section 16(a) on a timely basis during 1996.
Each late report related to one transaction each.
Executive Officers of the Company.
Information concerning non-director executive officers of the Registrant is as
follows:
Martin S. Lapera (age 44) became an Executive Vice President of the Company in
June 1992 after having been a Vice President. Mr. Lapera became the Executive
Vice President, Chief Operating Officer and Chief Lending Officer of FCNB in
January 1995 after having been the Executive Vice President and Chief Lending
Officer of the Bank.
Charles E. Weller (age 48) became a Senior Vice President of the Company in
January 1996 after having been a Vice President of the Company since March 24,
1995. Mr. Weller was President of Elkridge until it was merged with the Bank on
March 7, 1997.
15
<PAGE>
Mark A. Severson (age 43) became a Senior Vice President and Treasurer of the
Company in January 1996 after having been the Vice President and Treasurer. Mr.
Severson is the Senior Vice President and Chief Financial Officer of the Bank.
Fern W. Mercer (age 59) is a Vice President of the Company and is a Senior Vice
President of the Bank.
Helen G. Hahn (age 60) is a Vice President and Secretary of the Company. Mrs.
Hahn became a Senior Vice President and Cashier of the Bank in June 1992 and was
the Cashier prior to that time.
Item 11. Executive Compensation.
COMPENSATION OF DIRECTORS
During 1996, the directors of the Company received an annual retainer of $2,000
for attending Board of Directors meetings of the Company. Members of the Board
of Directors of the Company who were members of the Board of Directors of the
Bank received an additional fee of $200 for each meeting attended. Members of
the Board of Directors of the Company who also served as members of the Board of
Directors of the Bank received an annual retainer of $5,000 and a fee of $200
for each bi-weekly Board of Directors and committee meeting of the Bank
attended. Any member of the Board of Directors of the Company who was also on
the Board of Directors of Elkridge Bank received board meeting fees of $350.00
and committee meeting fees of $250.00 meeting attended. Elkridge Bank did not
pay an annual retainer fee.
Clyde C. Crum received a $30,000 annual fee for his services as Chairman of the
Board of both the Company and the Bank, along with the bi-weekly Board of
Directors meeting fees. However, he did not receive any committee meeting fees.
Effective in January 1997, the annual fee for Mr. Crum was increased to $35,000.
Directors who agree to defer receipt of at least four years of their annual
retainers may participate in an unfunded deferred compensation plan maintained
by the Bank. Under this plan, deferred amounts earn interest at the rate of 10%
per annum until the director attains age sixty-five, dies or becomes disabled.
Upon any such event, the deferred amount plus credited interest thereon will be
paid to the participant or his beneficiary over a period of up to ten years,
with interest continuing to accrue on the unpaid balance at the rate of 10% per
annum.
The Company paid a total of $121,000 in director and committee fees for the
fiscal year ended December 31, 1996.
EXECUTIVE OFFICERS' COMPENSATION AND CERTAIN TRANSACTIONS
COMPENSATION - OVERVIEW
16
<PAGE>
Set forth below are summarized tables of all compensation awarded to, earned by,
or paid to certain executive officers. It should be noted that no cash
compensation was paid to any executive officer of the Company in his or her
capacity as such. Each of the executive officers of the Company received
compensation from the Bank for services rendered in their capacities as
executive officers of the Bank.
The following table sets forth a comprehensive overview of the compensation for
the Company's Chief Executive Officer and the most highly compensated executive
officers for the year ended December 31, 1996. Comparative data is also provided
for the previous two fiscal years, in selected categories. Except as disclosed
below, no other executive officer of the Company or the Bank received salary and
bonus in excess of $100,000 during the year ended December 31, 1996.
17
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Restr- Secur-
icted ities All
Name and Stock Under- Other
Principal Fiscal Awards lying Compen-
Position Year Salary(1) Bonus (2) (3) Options sation(4)
- -------- ---- --------- --------- --- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
A. Patrick 1996 $198,222 $46,930 1,390 6,951 $10,442
Linton, Director, 1995 186,352 66,516 1,259 6,297 7,747
President and Chief 1994 161,321 46,283 1,154 5,765 2,087
Executive Officer of
the Company and
the Bank
Martin S. Lapera, 1996 $119,797 $23,733 546 2,732 $ --
Executive Vice 1995 112,091 30,513 497 2,485 --
President of the 1994 93,723 23,013 447 2,232 --
Company and
Executive Vice
President, Chief
Operating Officer and
Chief Lending Officer
of the Bank
Charles E. Weller, 1996 $112,579 $14,925 362 1,810 $1,427
Senior Vice President 1995 100,836 12,909 370 1,852 --
of the Company and
Senior Vice President
of the Bank (5)
Mark A. Severson, 1996 $101,194 $15,169 326 1,629 $ --
Senior Vice President 1995 94,677 19,620 298 1,491 --
and Treasurer of the 1994 83,309 15,568 278 1,389 --
Company and Senior
Vice President and
Chief Financial
Officer of the Bank
</TABLE>
- -------------
18
<PAGE>
(1) Includes contributions made by the Bank and Elkridge Bank under their
401(k) Profit Sharing Plans. Contributions made by the banks in 1996,
1995, and 1994, respectively, amounted to $8,222, $8,977 and $6,321 for
Mr. Linton, $7,797, $7,091 and $3,723 for Mr. Lapera, and $5,794,
$4,677, and $3,309 for Mr. Severson. Mr. Weller's contributions for
1996 and 1995 were $6,579 and $3,036, respectively.
(2) During 1994, the Bank changed the method of paying the annual bonuses.
There were no cash bonuses paid in 1994, however, annual bonuses
accrued as of December 31, 1996, 1995 and 1994 were paid in January
1997, 1996 and 1995, respectively. Previously, the annual bonuses were
paid in the year earned. The annual bonus for Mr. Weller was paid by
Elkridge Bank.
(3) The awards of restricted stock received are based on the formula of a
grant of one (1) restricted share for every five (5) shares of Common
Stock purchased pursuant to the exercise of stock options. The
restriction period is for three (3) years from the date of receipt, and
if the shares purchased pursuant to the exercise of stock options are
sold within this time period, a pro rata percentage of the restricted
shares are forfeited and must be returned to the Company. In 1994, Mr.
Lapera exercised options resulting in 696 restricted shares
outstanding, which are held in escrow for the benefit of Mr. Lapera, at
year end December 31, 1996.
(4) Includes payments for vacation pay taken in lieu of vacation. Included
in the 1996 and 1995 amounts for Mr. Linton are $8,250 and $5,700,
respectively, of Elkridge Bank directors' fees.
(5) Mr. Weller became an executive officer of the Company on March 24,
1995, as a result of the merger of ENB Financial Corporation with and
into the Company. Until the merger of Elkridge Bank into the Bank on
March 7, 1997, Mr. Weller served as President at Elkridge Bank.
STOCK OPTION PLAN. The following table sets forth as to the executive officers
whose compensation is reported in the SUMMARY COMPENSATION TABLE certain
information relating to options to purchase Common Stock of the Company granted
during fiscal 1996 under the 1992 Employee Stock Option Plan.
19
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(5)
- ------------------------------------------------------------------------------------------------------------------------------------
% of Total
Number of Options
Securities Granted to Exercise
Underlying Employees or Base
Options in Fiscal Price Expiration
Name Granted (#) Year ($/Share) Date 5%($) 10%($)
---- ----------- ---- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
A. Patrick Linton 6,951(1) 33% $20.50 12/31/06 $89,614 $227,100
Martin S. Lapera 2,732(2) 13% $20.50 12/31/06 $35,221 $ 89,259
Charles E. Weller 1,810(3) 9% $20.50 12/31/06 $23,334 $ 59,135
Mark A. Severson 1,629(4) 8% $20.50 12/31/06 $21,001 $ 53,222
</TABLE>
- ---------------
(1) The options granted to Mr. Linton to purchase 6,951 shares become
exercisable on December 31, 1997, and entitle Mr. Linton to receive an
aggregate of 1,390 shares of restricted stock when the underlying stock
options are exercised. The awards of restricted stock received are
based on the formula of one (1) restricted share for every five (5)
shares of Common Stock purchased pursuant to the exercise of stock
options. The restriction period is for three (3) years from the date of
receipt, and if the shares purchased pursuant to the exercise of stock
options are sold within this time period, a pro rata percentage of the
restricted shares are forfeited and must be returned to the Company.
(2) The options granted to Mr. Lapera to purchase 2,732 shares become
exercisable on December 31, 1997, and entitle Mr. Lapera to receive an
aggregate of 546 shares of restricted stock when the underlying stock
options are exercised.
20
<PAGE>
(3) The options granted to Mr. Weller to purchase 1,810 shares become
exercisable on December 31, 1997, and entitle Mr. Weller to receive an
aggregate of 362 shares of restricted stock when the underlying stock
options are exercised.
(4) The options granted to Mr. Severson to purchase 1,629 shares become
exercisable on December 31, 1997, and entitle Mr. Severson to receive
an aggregate of 326 shares of restricted stock when the underlying
stock options are exercised.
(5) The assumed annual rates of appreciation in the table are shown for
illustrative purposes only pursuant to applicable SEC requirements.
Actual values realized on stock options are dependent on actual future
performance of the Company's stock, among other factors. Accordingly,
the amounts shown may not necessarily be realized. Does not include the
value of restricted stock awards in conjunction with the grant of
options.
The table set forth below presents the amount and potential value of options
held by each named executive at the end of fiscal 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
Shares at FY-End(#) at FY-End ($)
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable(1)
- ---- ----------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
A. Patrick Linton -- -- 28,484/6,951 $122,588/-
Martin S. Lapera -- -- 7,474/2,732 15,250/-
Charles E. Weller -- -- 11,110/1,810 110,693/-
Mark A. Severson -- -- 6,853/1,629 29,720/-
</TABLE>
- ---------------
(1) Does not include the value of restricted stock awards in conjunction
with the grant of options.
21
<PAGE>
PROFIT SHARING PLAN. The Company has a Section 401 (k) profit sharing plan (the
"Plan") covering employees meeting certain eligibility requirements as to
minimum age and years of service. Employees may make voluntary contributions to
the Plan through payroll deductions on either a pre-tax or after-tax basis. The
Company makes contributions to the Plan in its discretion, based on a percentage
of the Bank's and Elkridge Bank's earnings. The Company's contributions are
subject to a vesting period based upon the completion of five years of service
with the Company, at which time they are fully vested. A participant's account
under the Plan, together with investment earnings thereon, is normally
distributable, following retirement, death, disability or other termination of
employment, in a single lump-sum payment.
The Company's annual contribution to the Plan totaled $357,000 in 1996,
including an aggregate of $28,392 of contributions for the executive officers
named in the SUMMARY COMPENSATION TABLE.
EXECUTIVE COMPENSATION PLAN. The Bank maintains an Executive Compensation Plan
which is intended to provide supplemental retirement benefits to executive
officers designated by the Compensation Committee of the Bank's Board of
Directors. Under this plan, an amount determined by the Committee will be paid
to a participant annually (in twelve monthly payments) for up to ten years
commencing upon the earliest of (a) his or her attaining sixty-five years of age
(or such later date as the participant and the Bank agree), (b) his or her death
or (C) his or her disability. The payments will be made to a participant or his
or her beneficiaries from the general funds of the Bank. Periodically, the
Compensation Committee will approve a change to the amount of annual benefits
payable under the Executive Compensation Plan. Under the plan, the current
annual benefits at normal retirement age established by the Compensation
Committee for Messrs. Linton, and Lapera are $20,000 and $10,000, respectively.
Messrs. Severson and Weller have no benefits under this plan.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Company is composed of three outside
directors, Messrs. George B. Callan, Jr., Bernard L. Grove, Jr. and Kenneth W.
Rice. None of the committee members has ever been an employee of the Company or
any of its subsidiaries. The Committee makes recommendations to the full Board
of Directors regarding the adoption, extension, amendment and termination of the
Company's compensation plans. In conjunction with the Company's Chairman and
President/Chief Executive Officer ("CEO"), it reviews the performance of senior
management, recommends annual salary revisions and administers the Company's
compensation plans.
The Committee is guided by the following executive compensation philosophy of
the Company:
1. Enable the Company to attract and retain superior management by
providing a very competitive total compensation package.
22
<PAGE>
2. Align the interests of shareholders and management by providing stock
options as a portion of the executive's total compensation package.
3. Base a portion of the executive's total compensation package upon the
attainment of defined performance goals that support the growth and
appreciation of the Company's value over time.
4. Balance objectives of short-term performance and long-term growth and
appreciation of the Company through a combination of an annual
incentive compensation program using annual cash bonuses, and the stock
option plan that rewards the executives through long-term growth and
appreciation of the Company.
Executive compensation consists primarily of three components: Base Salary,
Annual Bonus, and Stock Options.
BASE SALARY
The Company's policy is to set base salaries for each executive officer
position, including that of the CEO, in a range commensurate for equivalent
banking jobs in the Mid-Atlantic region. The Company utilizes outside
consultants to monitor the Company's competitive compensation status. The base
salaries of executive officers are set by the Board of Directors based upon the
Compensation Committee's recommendations.
Executive officers, other than the CEO, are reviewed annually by their superiors
while the CEO is reviewed by the Compensation Committee and the Executive
Committee of the Board of Directors of the Company. Salary adjustments for
executive officers are determined by the quality of their individual
performances and the relationship of their salary to their established salary
range.
Adjustments to the base salary of the CEO are governed by the same factors as
other executive officers, but also specifically take into account the Company's
current financial performance as measured by earnings, asset growth, and overall
financial soundness. The Committee also considers the CEO's leadership in
setting high standards for financial performance, motivating his management
colleagues, and representing the Company and its values to internal and external
communities.
ANNUAL BONUS
The Company has an Employee Performance Bonus Plan (the "Bonus Plan").
Annual bonuses are accrued as of the end of the fiscal year and are paid in
January. The Company's Bonus Plan has several components related to the
Company's performance. For 1996, these components consisted of the Company
achieving pre-determined return on average
23
<PAGE>
shareholders' equity, asset growth, stock price appreciation and earnings per
share growth. The CEO's annual cash bonus is strictly related to the Company's
performance goals, while the other named executive officers' annual cash bonus
was related one-third to the Company's performance goals and two-thirds to the
Bank's performance goals. Goals for each component of the Bonus Plan are
approved by the Compensation Committee at the beginning of each year. Annual
cash bonuses tied to Bank performance goals and/or the Company's performance
goals are evaluated on a point system. Points are awarded for equaling or
exceeding the predetermined base for each component. Target goals are determined
that exceed the threshold level, as well as maximum goals. For each specific
component, if the threshold level is not achieved, no bonus is awarded for that
component. The maximum potential annual bonus award for the four named executive
officers is 25% to 37.5% of base salary, depending on the executive's position.
In 1996, the Company exceeded its target performance goals. Based on these
results, the CEO was awarded a bonus of $46,930 which constituted 24.7% of his
1996 base salary. This annual bonus amount was accrued as of December 31, 1996
and paid in January 1997. The Committee also considered the performance of the
Company's Common Stock and the CEO's role in promoting the long-term strategic
growth of the Company.
For the other named executive officers, divisional bank performance goals were
substantially met in addition to exceeding the target corporate bank performance
goals.
As of December 31, 1996, the total accrued annual bonus for the four named
executive officers in the Bonus Plan was $100,757, which was paid in January
1997.
STOCK OPTIONS
The Company maintains a 1992 Stock Option Plan currently covering 413,438 shares
of the Company's Common Stock. This Stock Option Plan provides for grants by the
Compensation Committee of non-qualified stock options, as well as incentive
stock options, thus tying a portion of the executive's compensation directly to
the performance of the Company's stock price. The exercise price of the option
to purchase stock under the plan may not be less than 100% of the fair market
value of the Company's stock on the date of grant. Stock options become
exercisable one year from the date of the grant and expire five and ten years
from the date of the grant. Stock options for the four named executive officers
typically are granted each year for a number of shares, the aggregate market
value of which is in a range of 35% to 75% of the executive officer's base
salary as of the date of grant. The Stock Option Plan also provides that the
Company will grant one (1) share of restricted stock for every five (5) shares
of Common Stock purchased pursuant to the exercise of options under the plan.
The Common Stock purchased pursuant to the exercise of such options must be held
for a period of three years before the restricted stock granted by the Company
will fully vest to the recipient thereof. Stock options must be exercised in the
sequence in which they were granted.
24
<PAGE>
In 1996, the CEO received options to purchase 6,951 shares with an exercise
price of $20.50 per share. The CEO now owns 38,447 shares of the Company's
Common Stock and holds options to purchase an additional 35,435 shares, of which
28,484 shares are presently exercisable. In 1996, the other named executive
officers received options to purchase an aggregate of 6,171 shares of the
Company's Common Stock with an exercise price of $20.50 per share. The
Compensation Committee believes that significant equity interests in the Company
held by the Company's management align the interests of shareholders and
management.
Stock options are designed to align the interests of executives with those of
the shareholders. This approach is designed to incentivize the creation of
shareholder value over the long term since the full benefit of the compensation
package cannot be realized unless stock price appreciation occurs over a number
of years.
CONCLUSION
Through the programs described above, a moderate portion of the Company's
executive compensation is linked directly to individual and corporate
performance and stock price appreciation. In the case of the CEO, approximately
19% of his total 1996 compensation, including the accrued annual bonus as of
December 31, 1996, consisted of performance-based variable elements. The
Compensation Committee intends to continue the policy of linking executive
compensation to corporate performance and returns to shareholders, recognizing
that ups and downs of the business cycle from time to time may result in an
imbalance for a particular period.
This report has been prepared by the Compensation Committee of the Company.
George B. Callan, Jr., Bernard L. Grove, Jr., Kenneth W. Rice.
25
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
cumulative total shareholder return on the Company's Common Stock from January
1, 1992 to December 31, 1996. The Company's yearly percentage change in
cumulative total shareholder return as shown below is compared to the NASDAQ
Market Index and the published Industry Peer Group Index consisting of 142
middle Atlantic banks published by Media General Financial Services.
PLOT POINTS
- --------------------------------------------------------------------------------
FCNB Peer Group NASDAQ
---- ---------- ------
12/31/91 $100.00 $100.00 $100.00
12/31/92 102.50 125.23 100.98
12/31/93 139.66 155.57 121.13
12/31/94 189.62 147.70 127.17
12/31/95 194.87 224.28 164.96
12/31/96 202.86 317.65 204.98
Notes: 1. Total return assumes reinvestment of dividends.
2. Fiscal Year Ending December 31.
3. Return based on $100 dollars invested on January 1, 1992 in FCNB Corp
Common Stock, an index for NASDAQ Stock Market (U.S. Companies), and
Bank peer group.
VOTING SECURITIES
All voting rights are vested exclusively in the holders of the Common Stock of
the Company. Each shareholder is entitled to one vote for each share of Common
Stock owned on all matters brought to a vote of the shareholders. The Company
had 5,359,560 shares of Common Stock outstanding on the record date for the
Annual Meeting. The Company has no other class of equity securities outstanding.
Persons and groups beneficially owning in excess of 5% of the Common Stock are
required to file certain reports disclosing such ownership pursuant to the
Securities Exchange Act of 1934, as amended (hereinafter called the "Exchange
Act"). The following table sets forth, as of February 11, 1997, certain
information as to the shares of Common Stock beneficially owned by certain
officers of the Company who are not also directors of the Company, and all
officers and directors of the Company as a group. Management knows of no persons
who beneficially owned more than 5% of the outstanding shares of Common Stock at
February 11, 1997.
26
<PAGE>
Amount and Nature Percentage
Name of Beneficial Owner of Beneficial Ownership(1)(2) Of Class
- ------------------------ ----------------------------- --------
Martin S. Lapera 23,121(3) 0.43%
Mark A. Severson 10,139(4) 0.19
Charles E. Weller 12,070(5) 0.22
All Officers and Directors 613,943(6) 11.32
as a Group (18 persons)
- ----------------
(1) Unless otherwise indicated, all shares are owned
directly by the named individual or by the individual
indirectly through a trust, corporation or association,
or by the individual or his/her spouse as custodian or
trustee for the shares of minor children. Except as
otherwise indicated, the named individual exercises sole
voting and investment power over such shares.
(2) Restricted stock to be received by officers of the
Company or Bank is based on the formula of one (1)
restricted share for every five (5) shares of Common
Stock purchased pursuant to the exercise of stock
options. The restriction period is for three (3) years
from the date of receipt, and if the shares purchased
pursuant to the exercise of stock options are sold
within this time period, a pro rata percentage of the
restricted shares are forfeited and must be returned to
the Company.
(3) Mr. Lapera is executive vice president of the Company
and is executive vice president, chief operating officer
and chief lending officer of the Bank. The shares
attributed to Mr. Lapera include 15,257 shares as to
which Mr. Lapera shares voting and investment power with
his wife. Also, included in the total shares owned are
options, currently exercisable, to purchase 7,474 shares
of the Company's Common Stock. In addition, Mr. Lapera
will also receive 1,496 shares of restricted stock when
the underlying stock options are exercised, which shares
are not reflected in the table.
(4) Mr. Severson is senior vice president and treasurer of
the Company and is senior vice president and chief
financial officer of the Bank. The shares attributed to
Mr. Severson include 1,578 shares as to which Mr.
Severson shares voting and investment power with his
wife. Also, included in the total shares owned are
options, currently exercisable, to purchase 6,853 shares
of the Company's Common Stock. In addition, Mr. Severson
will also receive
27
<PAGE>
1,370 shares of restricted stock when the underlying
stock options are exercised, which shares are not
reflected in the table.
(5) Mr. Weller is senior vice president of the Company and
senior vice president of the Bank, having served as
President of Elkridge Bank. The shares attributed to Mr.
Weller include 156 shares owned by Mr. Weller's wife, as
to which Mr. Weller disclaims beneficial ownership and
283 shares held in joint ownership with Mr. Weller's
daughter. Also, included in the total shares owned are
options, currently exercisable, to purchase 11,110
shares of the Company's Common Stock. In addition, Mr.
Weller will also receive 370 shares of restricted stock
when the underlying stock options are exercised, which
shares are not reflected in the table.
(6) Includes an aggregate of 62,478 shares which may
currently be acquired by certain of such executive
officers upon the exercise of stock options. In
addition, such officers will also receive an aggregate
of 12,496 shares of restricted stock when the underlying
stock options are exercised, which shares are not
reflected in the table.
Item 13. Certain Relationships and Related Transactions.
During the past year the Bank and Elkridge Bank have had, and the Bank expects
to have in the future, banking transactions in the ordinary course of business
with its directors and officers as well as with their associates. These
transactions have been made on substantially the same terms, including interest
rates, collateral, and repayment terms, as those prevailing at the same time for
comparable transactions with unaffiliated parties. The extensions of credit to
these persons have not and do not currently involve more than the normal risk of
collectibility or present other unfavorable features. At December 31, 1996,
loans to directors and officers and their respective associates, including loans
guaranteed by such persons, aggregated $8.6 million, which represented
approximately 12.4% of consolidated shareholders' equity.
Gail T. Guyton, a director of the Company and the Bank, is president and a
principal shareholder of Morgan-Keller, Inc., a construction firm which is
serving as construction manager in connection with the development of the
Company's new headquarters project. During 1996, the Company paid Morgan-Keller,
Inc. a total of $1.3 million in construction payments, which included $1.2
million for the Company's headquarters project and $104,000 related to various
other construction projects. Morgan-Keller, Inc. received approximately $66,000
in fees which are included in the above totals, for serving as the construction
manager for the headquarter's project.
Jacob R. Ramsburg, Jr., a director of the Company and the Bank, is president and
a principal shareholder of Frederick Underwriters, Inc., a general insurance
agency which received $104,000
28
<PAGE>
in premiums during 1996 in connection with the Company's purchase of certain
types of insurance coverage.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of the Report:
1. The following consolidated financial statements
included in the 1996 Annual Report to Shareholders
are incorporated herein by reference under Item 8 of
this Report:
Page Number in
Annual Report
-------------
Consolidated Balance Sheets 25
Consolidated Statements of Income 26
Consolidated Statements of Changes
in Shareholders' Equity 27
Consolidated Statements of Cash
Flows 28
Notes to Consolidated Financial
Statements 30-43
Report of Independent Auditors 43
2. All schedules for which provision is made in the
accounting regulations of the Securities and Exchange
Commission are not applicable or are not required
under the related instruction and therefore have been
omitted.
3. Exhibits required by Item 601 of Regulation S-K:
29
<PAGE>
Exhibit No. Item
----------- ----
2-A A copy of the Laurel Bancorp, Inc.
Agreement and Plan of Merger is hereby
incorporated by reference to Exhibit 2
to the Registration Statement on Form
S-4 of the Registrant filed on July 31,
1995.
2-B A copy of the Harbor Investment
Corporation Agreement and Plan of Merger
is hereby incorporated by reference to
Exhibit 99(a) to the Current Report on
Form 8-K of the Registrant dated
December 22, 1995 and filed on January
10, 1996.
3-A A copy of the Articles of Restatement of
the Articles of Incorporation of FCNB
Corp is hereby incorporated by reference
to Exhibit 3-A of the Annual Report on
Form 10-K for 1994 of the Registrant.
3-B A copy of the amended By-Laws of FCNB
Corp is hereby incorporated by reference
to Exhibit 3-B of the Annual Report on
Form 10-K for 1993 of the Registrant.
10-D A copy of the Executive Compensation
Plan for Directors of FCNB Bank is
hereby incorporated by reference to
Exhibit 10-D to the Registration
Statement on Form S-4 (File No.
33-09406) of the Registrant.
10-E A copy of the Executive Compensation
Plan for Management Personnel of FCNB
Bank is hereby incorporated by reference
to Exhibit 10-E to the Registration
Statement on Form S-4 (File No. 33-
09406) of the Registrant.
10-F A copy of the Employee Incentive Bonus
Plan of FCNB Bank is hereby incorporated
by reference to Exhibit 10-F of the
Annual Report on Form 10-K for 1991 of
the Registrant.
30
<PAGE>
Exhibit No. Item
----------- ----
10-G A copy of the Compensation Agreement
with Clyde C. Crum is hereby
incorporated by reference to Exhibit
10-G of the Annual Report on Form 10-K
for 1994 of the Registrant.
11 Statement Regarding Computation of Per
Share Earnings, filed herewith.
12 Statement Regarding Computation of
Ratios, filed herewith.
13 The Company's 1996 Annual Report to
Shareholders, filed herewith.
21 A list of the subsidiaries of FCNB Corp
is hereby incorporated by reference to
the 1996 Annual Report to Shareholders
at page 45.
23 Consent of Independent Auditor
27 Financial Data Schedule
99-A A copy of the Dividend Reinvestment and
Stock Purchase Plan of FCNB Corp is
hereby incorporated by reference to
Registration Statement on Form S-3 (File
No. 33-55040) of Registrant.
99-B A copy of the FCNB Corp 1992 Employee
Stock Option Plan is hereby incorporated
by reference to Registration Statement
on Form S-8 (File No. 33-63092) of
Registrant.
99-C A copy of the Independent Auditor's
Report from Anderson Associates, filed
herewith.
(b) There were no Reports on Form 8-K filed during the quarter ended
December 31, 1996.
31
Exhibit 11
Statement Regarding the Computation of Per Share Earnings
1996 1995 1994
---- ---- ----
Earnings per Common Share $1.09 $1.31 $1.26
Average shares outstanding 5,405,224 5,346,481 5,355,756
Fully diluted $1.09 $1.30 $1.26
Average shares outstanding 5,406,463 5,367,683 5,365,882
Exhibit 12
Statement Regarding the Computation of Ratios
a. The percentage ratio of net income to average total assets is
calculated by dividing the 1996 and 1995 net income of $5,867,000 and
$6,998,000, respectively, by the average total assets for 1996 and 1995
of $700,921,000 and $641,519,000, respectively.
b. The percentage ratio of net income to average shareholders' equity is
calculated by dividing the 1996 and 1995 net income of $5,867,000 and
$6,998,000, respectively, by the average shareholders' equity for 1996
and 1995 of $65,785,000 and $62,413,000, respectively.
c. The percentage ratio of average shareholders' equity to average total
assets is calculated by dividing the 1996 and 1995 average
shareholders' equity of $65,785,000 and $62,413,000, respectively, by
the average total assets for 1996 and 1995 of $700,921,000 and
$641,519,000, respectively.
d. The percentage ratio of cash dividends declared to net income is
calculated by dividing the 1996 and 1995 cash dividends declared of
$2,925,000 and $2,912,000, respectively, by the net income for 1996 and
1995 of $5,867,000 and $6,998,000, respectively.
FCNB CORP AND SUBSIDIARY
FINANCIAL REPORT
DECEMBER 31, 1996 and 1995
<PAGE>
THE YEAR IN SUMMARY
FCNB CORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995(1) 1994(1)
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Net income $5,867 $6,998 $6,772
Net income before merger-related expenses 7,778 7,301 6,999
Per share:
Net income 1.09 1.31 1.26
Net income before merger-related expenses 1.45 1.37 1.31
Cash dividends declared .54 .55 .48
Book value at period end 12.88 12.50 11.20
Return on average assets 0.84% 1.09% 1.14%
Return on average assets before merger-related expenses 1.11 1.14 1.17
Return on average shareholders' equity 8.92 11.21 11.79
Return on average shareholders' equity before
merger-related expenses 11.82 11.70 12.18
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995(1) 1994(1)
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Assets $779,169 $660,984 $627,050
Loans, net of unearned income 497,995 439,794 390,177
Deposits 587,074 529,988 505,202
Federal funds purchased and securities sold
under agreements to repurchase 40,739 21,043 25,103
Other short-term borrowings 76,516 32,426 26,089
Long-term debt -- 5,680 7,000
Shareholders' equity 69,110 66,219 59,037
Banking facilities 21 19 17
- ----------
(1) Restated retroactively to reflect the acquisition of Laurel Bancorp, Inc. consummated on January 26, 1996 and accounted for as a
pooling of interests.
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
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 FCNB Corp (the
"Company") recognizes the January 26, 1996 acquisition of Laurel Bancorp, Inc.
("Laurel"), which was accounted for as a pooling of interests. The financial
data presented including earnings per share, have been restated to reflect this
business combination. Laurel was the holding company for Laurel Federal Savings
Bank, a $108 million financial institution headquartered in Laurel, Maryland
("Laurel FSB"). Pursuant to the terms of this merger, Laurel FSB was merged with
and into the Company's wholly-owned subsidiary, Elkridge Bank, and the branch of
Laurel FSB in Monrovia, Maryland was transferred to FCNB Bank. A total of
approximately 1,321,000 shares of the Company's common stock was issued in the
transaction.
The following paragraphs provide an overview of the financial condition and
results of operations of the Company and its principal wholly-owned subsidiaries
FCNB Bank and Elkridge Bank (the "Banks"). This discussion is intended to assist
the readers in their analysis of the accompanying consolidated financial
statements and notes thereto.
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. With this acquisition
the Company obtained approximately $35.0 million in assets and assumed
approximately $31.4 million in liabilities, for a cash price of $6.67 million.
This transaction was accounted for as a purchase, and $3.21 million of goodwill
was recorded. As a result of the merger, Odenton was merged with and into
Elkridge Bank. The Company's results of operations reflect earnings of Harbor
since the date of its acquisition.
During the third quarter of 1996, the Company announced its intention to merge
its subsidiary banks in March, 1997. Elkridge Bank will be merged with and into
FCNB Bank, with FCNB Bank surviving the merger. The Company expects to realize
significant cost savings and other operational efficiencies following this
event.
Throughout the discussion on the financial performance of the Company, the yield
on interest-earning assets, the net interest spread, the net interest margin,
the risk-based capital ratios, and the leverage ratio, exclude the effects of
the adoption of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." However, the return on
average assets, the return on average equity, and the book value per share at
period end include the effects of this pronouncement.
The following analysis of the Company's operating results is presented on a
consolidated basis. Net income was $5.87 million in 1996 compared to $7.00
million in 1995. Earnings per share were $1.09 in 1996 compared to $1.31 in
1995. In connection with the Laurel merger, accounted for as a pooling of
interests, certain costs incurred to effect the combination are expenses of the
combined enterprise and, accordingly, were charged to expense and deducted in
determining the results of operations of the combined entity. The specific
one-time costs associated with this merger that were charged to the Company's
results of operations following consummation of the merger, principally include:
(1) salaries and employee benefits associated with change-in-control payments to
certain executive officers of Laurel, totaling approximately $1.36 million; (2)
legal, accounting, financial advisor fees, and other conversion costs of
approximately $697,000 and (3) assessments to recapitalize the Savings
Association Insurance Fund of approximately $813,000. Net income before these
specific one-time merger related costs was $7.78 million in 1996 and $7.30
million in 1995, while earnings per share were $1.45 and $1.37 for 1996 and
1995, respectively.
Return on average assets and return on average shareholders' equity are key
measures of earnings performance. Return on average assets measures the ability
of a bank to utilize its assets in generating income. Return on average assets
was .84%in 1996 and 1.09% in 1995.
3
<PAGE>
Return on average shareholders' equity, which measures the income earned on the
capital invested, was 8.92% in 1996 compared to 11.21% in 1995. However, before
specific one-time merger related costs the return on average assets was 1.11% in
1996 and 1.14% in 1995, and the return on average shareholders' equity was
11.82% and 11.70% in 1996 and 1995, respectively.
During 1996, the Company experienced strong loan demand and, coupled with its
acquisition of Harbor, experienced an increase in net loans of $58.32 million
13.4% over the level at the end of 1995.
Noninterest income increased $343,000 (8.8%) from the level in 1995 and
noninterest expenses increased $3.78 million (18.3%) during the same period.
Included in the noninterest expenses are merger related costs of $2.87 million
in 1996 and $303,000 in 1995. If these amounts are excluded, noninterest
expenses would have risen by $1.22 million (6.0%).
In the ordinary course of business, the Company routinely explores opportunities
for additional growth and expansion of its core banking business and related
activities. However, there can be no assurance that this growth or expansion
will have a positive impact on the Company's earnings, dividends, book value or
market value.
The Company moved into its new headquarters facility during the first quarter of
1996. The Company's operating results for 1996 were impacted by the increased
overhead costs associated with this facility. However, the Company is pursuing
leasing opportunities for the facilities vacated with this move, in an attempt
to lessen the impact of the new facility's overhead expenses.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
Table 1 shows average balances of asset and liability categories, interest
income and interest paid, and average yields and rates for the periods
indicated.
NET INTEREST INCOME
Net interest income is generated from the Company's lending and investment
activities, and is the most significant component of the Company's earnings. Net
interest income is the difference between interest and rate-related fee income
on earning assets (primarily loans and investment securities) and the cost of
the funds (primarily deposits and short-term borrowings) supporting them. To
facilitate analysis, net interest income is presented on a taxable-equivalent
basis to adjust for the tax-exempt status of certain loans and investment
securities. This adjustment, based on the statutory federal income tax rate of
34% in 1996 and 1995, increases the tax-exempt income to an amount representing
an estimate of what would have been earned if that income were fully taxable.
Changes in net interest income between periods is affected primarily by the
volume of interest-earning assets and the yield on those assets, and by the
volume of interest-bearing deposits and other liabilities and the rates paid on
those deposits and liabilities. Table 2 reconciles the impact of changes in
average balances and average rates with the change in the Company's net interest
income for the periods indicated.
Taxable-equivalent net interest income totaled $29.39 million in 1996,
increasing 2.4% from $28.69 million in 1995. The Company's average
interest-earning assets increased 8.2% to $649.92 million during 1996. This
increase was primarily funded by 9.5% increase in the Company's average
interest-bearing liabilities and by a 12.5% increase in the Company's average
noninterest-bearing deposits during the year.
The Company's net interest margin (taxable-equivalent net interest income as a
percent of average interest-earning assets) was 4.52% in 1996, as compared to
4.78% in 1995. This decrease in net interest margin primarily reflects the
impact of the change in the spread between yields on average interest-earning
assets and rates paid on average interest-bearing liabilities realized during
1996. This spread decreased by 21 basis points in 1996. During the year, the
rate paid on average interest-bearing liabilities decreased 8 basis points,
while the yield on average interest earning assets decreased 29 basis points.
The yield on the average investment portfolio dropped drastically, falling by 47
basis points during 1996 compared to 1995, as investments in high yielding
tax-exempt securities matured in 1996. The yield on the average loan portfolio
decreased, reflecting the impact of competitive pressures. The rates paid on
federal funds purchased and securities sold under agreements to repurchase
decreased by 46 basis points. The rate of interest earned on interest-earning
assets and the rate paid on interest-bearing liabilities, while significantly
affected by
4
<PAGE>
the actions taken by the Federal Reserve to control economic growth, are
influenced by competitive factors within the Company's market. Competitive
pressures during 1996 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 Company's management feels that the competitive pressures in this
market will cause the net interest spread to continue to be under pressure.
Therefore, the Company is currently pursuing operating efficiencies through
improved technology and is adding new products and services to enhance its level
of noninterest income.
5
<PAGE>
<TABLE>
<CAPTION>
Table 1. Comparative Statement Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
daily income(2) yield/ daily income(2) yield/ daily income(2) yield/
balance(1) / paid rate balance(1) / paid rate balance(1) / paid rate
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Interest-bearing
deposits in
other banks $ 2,763 $ 174 6.30% $ 5,966 $ 411 6.89% $ 3,264 $ 194 5.94%
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 14,710 739 5.02 7,460 457 6.13 10,802 439 4.06
- ------------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 3,287 237 7.21 1,252 82 6.55 3,398 251 7.39
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable 158,055 10,193 6.45 147,597 9,706 6.58 164,275 10,353 6.30
Nontaxable 6,664 765 11.48 14,435 1,835 12.71 21,342 2,752 12.89
- ------------------------------------------------------------------------------------------------------------------------------------
Total invest-
ment securities 164,719 10,958 6.65 162,032 11,541 7.12 185,617 13,105 7.06
- ------------------------------------------------------------------------------------------------------------------------------------
Loans(3), net of
unearned income 464,440 42,050 9.05 423,722 39,261 9.27 358,051 30,848 8.62
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 649,919 54,158 8.33 600,432 51,752 8.62 561,132 44,837 7.99
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning
assets 50,975 41,616 36,207
Net effect of unrealized
gain (loss) on securities
available for sale 27 (529) (947)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $700,921 $641,519 $596,392
====================================================================================================================================
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
NOW/SuperNOW accounts $ 55,626 1,153 2.07% $ 51,370 1,195 2.33% $ 50,700 1,124 2.22%
Savings accounts 84,294 2,596 3.08 81,128 2,497 3.08 85,102 2,457 2.89
Money market accounts 80,654 2,589 3.21 84,904 2,852 3.36 93,690 2,848 3.04
Certificates of deposit
and other time deposits
less than $100,000 221,471 11,704 5.28 188,243 10,135 5.38 156,639 6,583 4.20
Certificates of deposit
and other time deposits
of $100,000 or more 43,709 2,232 5.11 50,377 2,846 5.65 38,409 1,614 4.20
Federal funds purchased
and securities sold
under agreements to
repurchase 24,815 1,357 5.47 18,928 1,122 5.93 29,592 1,247 4.21
Other short-term
borrowings 46,626 2,727 5.85 32,246 1,882 5.84 19,059 846 4.44
Long-term debt 5,901 406 6.88 7,087 530 7.48 5,667 291 5.13
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities(4) 563,096 24,764 4.40 514,283 23,059 4.48 478,858 17,010 3.55
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
deposits 66,111 58,789 55,503
Noninterest-bearing
liabilities 5,929 6,034 4,589
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 635,136 579,106 538,950
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 65,758 62,942 58,389
Net effect of unrealized
gain (loss) on securities available
for sale 27 (529) (947)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders'
equity 65,785 62,413 57,442
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholders'
equity $700,921 $641,519 $596,392
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $29,394 $28,693 $27,827
====================================================================================================================================
Net interest spread 3.93% 4.14% 4.44%
Net interest margin 4.52% 4.78% 4.96%
====================================================================================================================================
</TABLE>
(1) The average daily balances for investment securities exclude the
effects of the fair value adjustments under of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
(2) Presented on a taxable-equivalent basis using the statutory federal
income tax rate of 34%. The statement of income for 1996 includes the
results of operations for Laurel for the thirteen month period from
December 1, 1995 to December 31, 1996. To facilitate the analysis in
this table, Laurel's interest income and interest expense, totaling
$755,000 and $358,000, respectively, for the month of December 1995
have been eliminated.
(3) Nonaccruing loans, which include impaired loans, are included in the
average balances. Net loan fees included in interest income totaled
$1,149,000, $1,051,000 and $809,000 for 1996, 1995 and 1994,
respectively.
(4) The interest paid in 1996 and 1995 includes $108,000 and $300,000,
respectively, of capitalized construction period interest.
7
<PAGE>
<TABLE>
<CAPTION>
Table 2
Rate/Volume Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
1996 compared to 1995 1995 compared to 1994 1994 compared to 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Increase Increase Increase
(decrease) Net (decrease) Net (decrease) Net
due to increase due to increase due to increase
Volume Rate(1) (decrease) Volume Rate(1) (decrease) Volume Rate(1) (decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Interest-earning assets:
Interest-bearing deposits
in other banks $ (221) $ (16) $ (237) $ 161 $ 56 $ 217 $ (84) $ 60 $ (24)
Federal funds sold 444 (162) 282 (136) 154 18 (74) 110 36
Loans held for sale 133 22 155 (159) (10) (169) (317) (26) (343)
Investment securities
Taxable 689 (202) 487 (1,051) 404 (647) 664 (643) 21
Nontaxable(2) (988) (82) (1,070) (891) (26) (917) (446) 12 (434)
Loans(3) 3,773 (984) 2,789 5,658 2,755 8,413 3,187 (398) 2,789
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest
income(6) 3,830 (1,424) 2,406 3,582 3,333 6,915 2,930 (885) 2,045
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Paid
Interest-bearing
liabilities:
Savings deposits(4) 95 (301) (206) (339) 454 115 604 (188) 416
Time deposits 1,445 (490) 955 1,831 2,953 4,784 41 (111) (70)
Federal funds purchased and
securities sold under
agreements to repurchase 349 (114) 235 (449) 324 (125) 292 338 630
Other short-term
borrowings 839 6 845 585 451 1,036 (441) 139 (302)
Long-term debt (89) (35) (124) -- 239 239 291 (9) 282
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest
paid(5) (6) 2,639 (934) 1,705 1,628 4,421 6,049 787 169 956
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $1,191 $(490) $ 701 $1,954 $(1,088) $ 866 $2,143 $(1,054) $1,089
====================================================================================================================================
</TABLE>
(1) The volume/rate variance is allocated entirely to changes in rates.
(2) Taxable-equivalent adjustments of $260,000 for 1996, $624,000 for
1995, and $934,000 for 1994 are included in the calculation of
nontaxable investment securities rate variances.
(3) Taxable-equivalent adjustments of $2,000 for 1995 and $11,000 for 1994
are included in the calculation of loan rate variances.
(4) Savings deposits include NOW/SuperNOW, savings and money market
accounts.
(5) Total interest paid includes capitalized construction period interest
of $108,000 for 1996 and $300,000 for 1995.
(6) The statement of income for 1996 includes the results of operations
for Laurel for the thirteen month period from December 1, 1995 to
December 31, 1996. To facilitate the analysis in this table, Laurel's
interest income and interest expense, totaling $755,000 and $358,000,
respectively, for the month of December 1995, have been eliminated.
8
<PAGE>
Noninterest Income
Noninterest income increased by $343,000 or 8.8% in 1996. The Company engages in
the secondary mortgage market to enable it to satisfy customer demand for
fixed-rate mortgage loans. In past years, this product assisted the Company in
generating additional noninterest income. Gains realized from loan sales in the
secondary market were $305,000 in 1996 and $315,000 in 1995. Noninterest income
from gains realized on the sale of mortgage loans is directly affected by the
volume of mortgage loans settled, which is significantly influenced by increases
and decreases in the level of interest rates. In periods of rising interest
rates, mortgage loan production typically declines, whereas in periods of
declining interest rates mortgage loan production increases. As a result, this
source of noninterest income is highly influenced by the level and direction of
future interest rate changes. In 1996 and 1995, servicing fee income totaled
$490,000 and $597,000. Servicing income on mortgage loans originated and sold
however, is expected to make a smaller contribution to noninterest income since
the Company is currently not retaining servicing rights on mortgages sold. For
an analysis of securities gains and losses, see Note 4 to the consolidated
financial statements.
The increase in service fees on deposit accounts is attributable to some price
increases but primarily to increases in account volume and activity.
The Company is adding new products and services to enhance its level of
noninterest income in an effort to mitigate the effect of its decreasing net
interest spread. Some of these products are fee-based and, accordingly, are less
sensitive to fluctuations in the level of interest rates. The Company has an
arrangement with Liberty Securities Corp, a third party provider of mutual funds
and annuities, to offer these products to its customers. The arrangement will
enable the Company in future years to earn commissions on the sale of mutual
funds and annuities while providing customers access to alternative investment
products. Additionally, revenue from service charges on deposit accounts will
continue to increase as the volume of accounts maintained expands.
The Company's management is committed to developing and offering innovative,
market-driven products and services that will generate additional sources of
noninterest income.
Noninterest Expenses
Noninterest expenses increased $3.78 million, but excluding merger related costs
of $2.87 million in 1996 and $303,000 in 1995 would have only increased $1.22
million. Total salaries and employee benefits increased $428,000 or 3.8% in
1996.
Net occupancy and equipment expenses increased $736,000 (43.7%) and $161,000
(11.2%), respectively, compared to those incurred during 1995. 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.
Other operating expenses decreased $106,000 (1.7%) compared to the prior year.
See Note 13 to the consolidated financial statements for a schedule showing a
detailed breakdown of the Company's more significant other operating expenses.
Income Taxes
Income tax expense decreased to $3.25 million in 1996, compared to $3.89 million
in 1995, reflecting the lower level of pre-tax income in 1996. The Company's
effective tax rate was 35.6% in 1996, compared to 35.7% in 1995. The Company's
income tax expense differs from the amount computed at statutory rates primarily
due to tax-exempt interest from certain investment securities. Additionally, the
Company derives income tax benefits from a subsidiary located in the state of
Delaware that holds and manages a portion of its investment portfolio. Note 12
to the consolidated financial statements reconciles expected income taxes at
statutory rates for the past three years with income tax expense included in the
consolidated statements of income
Liquidity and Interest Rate Sensitivity
Asset/liability management involves the funding and investment strategies
necessary to maintain an appropriate balance between interest sensitive assets
and liabilities. It also involves providing adequate liquidity while sustaining
stable growth in net interest income. Regular review and analysis of deposit and
loan trends, cash flows in various categories of loans and monitoring of
interest spread relationships are vital to this process.
9
<PAGE>
The conduct of our banking business requires that we maintain adequate liquidity
to meet changes in composition and volume of assets and liabilities due to
seasonal, cyclical or other reasons. Liquidity describes the ability of the
Company to meet financial obligations that arise during the normal course of
business. Liquidity is primarily needed to meet the borrowing and deposit
withdrawal requirements of the customers of the Company, as well as for meeting
current and future planned expenditures. This liquidity is typically provided by
the funds received through customer deposits, investment maturities, loan
repayments, borrowings, and income. Normally, this requires maintaining
prospective liquidity sufficient to meet our customers' demand for loans.
The Company seeks to contain the risks associated with interest rate
fluctuations by managing the balance between interest sensitive assets and
liabilities. Managing to mitigate interest rate risk is, however, not an exact
science. Not only does the interval until repricing of interest rates on assets
and liabilities change from day to day as the assets and liabilities change, but
for some assets and liabilities, contractual maturity and the actual maturity
experienced are not the same. For example, mortgage-backed securities may have
contractual maturities well in excess of five years but, depending upon the
interest rate carried by the specific underlying mortgages and the then
currently prevailing rate of interest, these securities may be prepaid in a
shorter time period. Accordingly, the mortgage-backed securities and
collateralized mortgage obligations that have average stated maturities in
excess of five years, are evaluated as part of the asset/liability management
process using their expected average lives due to anticipated prepayments on the
underlying loans. Loans held for sale which have a contracted maturity of five
to thirty years are included in the one year or less time frame since they are
available to be sold at any time and are carried at the lower of cost or fair
value. Similarly, NOW/SuperNOW accounts, by contract, may be withdrawn in their
entirety upon demand and savings deposits may be withdrawn on seven days notice.
While these contracts are extremely short, it has been the Company's experience
that these accounts turn over at the rate of five percent (5%) per year. If all
of the Company's NOW/SuperNOW and savings accounts were treated as repricing in
one year or less, the cumulative negative gap at one year or less would be
$187.88 million or 24.11% of total assets. Due to their very liquid nature, the
entire balance of money market accounts is assumed to be repriced within one
year.
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of the Company's earning assets and
funding sources. An Asset/Liability Committee manages the interest rate
sensitivity position in order to maintain an appropriate balance between the
maturity and repricing characteristics of assets and liabilities that is
consistent with the Company's liquidity analysis, growth, and capital adequacy
goals. The Company sells fixed-rate real estate loans in the secondary mortgage
market. The Company believes that by selling certain loans rather than retaining
them in its portfolio, it is better able to match the maturities or repricing of
interest sensitive assets to interest sensitive liabilities. It is the objective
of the Asset/Liability Committee to maximize net interest margins during periods
of both volatile and stable interest rates, to attain earnings growth, and to
maintain sufficient liquidity to satisfy depositors' requirements and meet
credit needs of customers.
The following table summarizes, as of December 31, 1996, the anticipated
maturities or repricing of the Company's interest-earning assets and
interest-bearing liabilities, the Company's interest rate sensitivity gap
(interest-earning assets less interest-bearing liabilities), the Company's
cumulative interest rate sensitivity gap, and the Company's cumulative interest
sensitivity gap ratio (cumulative interest rate sensitivity gap divided by total
assets). A negative gap for any time period means that more interest-bearing
liabilities will reprice or mature during that time period than interest-earning
assets. During periods of rising interest rates, a negative gap position would
generally decrease earnings, and during periods of declining interest rates, a
negative gap position would generally increase earnings. The converse would be
true for a positive gap position. Therefore, a positive gap for any time period
means that more interest-earning assets will reprice or mature during that time
period than interest-bearing liabilities. During periods of rising interest
rates, a positive gap position would generally increase earnings, and during
periods of declining interest rates, a positive gap position would generally
decrease earnings.
In addition to the gap method of monitoring interest rate sensitivity, the
Company also employs computer model simulations. These simulations are run on a
monthly basis using a shock analysis technique to determine the effects on the
Company's net income assuming an immediate increase or decrease in interest
rates. The Company has an interest rate risk management policy that limits the
amount of deterioration in net income, associated with an assumed interest rate
shock of +/- 100 and +/- 200 basis points change in interest rates, to no more
than 10% and 20% of net income, respectively.
10
<PAGE>
Interest Rate Sensitivity Analysis - December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity period
- ------------------------------------------------------------------------------------------------------------------------------------
After 1
3 or less 4 to 12 through After 5
months months 5 years years Total
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-bearing deposits
in other banks $ 1,065 $ -- $ -- $ -- $ 1,065
Federal funds sold 12,438 -- -- -- 12,438
Loans held for sale:
Fixed rate 3,162 -- -- -- 3,162
Investment securities:(1)
Fixed rate 1,577 14,510 76,512 39,306 131,905
Variable rate 46,869 5,436 196 -- 52,501
Loans:(2)
Fixed rate 37,284 49,491 164,292 60,858 311,925
Variable rate 181,439 -- -- -- 181,439
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $283,834 $69,437 $241,000 $100,164 $694,435
====================================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits:
NOW/SuperNOW accounts
and savings $ 1,842 $ 5,527 $29,478 $110,543 $147,390
Money market accounts 78,156 -- -- -- 78,156
Certificates of deposit and
other time deposits:
Fixed rate 66,367 116,480 65,522 5,499 253,868
Variable rate 31,295 -- -- -- 31,295
Federal funds purchased and securities
sold under agreements to repurchase 40,739 -- -- -- 40,739
Other short-term borrowings:
Fixed rate 40,643 20,873 -- -- 61,516
Variable rate 15,000 -- -- -- 15,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $274,042 $142,880 $95,000 $116,042 $627,964
====================================================================================================================================
Interest-earning assets less
interest-bearing liabilities ("Gap") $9,792 $(73,443) $146,000 $(15,878) $66,471
Cumulative Gap $9,792 $(63,651) $ 82,349 $66,471 $66,471
Cumulative Gap as a percentage of
total assets 1.26% (8.17)% 10.57% 8.53% 8.53%
- ------------------------------------
(1)Excludes non-rate sensitive equity securities. Reflects fair value adjustments for securities available for sale.
(2)Includes consumer loans net of unearned income, and excludes nonaccrual and impaired loans.
</TABLE>
11
<PAGE>
Investment Portfolio
Investment securities represent the second largest component of earning assets,
at 25% of average earning assets in 1996 and 27% in 1995. The investment
portfolio is used as a source of interest income, credit risk diversification
and liquidity, as well as to manage rate sensitivity and provide collateral for
secured public funds and repurchase agreements. The investment portfolio
averaged $164.72 million in 1996, compared to $162.03 million in 1995. The
average yield on the portfolio decreased 47 basis points to 6.65% in 1996.
Mortgage-backed pass-through agency securities are popular investments for banks
because they are generally higher yielding than U.S. Treasury securities, have
little credit risk and have a lower risk-weighting under the risk-based capital
guidelines than many other investments.
As of December 31, 1996, the gross unrealized losses in the Company's investment
portfolio were $472,000 in the held-to-maturity investment portfolio and
$714,000 in the available-for-sale investment portfolio compared to $547,000 and
$523,000, respectively, as of December 31, 1995. The investment portfolio had an
average life of less than four years, with an estimated tax-equivalent average
yield of 6.63%, at December 31, 1996. Since the Company's held-to-maturity
investment portfolio includes fixed rate investment securities that have below
market interest rates, the future operating results of the Company would be
negatively impacted in an increasing rate environment. This reduction in net
interest income would result when the cost of funding the Company's operations
increases, while the income earned on the held-to-maturity portfolio remains
constant.
On December 29, 1995, the Company transferred $23,751,000 of securities at
amortized cost, having an unrealized gain of $336,000, from the held-to-maturity
portfolio into the available-for-sale portfolio. This transfer has been handled
in accordance with the special provisions related to the one-time transfer of
investment securities as allowed by the Financial Accounting Standards Board.
The Company took advantage of this opportunity to reposition its investment
portfolios to enhance its ability to react to changes in the securities market
and liquidity needs.
<TABLE>
<CAPTION>
Investment Portfolio Distribution-Book Value (Amortized cost)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996(1) 1995(1) 1994(1)
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury and other U.S. government
agencies and corporations $166,801 $125,596 $148,647
State and political subdivisions 5,138 8,929 17,955
Other securities 23,632 7,135 12,275
- ------------------------------------------------------------------------------------------------------------------------------------
Total $195,571 $141,660 $178,877
====================================================================================================================================
(1) Reflects the cost of securities purchased, adjusted for premium
amortization and discount accretion, which differs from the amounts
reflected in the consolidated balance sheets due to fair value adjustments.
Analysis of Investment Portfolio (Held-to-Maturity) - December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
After 1 After 5
1 year through through After 10
Maturing in: or less 5 years 10 years years
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies
and corporations -- -- $24,931 5.80% $3,456 7.35% -- --
State and political
subdivisions (1) $985 14.31% 1,462 10.28 2,338 11.64 $353 8.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $985 14.31% $26,393 6.05% $5,794 9.08% $353 8.44%
====================================================================================================================================
</TABLE>
(1) Yields, calculated using amortized cost book values, are presented on a
fully taxable equivalent basis using the federal statutory rate of 34%. All
of the obligations of states and political subdivisions are rated A or
higher by either Moody's Investors Service, Inc. or Standard & Poor's
Corporation.
12
<PAGE>
<TABLE>
<CAPTION>
Analysis of Investment Portfolio (Available-for-Sale) - December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
After 1 After 5
1 year through through After 10
Maturing in: or less 5 years 10 years years
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Amount(1) Yield Amount(1) Yield Amount(1) Yield Amount(1) Yield
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies
and corporations $1,558 6.16% $94,235 6.58% $45,394 6.80% $854 7.68%
Other securities -- -- 1,007 6.69 5,918 7.06 13,080 5.65
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,558 6.16% $95,242 6.58% $51,312 6.83% $13,934 5.77%
====================================================================================================================================
</TABLE>
(1) Reflects the cost of securities purchased, adjusted for premium
amortization and discount accretion, which differs from the amounts
reflected in the consolidated balance sheets due to fair value adjustments.
The Company had no investments that were obligations of the issuer, or payable
from or secured by a source of revenue or taxing authority of the issuer, whose
aggregate book value exceeded 10% of shareholders' equity at December 31, 1996.
Loan Portfolio
During 1996, the Company sold $28.99 million of conforming residential mortgage
loans to Countrywide Mortgage (Countrywide) and other private investors, and
held additional loans totaling $3.16 million at December 31, 1996, whereas in
1995, the Company sold loans totaling $23.16 million to FHLMC ("Freddie Mac"),
Countrywide, and FNMA ("Fannie Mae") and held additional loans for sale totaling
$2.36 million at December 31, 1995. The average balance of loans held for sale
for 1996 was $3.29 million, and in 1995 was $1.25 million which generated
average yields of 7.21% and 6.55%, respectively.
The Company makes real estate construction, real estate mortgage, commercial and
agricultural, and consumer loans. The real estate construction loans are
generally secured by the construction project financed, and have a term of one
year or less. The real estate mortgage loans are generally secured by the
property and have a maximum loan to value ratio of 75% and a term of one to
seven years. The commercial and agricultural loans consist of secured and
unsecured loans. The unsecured commercial loans are made based on the financial
strength of the borrower and usually require personal guarantees from the
principals of the business. The collateral for the secured commercial loans may
be equipment, accounts receivable, marketable securities or deposits in the
subsidiary banks of the Company. These loans have a maximum loan to value ratio
of 75% and a term of one to five years. The consumer loan category consists of
secured and unsecured loans. The unsecured consumer loans are made based on the
financial strength of the individual borrower. The collateral for secured
consumer loans may be marketable securities, automobiles, recreational vehicles
or deposits in the Company's subsidiary banks. The usual term for these loans is
three to five years.
<TABLE>
<CAPTION>
Loan Distribution
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 % 1995 % 1994 % 1993 % 1992 %
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction $ 55,614 11% $ 38,043 9% $ 25,988 7% $ 18,678 6% $ 16,197 5%
Real estate-mortgage 335,784 67 299,114 68 273,485 70 245,209 73 235,673 75
Commercial and agricultural 52,515 11 49,667 11 44,164 11 38,843 11 32,664 10
Consumer 54,082 11 52,970 12 46,540 12 34,186 10 31,797 10
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned income 497,995 100% 439,794 100% 390,177 100% 336,916 100% 316,331 100%
Less: Allowance for
credit losses (5,123) (5,242) (4,691) (4,219) (3,694)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans $492,872 $434,552 $385,486 $332,697 $312,637
====================================================================================================================================
</TABLE>
13
<PAGE>
Maturity and Interest Rate Sensitivity of Loans-December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1 year After 1
Maturing in: or less through 5 years After 5 years
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Variable Fixed Variable Fixed Variable
interest interest interest interest interest interest
rates rates rates rates rates rates Total
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate - construction $12,757 $31,223 $ 4,376 $ 2,378 $ 419 $4,461 $ 55,614
Real estate - mortgage(1) 63,348 10,265 88,656 92,449 81,066 -- 335,784
Commercial and agricultural 5,376 11,274 18,474 16,268 1,065 58 52,515
Consumer 3,020 2,653 44,027 1,349 2,959 74 54,082
- ------------------------------------------------------------------------------------------------------------------------------------
Total $84,501 $55,415 $155,533 $112,444 $85,509 $4,593 $497,995
====================================================================================================================================
</TABLE>
(1) The Company's customary business practice is to write real estate mortgage
loans, which will be retained in its loan portfolio, with repayment terms
normally not exceeding seven years. Most loans mature in one year with the
balance due at maturity. Assuming that credit standards are met at each
maturity, the Company customarily extends its loans for successive one year
periods. During 1994, the Company began to write some real estate mortgage loans
with terms up to 15 years, of which the volume was minimal as of December 31,
1996.
Allowance for Credit Losses
The Company follows the guidance of Statement of Financial Accounting Standards
No. 114 (Statement 114), "Accounting by Creditors for Impairment of a Loan," as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." It requires that impaired loans,
within its scope, be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Since the Company's allowance for credit losses was
considered adequate when this Statement was adopted, the impact on the Company's
financial condition and results of operations was not material.
Statement 114 excludes smaller balance and homogeneous loans from impairment
reporting. Therefore, the Company has designated consumer, credit card and
residential mortgage loans to be excluded for this purpose. From the remaining
loan portfolio, loans rated as doubtful, or worse, classified as nonaccrual, and
troubled debt restructurings may be evaluated to be impaired. Loans are
evaluated for nonaccrual status when principal or interest is delinquent for 90
days or more and are placed on nonaccrual status when a loan is specifically
determined to be impaired. 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. See Note 5 to the
consolidated financial statements for selected information concerning the
Company's recorded investment in impaired loans.
The Company maintains its allowance for credit losses at a level deemed
sufficient to provide for estimated potential losses inherent in the credit
extension process. Management reviews the adequacy of the allowance each
quarter, considering factors such as current and future economic conditions and
their anticipated impact on specific borrowers and industry groups, the growth
and composition of the loan portfolio, the level of classified and problem
assets, historical loss experience, and the 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 $5.12 million, or 1.03% of total loans, net
of unearned income, at December 31, 1996, compared to $5.24 million, or 1.19% as
of December 31, 1995. The allowance for credit losses to nonperforming loans was
71.5% and 197.5% as of December 31, 1996 and 1995, respectively.
14
<PAGE>
The Company's provision for credit losses in 1996 was $318,000 compared to
$710,000 in 1995. Net credit losses in 1996 exceeded the provision for credit
losses by $581,000. The provision for credit losses in 1995 exceeded net credit
losses by $551,000.
Total nonperforming assets as of December 31, 1996 totaled $10.29 million,
reflecting a $5.37 million increase from the $4.92 million in nonperforming
assets as of December 31, 1995. Total nonperforming assets, including properties
acquired through foreclosure, represent 1.32% and .74% of total assets as of
December 31, 1996 and 1995 respectively. The increase in nonperforming assets
principally related to loans acquired in recent acquisitions.
Nonperforming assets at December 31, 1996, include $4.63 million of nonaccrual
loans, $2.53 million of loans past due 90 days or more, $1.94 million of
foreclosed properties, consisting principally of commercial properties, and
$1.19 million for the Company's vacated Operations Center transferred to other
real estate owned. The increase in past due loans is principally related to
loans acquired in recent acquisitions.
It is the Company's practice to continue the recognition of earnings on
delinquent consumer loans until the loans are charged-off after being 90 days
past due.
<TABLE>
<CAPTION>
Problem Assets
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Nonperforming loans:
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans(1) $ 4,631 $2,532 $3,445 $3,282 $5,279
Restructured loans(2) - - - - -
Past due loans(3) 2,531 122 153 89 90
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 7,162 2,654 3,598 3,371 5,369
Foreclosed properties(4) 3,131 2,262 2,212 2,665 3,420
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming
assets $10,293 $4,916 $5,810 $6,036 $8,789
====================================================================================================================================
Nonperforming assets to
total loans (net of
unearned income) and foreclosed
properties at period end 2.05% 1.11% 1.48% 1.78% 2.75%
Nonperforming assets to total
assets at period end 1.32% .74% .93% 1.00% 1.62%
Allowance for credit losses
to nonperforming loans at
period end 71.5% 197.5% 130.4% 125.2% 68.8%
- ------------------------------------
</TABLE>
(1) See discussion at "Allowance for Credit Losses" for nonaccrual and impaired
loans.
(2) Restructured loans are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15. Nonaccrual loans are
not included in these totals.
(3) Past due loans are loans that were contractually past due 90 days or more
as to principal or interest payments at the dates indicated. Nonaccrual and
restructured loans are not included in these totals.
(4) Foreclosed properties include facilities no longer used for banking
purposes and properties that have been acquired in complete or partial
satisfaction of debt. These properties, which are held for resale, are
carried at the lower of fair value (net of estimated selling expenses) or
cost.
15
<PAGE>
The Company has loans totaling $16.88 million that are now current for which
there are concerns as to the ability of the borrowers to comply with present
loan repayment terms. While management does not anticipate any loss not
previously provided for on these loans, changes in the financial condition of
these borrowers may necessitate future modifications in their loan repayment
terms.
At December 31, 1996, the Company had no concentrations of loans in any one
industry exceeding 10% of its total loan portfolio. An industry for this purpose
is defined as a group of counterparties that are engaged in similar activities
and have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.
There were no other interest-bearing assets at December 31, 1996, classifiable
as nonaccrual, past due, restructured or problem assets.
Allowance for Credit Losses
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average total loans out-
standing during year $464,440 $423,722 $358,051 $321,539 $323,357
====================================================================================================================================
Allowance at beginning
of year $5,242 $4,691 $4,219 $3,694 $3,671
- ------------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate-construction -- -- -- -- 31
Real estate-mortgage 136 22 32 - 856
Commercial and agricultural 570 19 - 140 86
Consumer 293 168 129 127 145
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 999 209 161 267 1,118
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate-construction -- - - - -
Real estate-mortgage -- 1 - 2 2
Commercial and agricultural 20 - 38 8 11
Consumer 80 49 70 17 52
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 100 50 108 27 65
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 899 159 53 240 1,053
- ------------------------------------------------------------------------------------------------------------------------------------
Additions to allowance charged
to operating expenses 318 710 525 765 1,076
- ------------------------------------------------------------------------------------------------------------------------------------
Other transfers and allowance on loans
acquired with purchased entity 462 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance at end of year $5,123 $5,242 $4,691 $4,219 $3,694
====================================================================================================================================
Ratio of net charge-offs
to average total loans .19% .04% .01% .07% .33%
====================================================================================================================================
</TABLE>
16
<PAGE>
The allocation of the Allowance, presented in the following table, is based
primarily on the factors discussed above in evaluating the adequacy of the
Allowance as a whole. Since all of those factors are subject to change, the
allocation is not necessarily indicative of the category of future loan losses.
<TABLE>
<CAPTION>
Allocation of Allowance for Credit Losses
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 %(1) 1995 %(1) 1994 %(1) 1993 %(1) 1992 %(1)
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction $1,059 11% $ 806 9% $ 743 7% $ 693 6% $ 532 5%
Real estate-mortgage 2,300 67 2,406 68 2,370 70 2,247 73 1,800 75
Commercial and agricultural 855 11 1,129 11 749 11 991 11 1,134 10
Consumer 534 11 476 12 344 12 288 10 228 10
Unallocated 375 - 425 -- 485 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Allowance $5,123 100% $5,242 100% $4,691 100% $4,219 100% $3,694 100%
====================================================================================================================================
(1) Percent of loans in each category to total loans, net of unearned income.
</TABLE>
<TABLE>
<CAPTION>
Deposits
Average Deposits and Average Rates
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
daily Average daily Average daily Average
balance Rate balance Rate balance Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 66,111 -. % $ 58,789 -. % $ 55,503 -%
Interest-bearing
demand deposits 136,280 2.75 136,274 2.97 144,390 2.75
Savings deposits 84,294 3.08 81,128 3.08 85,102 2.89
Certificates of deposit
and other time deposits 265,180 5.26 238,620 5.44 195,048 4.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total average deposits $551,865 3.67% $514,811 3.79% $480,043 3.04%
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Maturities of Time Deposits-$100,000 or More
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Maturing in:
<S> <C> <C> <C>
3 months or less $23,025 $13,218 $13,651
Over 3 months through 6 months 9,009 13,268 12,878
Over 6 months though 12 months 6,226 7,893 13,539
Over 12 months 11,991 10,944 7,932
- ------------------------------------------------------------------------------------------------------------------------------------
$50,251 $45,323 $48,000
====================================================================================================================================
</TABLE>
17
<PAGE>
Short-term Borrowings
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Total outstanding at year-end(1) $40,739 $21,043 $25,103
====================================================================================================================================
Average amount outstanding during the year $24,815 $18,928 $29,592
====================================================================================================================================
Maximum amount outstanding at any month-end $43,714 $28,237 $43,768
====================================================================================================================================
Weighted average interest rate at year-end 5.43% 5.65% 5.93%
====================================================================================================================================
Weighted average interest rate during the year 5.47% 5.93% 4.21%
====================================================================================================================================
(1) Includes securities sold under agreements to repurchase with the Federal
Home Loan Bank of Atlanta, totaling $24.22 million at December 31, 1996.
Securing this arrangement are investment securities with book values of
$26.50 million and fair values of $26.24 million at December 31, 1996.
These repurchase agreements mature primarily within 30 days of December 31,
1996.
Other Short-term Borrowings(2)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Total outstanding at year-end $76,516 $32,426 $26,089
====================================================================================================================================
Average amount outstanding during the year $46,626 $32,246 $19,059
====================================================================================================================================
Maximum amount outstanding at any month-end $76,516 $50,382 $29,887
====================================================================================================================================
Weighted average interest rate at year-end 5.59% 5.91% 5.81%
====================================================================================================================================
Weighted average interest rate during the year 5.85% 5.84% 4.44%
====================================================================================================================================
</TABLE>
(2) Primarily reflects the amounts borrowed under secured lending arrangements
with the Federal Home Loan Bank of Atlanta.
Long-term debt
On May 31, 1995, the Company entered into a secured lending arrangement with a
regional national bank to finance the cost of its new corporate headquarters
facility in Frederick, Maryland (the "Facility"). The loan, secured by a first
lien security interest on the Facility's land, improvements and fixtures and
equipment, provided for interest at a fluctuating rate equal to the daily London
Interbank Offered Rate for one-month U.S. Dollar deposits (LIBOR), plus 1.35%
was paid off on December 19, 1996. A balance was outstanding on December 31,
1995 of $4.68 million, bearing interest at a rate of 7.32%.
At December 31, 1995, the Company had $1.0 million in advances totaling from the
Federal Home Loan Bank that were due in March 1997, bearing interest at the rate
of 7.35%.
Capital Resources
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and Banks must meet specific capital guidelines that involve
quantitative measures of the Company's Banks' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
18
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios of total
and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1996 and 1995 that the Company and Banks
meet all capital adequacy requirements to which they are subject. See Note 14 to
the consolidated financial statements for a table depicting compliance with
regulatory capital requirements.
As of December 31, 1996, the most recent notification from the regulatory agency
categorized the Banks as adequately capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately capitalized the
Banks must maintain minimum total risk- based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table in Note 14. There are no conditions or
events since that notification which management believes have changed the Bank's
category.
19
<PAGE>
Financial Analysis 1995-1994
Earnings Summary:
Net income was $7.00 million in 1995 compared to $6.77 million for 1994.
Earnings per share were $1.31 in 1995 compared to $1.26 for 1994.
Return on average assets was 1.09% in 1995 compared to 1.14% for 1994. Return on
average shareholders' equity was 11.21% in 1995 compared to 11.79% in 1994.
Net Interest Income: On a fully taxable-equivalent basis, net interest income
increased $866,000 or 3.1% in 1995 and $1.09 million or 4.1% in 1994.
In 1995, the net margin on average total interest-earning assets decreased to
4.78% from 4.96% in 1994 and from 5.08% in 1993. Changes in net interest income
between periods is affected principally by the volume of interest-earning assets
and the yield on those assets, and by the volume of interest-bearing deposits
and other liabilities and the rates paid on those deposits and liabilities.
Table 2 summarizes, on a fully taxable-equivalent basis, the impact of changes
in average balances and average rates on the Company's net interest income for
the periods indicated.
Noninterest Income: Noninterest income increased by $1.04 million, or 36.1% in
1995 but decreased by $436,000, or 13.2% in 1994.
The Company utilized the secondary mortgage market to satisfy its customers'
demand for long-term fixed-rate mortgage financing and, in so doing, generated
gains in the amount of $315,000 from the sale of conforming mortgage loans and
generated $597,000 in related servicing fees in 1995. During 1994, the Company
realized losses from loan sales and servicing fee income of $260,000 and
$341,000, respectively, from its activity in this market.
The increased service fees on deposit accounts are attributed to increases in
both account volume and activity, since service charges per account and per
transaction remained relatively constant between the periods.
Noninterest Expenses: Noninterest expenses increased $1.50 million, or 7.8.% in
1995 and $1.18 million, or 6.5% in 1994.
Increases in salaries and employee benefits of $1.33 million or 13.5% in 1995
and $438,000 or 4.6% in 1994, primarily reflect the effects of an increase in
the number of Company personnel during these periods.
Other operating expenses decreased $20,000 or 0.33% in 1995, but increased by
$365,000 or 6.3% in 1994. See Note 13 to the consolidated financial statements
for a schedule showing a detailed breakdown of the Company's more significant
other operating expenses.
Income Taxes: Income tax expense increased to $3.89 million in 1995, compared to
$3.27 million in 1994, reflecting the higher level of pretax income in 1995 and
the Company's higher effective tax rate of 35.7% in 1995 compared to 32.58% in
1994.
20
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning the
Company, as restated for the effects of its merger with Laurel Bancorp, Inc.
that was accounted for as a pooling of interests, and is qualified in its
entirety by the detailed information and financial statements, including notes
thereto, included elsewhere herein. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation have been included.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Summary of Operating Results:
<S> <C> <C> <C> <C> <C>
Total interest income $54,653 $51,126 $43,892 $41,691 $43,616
Total interest expense(1) 25,014 22,759 17,010 16,054 19,783
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 29,639 28,367 26,882 25,637 23,833
Provision for credit losses 318 710 525 765 1,076
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 29,321 27,657 26,357 24,872 22,757
Net securities gains (losses) 193 123 375 (1,183) (1,510)
Noninterest income (excluding net
securities gains (losses)) 4,068 3,795 2,503 4,497 3,418
Noninterest expenses 24,470 20,689 19,191 18,013 16,498
- ------------------------------------------------------------------------------------------------------------------------------
Income before provision for income
taxes and cumulative effect of
changes in accounting principles 9,112 10,886 10,044 10,173 8,167
Provision for income taxes 3,245 3,888 3,272 3,301 2,346
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 5,867 6,998 6,772 6,872 5,821
Cumulative effect on prior years of
changes in accounting principles -- -- -- -- (129)
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 5,867 $ 6,998 $ 6,772 $ 6,872 $ 5,692
==============================================================================================================================
Per Share:
Income before cumulative effect
of changes in accounting principles $1.09 $1.31 $1.26 $1.29 $1.11
Cumulative effect on prior years of
changes in accounting
principles-- -- -- -- (0.03)
Net income 1.09 1.31 1.26 1.29 1.08
Cash dividends declared 0.54 0.55 0.48 0.39 0.31
Book value at year-end(2) 12.88 12.50 11.20 10.96 9.79
Average common shares
outstanding 5,381,797 5,346,481 5,355,756 5,333,441 5,253,847
Other Data (At Year-End):
Total loans, net of unearned income $497,995 $439,794 $390,177 $336,916 $316,331
Total assets 779,169 660,984 627,050 603,497 543,992
Total deposits 587,074 529,988 505,202 485,543 446,748
Federal funds purchased and securities
21
<PAGE>
sold under agreements to repurchase 40,739 21,043 25,103 32,304 7,679
Other short-term borrowings 76,516 32,426 26,089 13,776 32,423
Long-term debt -- 5,680 7,000 10,106 1,208
Total shareholders' equity 69,110 66,219 59,037 57,689 51,422
Consolidated Ratios:
Return on average total assets(2) 0.84% 1.09% 1.14% 1.23% 1.07%
Return on average shareholders'
equity(2) 8.92 11.21 11.79 12.73 11.56
Average shareholders' equity
to average total assets(2) 9.39 9.73 9.63 9.67 9.24
Cash dividends declared to
net income 49.86 41.61 37.45 30.32 27.76
============================================================================================================================
</TABLE>
(1) Net of $108,000 and $300,000 of capitalized construction period interest in
1996 and 1995, respectively.
(2) The 1996, 1995, 1994 and 1993 amounts and ratios shown include the effects
of the December 31, 1993 adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
22
<PAGE>
FCNB Corp and Subsidiaries
Consolidated Balance Sheets
December 31, 1996 and 1995
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 31,023 $ 24,085
Interest-bearing deposits in other banks 1,065 2,261
Federal funds sold 12,438 20,017
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 44,526 46,363
- ------------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 3,162 2,362
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity - fair value
of $33,740 in 1996 and $59,192 in 1995 33,525 58,511
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale - at fair value 162,860 83,987
- ------------------------------------------------------------------------------------------------------------------------------------
Loans 498,391 440,724
Less: Allowance for credit losses (5,123) (5,242)
Unearned income (396) (930)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 492,872 434,552
- ------------------------------------------------------------------------------------------------------------------------------------
Bank premises and equipment 22,691 19,997
- ------------------------------------------------------------------------------------------------------------------------------------
Other assets 19,533 15,212
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $779,169 $660,984
====================================================================================================================================
LIABILITIES AND Shareholders' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 76,365 $ 66,558
Interest-bearing deposits 510,709 463,430
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 587,074 529,988
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 40,739 21,043
Other short-term borrowings 76,516 32,426
Long-term debt -- 5,680
Accrued interest and other liabilities 5,730 5,628
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 710,059 594,765
- ------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 10 & 17)
- ------------------------------------------------------------------------------------------------------------------------------------
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; 5,364,560 in 1996
and 5,298,361 in 1995 shares issued
and outstanding 5,365 5,298
Surplus 26,652 26,733
Retained earnings 36,589 33,658
Net unrealized gain (loss) on securities
available for sale 504 530
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 69,110 66,219
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $779,169 $660,984
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
23
<PAGE>
FCNB Corp and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $42,948 $39,341 $31,088
Interest and dividends on investment
securities:
Taxable 9,728 9,292 10,083
Tax exempt 505 1,211 1,816
Dividends 539 414 272
Interest on federal funds sold 759 457 439
Other interest income 174 411 194
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 54,653 51,126 43,892
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 20,549 19,361 14,626
Interest on federal funds purchased and
securities sold under agreements
to repurchase 1,357 1,122 1,247
Interest on other short-term
borrowings 2,762 1,882 846
Interest on long-term debt 346 394 291
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 25,014 22,759 17,010
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 29,639 28,367 26,882
Provision for credit losses 318 710 525
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for credit losses 29,321 27,657 26,357
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service fees 2,454 2,104 1,845
Net securities gains 193 123 375
Gain (loss) on sale of loans 305 315 (260)
Servicing fees on loans sold 490 597 341
Other operating income 819 779 577
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 4,261 3,918 2,878
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 11,621 11,193 9,860
Occupancy expenses, net 2,419 1,683 1,667
Equipment expenses 1,599 1,438 1,345
Merger-related expenses 2,865 303 227
Other operating expenses 5,966 6,072 6,092
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 24,470 20,689 19,191
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 9,112 10,886 10,044
Provision for income taxes 3,245 3,888 3,272
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 5,867 $ 6,998 $ 6,772
====================================================================================================================================
Net income per share $1.09 $1.31 $1.26
====================================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
FCNB Corp and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Net
Unrealized
Gain (loss) Total
on Securities Share-
Shares Common Retained Available holders'
Outstanding Stock Surplus Earnings Other for Sale Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 2,595,118 $2,595 $19,717 $17,805 $ -- $1,135 $41,252
Effect of pooled entity 1,200,002 1,200 3,778 11,633 (175) -- 16,436
Net income -- -- -- 6,772 -- -- 6,772
Shares issued under dividend
reinvestment and stock purchase
plan 3,764 4 51 (13) -- -- 42
Shares issued with
stock dividend 112,013 112 2,688 (2,800) -- -- --
Stock option
transactions 2,652 3 79 -- -- -- 82
Cash dividends declared
($0.48 per share) -- -- -- (2,480) -- -- (2,480)
Other -- -- 56 22 140 -- 218
Fair value adjustment for securities
available for sale, net -- -- -- -- -- (3,285) (3,285)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 3,913,549 3,914 26,369 30,939 (35) (2,150) 59,037
Net income -- -- -- 6,998 -- -- 6,998
Dividend reinvestment
and stock purchase plan -- -- -- (11) -- -- (11)
Shares issued with stock
split, effected in the form
of a stock dividend 1,356,332 1,356 -- (1,356) -- -- --
Stock option transactions 28,480 28 182 -- -- -- 210
Cash dividends declared
($0.55 per share) -- -- -- (2,912) -- -- (2,912)
Other -- -- 182 -- 35 -- 217
25
<PAGE>
Fair value adjustment for securities
available for sale, net -- -- -- -- -- 2,680 2,680
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 5,298,361 5,298 26,733 33,658 -- 530 66,219
Net income -- -- -- 5,867 -- -- 5,867
Dividend reinvestment
and stock purchase plan -- -- -- (11) -- -- (11)
Repurchase of common stock (30,000) (30) (550) -- -- -- (580)
Stock option transactions 96,199 97 469 -- -- -- 566
Cash dividends declared
($0.54 per share) -- -- -- (2,925) -- -- (2,925)
Fair value adjustment for securities
available for sale, net -- -- -- -- -- (26) (26)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 5,364,560 $5,365 $26,652 $36,589 -- $ 504 $69,110
====================================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
26
<PAGE>
FCNB Corp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,867 $ 6,998 $ 6,772
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,308 1,029 1,027
Provision for credit losses 318 710 525
Provision for foreclosed properties -- 352 261
Provision for deferred income taxes (benefits) (125) (210) --
Net premium amortization (discount accretion)
on investment securities (9) (87) 116
Noncash charitable contribution 64 -- 31
Federal Home Loan Bank stock dividend -- -- (26)
Accretion of net loan origination fees (496) (470) (207)
Net securities gains (193) (123) (375)
Net (gain) loss on sales of property 15 (55) 37
Increase in other assets (466) (997) (1,086)
Decrease (increase) in loans held for sale (800) (1,339) 13,648
Increase (decrease) in accrued interest and other liabilities 503 992 496
Other operating activities -- 217 114
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,980 7,017 21,333
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Maturity of interest-bearing deposits in other banks -- -- 1,088
Proceeds from sales of investment securities
available for sale 33,434 21,618 4,080
Proceeds from maturities of investment securities
available for sale 20,424 6,820 26,160
Proceeds from maturities of investment securities
held to maturity 25,286 24,965 22,810
Purchases of investment securities available for sale (104,922) (6,457) (26,484)
Purchases of investment securities held to maturity (25,209) (9,520) (13,054)
Net increase in loans (30,046) (50,566) (53,407)
Purchases of bank premises and equipment (4,622) (8,778) (1,806)
Proceeds from dispositions of property 780 568 855
Purchase of foreclosed properties (76) -- --
Investments in other real estate owned -- (196) (66)
Acquisition of business, net of cash acquired (2,981) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (87,932) (21,546) (39,824)
- ------------------------------------------------------------------------------------------------------------------------------------
27
<PAGE>
FCNB Corp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996 1995, and 1994
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in noninterest-
bearing deposits, NOW accounts, money
market accounts, and savings accounts $17,285 $ 1,866 $ 9,387
Net increase in time deposits 10,791 22,937 10,314
Net increase in short-term borrowings 61,786 2,277 5,111
Proceeds from (repayment of) long-term debt (5,680) (1,320) (3,000)
Dividend reinvestment and stock purchase plan (11) (11) (13)
Proceeds from sale of common stock 449 130 96
Repurchase of common stock (580) -- --
Dividends paid (2,925) (2,912) (2,480)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 81,115 22,967 19,415
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease)in cash and cash equivalents (1,837) 8,438 924
Cash and cash equivalents-beginning of year 46,363 37,925 37,001
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents-end of year $44,526 $46,363 $37,925
====================================================================================================================================
Supplemental cash flow information: Noncash investing and financing activities:
Foreclosed properties acquired in settlement of loans $106 $1,513 $1,318
====================================================================================================================================
Transfers from foreclosed properties to loans $1,165 $253 $1,012
====================================================================================================================================
Bank premises transferred to other assets $1,190 -- --
====================================================================================================================================
Surplus from stock option transactions $117 $80 $41
====================================================================================================================================
Book value of securities transferred to available
for sale from held to maturity -- $23,751 --
====================================================================================================================================
Details of acquisition:
Fair value of assets acquired $35,130 -- --
Fair value of liabilities assumed (31,616) -- --
Purchase price in excess of the net assets acquired 3,212 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash paid 6,726 -- --
Less cash acquired 3,745 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash paid for acquisition $2,981 -- --
====================================================================================================================================
The Company paid interest of $25,182, $22,870 and $16,802 in 1996, 1995 and
1994, respectively. Income taxes paid by the Company were $4,315, $3,216 and
$2,784 in 1996, 1995 and 1994 respectively.
====================================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
28
<PAGE>
FCNB Corp and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of banking activities and significant accounting policies:
FCNB Corp (the "Parent Company") is a multi-bank holding company that provides
its customers with banking and bank related financial services through its
wholly-owned subsidiaries FCNB Bank and Elkridge Bank (the "Banks"). The Banks
offer various loan, deposit and other financial service products to their
customers. The Banks' customers include individuals and commercial enterprises
located within the State of Maryland. Their principal market areas encompass
Frederick, Carroll, Howard, Prince George's, Anne Arundel and Montgomery
counties and portions of the adjacent counties within the State. Additionally,
the Banks maintain correspondent banking relationships and transact daily
federal funds sales on an unsecured basis with regional correspondent banks.
The accounting and reporting policies and practices of the Parent Company and
its subsidiaries (collectively, the "Company") conform with generally accepted
accounting principles. The following is a summary of the Company's significant
accounting policies:
Basis of presentation:
The consolidated financial statements include the accounts of the Parent Company
and its wholly-owned subsidiaries, presented on the accrual basis of accounting,
after elimination of all inter-company accounts and transactions. In the Parent
Company's unconsolidated financial statements, investments in subsidiaries are
accounted for using the equity method of accounting.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Presentation of cash flows:
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks (including cash items in process of clearing) with
a maturity of 90 days or less, and federal funds sold. Generally, federal funds
are sold for one day periods.
Investment securities:
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.
Dividend and interest income, including amortization of premium and accretion of
discount arising at acquisition, from all categories of investment securities
are included in interest income in the consolidated statements of income. Gains
and losses realized on sales of investment securities, determined using the
adjusted cost basis of the specific securities sold, are included in noninterest
income in the consolidated statements of income. Additionally, declines in the
fair value of individual investment securities below their cost that are other
than temporary are reflected as realized losses in the consolidated statements
of income.
Loans held for sale:
29
<PAGE>
Loans held for sale are generally held for periods of ninety days or less and
are carried at the lower of aggregate cost or fair value.
Loans and allowance for credit losses:
On January 1, 1995, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 114, "Accounting by Creditors for Impairment of a Loan,"
(Statement 114) as amended by FASB Statement No. 118, "Accounting by Creditors
for Impairment of a Loan Income Recognition and Disclosures." Statement 114, as
amended, requires that the measurement of a loan's impairment be based on the
present value of the loan's expected future cash flows or, alternatively, the
observable market price of the loan or the fair value of the collateral. The
effect of adopting Statement 114 was not material.
Loans are carried at the amount of unpaid principal, adjusted for deferred loan
fees and origination costs. Interest on loans is accrued based on the principal
amounts outstanding. The Company discontinues the accrual of interest when a
loan is specifically determined to be impaired. When principal or interest is
delinquent for ninety days or more the Company evaluates the loan for nonaccrual
status. After a loan is placed on nonaccrual status, all interest previously
accrued but not collected is reversed against current period interest income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Cash collections on such loans are
applied as reductions of the loan principal balance and no interest income is
recognized on those loans until the principal balance has been collected.
Interest income on other nonaccrual loans is recognized only to the extent of
interest payments received.
Nonrefundable loan fees and related direct costs are deferred and the net amount
is amortized to income as a yield adjustment over the life of the loan using the
interest method.
The allowance for credit losses is maintained at a level that, in management's
judgment, is adequate to absorb credit losses inherent in the credit extension
process. Management's evaluation of the loan portfolio considers current
economic conditions, past loss experience, specific impaired loans and such
other factors as, in management's best judgment, deserve recognition in
estimating credit losses. Allowances for impaired loans are generally based on
collateral values or the present value of estimated cash flows. Uncertainties
inherent in the estimation process, might cause management's estimate of credit
losses in the loan portfolio and the related allowance to change in the near
term. The provisions for credit losses included in the consolidated statements
of income serve to maintain the allowance at a level which management considers
adequate.
Bank premises and equipment:
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. The provision for depreciation is computed using straight-line and
accelerated methods based on the estimated useful lives of the assets which
range from 5 to 75 years for bank premises and 5 to 25 years for equipment.
Leasehold improvements are amortized over the lesser of the terms of the leases
or their estimated useful lives. Expenditures for improvements which extend the
life of an asset are capitalized and depreciated over the asset's remaining
useful life. Gains or losses realized on the disposition of properties and
equipment are reflected in the consolidated statements of income. Expenditures
for repairs and maintenance are charged to operating expenses as incurred.
Foreclosed properties:
Foreclosed properties include properties that have been acquired in complete or
partial satisfaction of debt. These properties are initially recorded at fair
value on the date of acquisition, establishing a new cost basis. Any write-downs
at the time of acquisition are charged to the allowance for credit losses.
Subsequent to acquisition, a valuation allowance is established, if necessary,
to report these assets at the lower of (a) fair value minus estimated costs to
sell or (b) cost. Gains and losses realized on the sale, and any adjustments
resulting from periodic revaluation of this property are included in noninterest
income or expense, as appropriate. Net costs of maintaining and operating the
properties are expensed as incurred.
Goodwill:
Goodwill represents the excess of the cost of companies acquired over the fair
value of their net assets at dates of acquisition and is being amortized on the
straight-line method over 25 years.
30
<PAGE>
Income taxes:
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of non-taxable income such as interest on state
and municipal securities) and deferred taxes on temporary differences between
the amount of taxable income and pretax financial income and between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Per share amounts:
Per share amounts are based on the weighted average number of shares outstanding
during each year or 5,381,797 shares for 1996, 5,346,481 shares for 1995 and
5,355,756 shares for 1994.
Fair value of financial instruments:
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. When no market exists for the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage banking
operation, depositor relationships, deferred tax assets, and property, plant and
equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates. As a result,
the estimates are only indicative of individual financial instruments' values
and should not be considered an indication of the fair value of the combined
Company taken as a whole.
Reclassifications:
Certain reclassifications to prior year balances have been made in the
accompanying consolidated financial statements to make disclosures consistent
with those of the current year.
Note 2. Acquisitions:
On March 24, 1995, the Company acquired ENB Financial Corporation ("ENB") in
exchange for approximately 526,000 shares of the Company's common stock. ENB was
the holding company for Elkridge Bank, a commercial bank located in Elkridge,
Maryland. The Company's 1995 consolidated statements of income include total
income and net income of ENB for the period during 1995 prior to its acquisition
totaling $1,600,000 and $145,000, respectively.
On January 26, 1996, the Company acquired Laurel Bancorp, Inc. ("Laurel") in
exchange for approximately 1,321,000 shares of the Company's common stock.
Laurel was the holding company for Laurel Federal Savings Bank ("Laurel FSB"), a
thrift institution with branch offices in Laurel and Monrovia, Maryland.
Pursuant to the terms of this merger, Laurel FSB was merged with and into
Elkridge Bank and the branch of Laurel FSB located in Monrovia, Maryland was
transferred to FCNB Bank. Laurel's fiscal year ended on November 30, 1995. The
Company's 1996 consolidated statements of income include total income and net
income of Laurel for the period from December 1, 1995 through the date of its
acquisition in 1996 totaling $1,510,000 and $261,000, respectively.
The acquisitions of ENB and Laurel have been accounted for using the pooling of
interest method. Accordingly, the Company's consolidated financial statements
for the periods presented have been restated to include the accounts and
operations of ENB and Laurel. Certain reclassifications have been made to ENB
and Laurel's historical financial statements to conform with the Company's
presentation.
31
<PAGE>
On April 30, 1996, the Company acquired all of the outstanding shares of common
stock of Harbor Investment Corporation ("Harbor") for a cash price of
approximately $6.7 million. Harbor was the holding company of Odenton Federal
Savings and Loan Association, a thrift institution located in Odenton, Maryland.
This acquisition has been accounted for under the purchase method of accounting
and the results of the operations of Harbor have been included in the
consolidated financial statements since the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired of $3.2 million,
was recognized as goodwill and is being amortized on a straight-line basis over
25 years. Amortization expense charged to operations for 1996 was approximately
$85,000.
The following tables present the combined and separate results of operations for
ENB, Laurel and the Company for the periods preceding the acquisitions of ENB
and Laurel and, additionally reflect the unaudited pro forma consolidated
results of operations of the Company and Harbor as if its acquisition had
occurred on January 1, 1995.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Total Net Net Income
(dollars in thousands, except per share data) Income Income Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1994
<S> <C> <C>
ENB $ 5,683 $ 136
Laurel 8,673 1,479
Company 32,414 5,157 $1.45
- ------------------------------------------------------------------------------------------------------------------------------------
Combined $46,770 $6,772 $1.26
====================================================================================================================================
Year ended December 31, 1995
Laurel $ 9,395 $1,248
Company 45,649 5,750 $1.41
- ------------------------------------------------------------------------------------------------------------------------------------
Combined 55,044 6,998 1.31
Harbor 2,801 255
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma (unaudited) $57,845 $7,253 $1.36
====================================================================================================================================
Year ended December 31, 1996
Company $58,914 $5,867 $1.09
Harbor 1,037 81
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma (unaudited) $59,951 $5,948 $1.11
====================================================================================================================================
</TABLE>
The unaudited pro forma results in the preceding tables have been prepared for
comparative purposes only and include certain adjustments, such as additional
depreciation expense as a result of a step-up in basis of fixed assets and
additional amortization expense as a result of goodwill. They do not purport to
be indicative of the results of operations which actually would have resulted
had the combination been in effect on January 1, 1995, or of future results of
operations of the consolidated entities.
Merger-related expenses in the consolidated statements of income principally
include costs for investment bankers, professional fees, severance payments to
terminated employees, assessments to recapitalize the Savings Association
Insurance Fund and other conversion costs.
Note 3. Compensating balances:
Compensating balance arrangements exist with various correspondent banks. These
noninterest-bearing deposits are maintained in lieu of cash payments for
standard bank services. The required balances amounted to $74,000 at December
31, 1996 and $99,000 at December 31, 1995. In addition, for the reserve
maintenance period in effect at December 31, 1996 and 1995, the Banks were
required to maintain average daily balances totaling $5,392,000 and $4,074,000
respectively, with the Federal Reserve Bank.
Note 4. Investments:
The amortized cost and estimated fair value of securities being held to maturity
at December 31, 1996 and 1995 are as follows:
32
<PAGE>
<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
====================================================================================================================================
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other U.S.
government agencies and corporations $14,507 $ 37 $137 $14,407
State and political subdivisions 8,329 681 -- 9,010
Mortgage-backed debt securities 35,675 510 410 35,775
- ------------------------------------------------------------------------------------------------------------------------------------
$58,511 $1,228 $547 $59,192
====================================================================================================================================
The amortized cost and estimated fair value of securities available for sale at
December 31, 1996 and 1995 are as follows:
Available-for-sale portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasury and other U.S.
government agencies and corporations $ 34,300 $ 379 $ 42 $ 34,637
Mortgage-backed debt securities 107,741 636 628 107,749
Corporate Bonds 6,925 56 32 6,949
Equity securities 13,080 457 12 13,525
- ------------------------------------------------------------------------------------------------------------------------------------
$162,046 $1,528 $714 $162,860
====================================================================================================================================
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other U.S.
government agencies and corporations $12,423 $ 53 $116 $12,360
State and political subdivisions 600 5 -- 605
Mortgage-backed debt securities 62,991 1,046 407 63,630
Equity securities 7,135 257 -- 7,392
- ------------------------------------------------------------------------------------------------------------------------------------
$83,149 $1,361 $523 $83,987
====================================================================================================================================
The amortized cost and estimated fair value of securities being held to maturity
and those available for sale at December 31, 1996 by contractual maturity, are
as follows:
33
<PAGE>
Held-to-maturity Available-for-sale
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Due in one year or less $ 985 $ 1,017 $ -- $ --
Due after one through five years 4,081 4,169 27,623 27,834
Due after five years through ten years 4,835 5,194 13,602 13,752
Due after ten years 352 364 -- --
Mortgage-backed debt securities 23,272 22,996 107,741 107,749
Equity securities -- -- 13,080 13,525
- ------------------------------------------------------------------------------------------------------------------------------------
$33,525 $33,740 $162,046 $162,860
====================================================================================================================================
Actual maturities may differ from the contractual maturities reflected in the
preceding table because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Mortgage-backed securities
have no stated maturity and primarily reflect investments in various
Pass-through and Participation Certificates issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation,
respectively. Repayment of mortgage-backed securities is affected by the
contractual repayment terms of the underlying mortgages collateralizing these
obligations and the current level of interest rates.
Included in the investment portfolio at December 31, 1996 and 1995, are
securities carried at $96,718,000 and $51,144,000, respectively, which are
pledged to secure public deposits, securities sold under agreements to
repurchase and for other purposes as required and permitted by law.
On December 29, 1995, the Company transferred $23,751,000 of securities at
amortized cost, having an unrealized gain of $336,000, from the held-to-maturity
portfolio into the available-for-sale portfolio. This transfer has been handled
in accordance with the special provisions related to the one-time transfer of
investment securities as allowed by the Financial Accounting Standards Board.
The Company took advantage of this opportunity to reposition its investment
portfolios to enhance its ability to react to changes in the securities market
and its liquidity needs.
Gross realized gains and losses from the sale of securities available for sale
were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Realized gains $ 523 $214 $471
====================================================================================================================================
Realized (losses) $(330) $(91) $ (96)
====================================================================================================================================
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Note 5. Loans and allowance for credit losses:
Loans are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Real estate loans:
Construction and land development $ 55,614 $ 38,043
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans:
Secured by farmland 3,154 4,129
Secured by 1 to 4 family residential
properties 182,907 177,912
Secured by multi-family (5 or more)
residential properties 6,935 8,214
Secured by commercial properties 142,788 108,859
- ------------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 335,784 299,114
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans secured by real estate 391,398 337,157
Commercial and industrial loans 51,454 48,825
Industrial revenue bonds 36 81
Loans to farmers 1,025 761
Loans to individuals for household, family
and other personal expenditures 54,478 53,900
- ------------------------------------------------------------------------------------------------------------------------------------
$498,391 $440,724
====================================================================================================================================
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was $123,621,000 and $141,887,000 at December 31, 1996 and
1995, respectively.
Transactions in the allowance for credit losses are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of year $5,242 $4,691 $4,219
Provision for credit losses 318 710 525
Recoveries 100 50 108
Other transfers and allowance on loans
acquired with purchased entity 462 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
6,122 5,451 4,852
Credits charged-off (999) (209) (161)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $5,123 $5,242 $4,691
====================================================================================================================================
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Impaired loans with specific allocation of allowance for credit losses $1,670 $1,650
Specific allocation of allowance for credit losses 427 296
Other impaired loans 2,230 218
Average recorded investment in impaired loans 5,540 2,270
Interest income recognized on impaired loans based on cash
payments received 205 233
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Additional information concerning the Company's recorded investment in
nonaccrual loans, for which impairment had not been recognized are as follows:
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Nonaccrual loans $731 $664
Interest income not recognized due to loans in nonaccrual status 73 12
- ------------------------------------------------------------------------------------------------------------------------------------
Note 6. Bank premises and equipment:
Bank premises and equipment consist of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Bank premises and leasehold improvements $21,733 $21,099
Equipment 8,879 6,939
- ------------------------------------------------------------------------------------------------------------------------------------
30,612 28,038
Less accumulated depreciation and amortization 7,921 8,041
- ------------------------------------------------------------------------------------------------------------------------------------
$22,691 $19,997
====================================================================================================================================
Depreciation and amortization charged to operations amounted to $1,369,000 for
1996, $1,029,000 for 1995 and $1,027,000 for 1994.
Note 7. Deposits:
Certificates of deposit and other time deposits issued in denominations of
$100,000 or more totaled $50,251,000 and $45,323,000 at December 31, 1996 and
1995, respectively, and are included in interest-bearing deposits in the
consolidated balance sheets.
At December 31, 1996, the amount outstanding and maturity distribution of
certificates of deposit are presented in the following table:
- ------------------------------------------------------------------------------------------------------------------------------------
Certificates of Deposit
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Maturing:
1997 $200,376
1998 48,475
1999 16,365
2000 18,237
2001 1,677
Thereafter 33
- ------------------------------------------------------------------------------------------------------------------------------------
$285,163
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Interest on deposits consists of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
NOW and SuperNOW accounts $ 1,180 $ 1,195 $ 1,124
Savings accounts 2,632 2,497 2,457
Money market accounts 2,625 2,852 2,848
Certificates of deposit and other time
deposits less than $100,000 11,887 10,135 6,583
Certificates of deposit and other time
deposits of $100,000 or more 2,267 2,846 1,614
- ------------------------------------------------------------------------------------------------------------------------------------
20,591 19,525 14,626
Less capitalized construction period interest 42 164 --
- ------------------------------------------------------------------------------------------------------------------------------------
$20,549 $19,361 $14,626
====================================================================================================================================
Note 8. Short-term borrowings:
The Company purchases federal funds and enters into sales of securities under
agreements to repurchase the same securities, which generally mature within one
to ninety days from the transaction date. Securities pledged as collateral for
securities sold under agreements to repurchase include various debt securities
having an aggregate amortized cost book value of $47,649,000 and $33,800,000 at
December 31, 1996 and 1995, respectively.
Other short-term borrowings primarily reflect the amount borrowed under a
secured lending arrangement with the Federal Home Loan Bank of Atlanta, which is
secured by a blanket lien on all real estate mortgage loans secured by 1 to 4
family residential properties.
The Company's unused lines of credit for short-term borrowings totaled
$28,552,000 at December 31, 1996.
Selected information on short-term borrowings is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Federal funds purchased and securities sold under agreement to repurchase:
Total outstanding at year-end $40,739 $21,043
====================================================================================================================================
Average amount outstanding during year $24,815 $18,928
====================================================================================================================================
Maximum amount outstanding at any month-end $43,714 $28,237
====================================================================================================================================
Weighted average interest rate at year-end 5.43% 5.65%
====================================================================================================================================
Weighted average interest rate for the year 5.47% 5.93%
====================================================================================================================================
Other short-term borrowings:
Total outstanding at year-end $76,516 $32,426
====================================================================================================================================
Average amount outstanding during year $46,626 $32,246
====================================================================================================================================
Maximum amount outstanding at any month-end $76,516 $50,382
- -=================================================================================================================================--
Weighted average interest rate at year-end 5.59% 5.91%
====================================================================================================================================
Weighted average interest rate for the year 5.85% 5.84%
====================================================================================================================================
</TABLE>
37
<PAGE>
Note 9. Long-term debt:
On May 31, 1995, the Company entered into a secured lending arrangement with a
regional national bank to finance the cost of its new corporate headquarters
facility in Frederick, Maryland (the "Facility"). The loan was secured and
provided for interest at a fluctuating rate equal to the daily London Interbank
Offered Rate for one-month U.S. Dollar deposits (LIBOR), plus 1.35%. On December
19, 1996 this loan was paid in full. On December 31, 1995 a balance was
outstanding of $4,680,000, bearing interest at a rate of 7.32%. The interest
paid on this loan totaled $394,000 in 1996 and $136,000 in 1995. In 1996 and
1995 $66,000 and $136,000, respectively of the interest paid was capitalized as
part of the cost of the Facility.
At December 31, 1995, the Company had $1,000,000 in outstanding advances from
the Federal Home Loan Bank that were due in March, 1997, bearing interest at the
rate of 7.35%. These advances were primarily secured by a blanket lien on all
real estate mortgage loans secured by 1-4 family residential properties.
Note 10. Leasing arrangements:
The Company leases branch office facilities under noncancellable operating lease
arrangements whose terms do not extend beyond November 2009. These leases
contain options which enable the Company to renew the leases at fair rental
value for periods of 3 to 10 years. In addition to minimum rentals, certain
leases have escalation clauses based upon various price indices and include
provisions for additional payments to cover taxes, insurance and maintenance.
The total minimum rental commitment, including renewal periods under these
leases at December 31, 1996 is outlined below:
- --------------------------------------------------------------------------------
Years ending December 31, (dollars in thousands)
1997 $ 392
1998 309
1999 305
2000 297
2001 290
Later years 2,244
- --------------------------------------------------------------------------------
$3,837
================================================================================
Rent expense included in occupancy expenses amounted to $555,000 for 1996,
$532,000 for 1995, and $492,000 for 1994.
Note 11. Employee benefit plans:
401(k) profit sharing plan:
The Company has a Section 401(k) profit sharing plan covering employees meeting
certain eligibility requirements as to minimum age and years of service.
Employees may make voluntary contributions to the Plan through payroll
deductions on either a pre-tax or after-tax basis. The Company makes
discretionary contributions to the Plan based on the Company's earnings. The
Company's contributions are subject to a vesting period based upon the
completion of five years of service with the Company, at which time they are
fully vested. A participant's account under the Plan, together with investment
earnings thereon, is normally distributable, following retirement, death,
disability or other termination of employment, in a single lump-sum payment.
The Company's annual contribution to the Plan totaled $357,000 in 1996, $300,000
in 1995 and $266,000 in 1994.
Deferred compensation plans:
The Company maintains deferred compensation plans for certain key executives and
its directors. The Plans provide for a maximum ten year period of supplemental
retirement income for the Plan's participants. Amounts to be paid by the Company
under this Plan will be recovered through life insurance policies purchased on
the lives of the participants. The expense for the deferred compensation plans
is included in the consolidated statements of income and totaled $175,000,
$149,000 and $128,000 for 1996, 1995, and 1994, respectively.
Stock option plan:
The Company has a stock option plan for key employees, which is accounted for in
accordance with Accounting Principles Board (APB) Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations. In connection with the
stock options granted under
38
<PAGE>
this Plan, additional restricted stock grants for 16,453 shares at December 31,
1996, may be awarded at no additional cost to the Plan's participants.
Restricted stock, subject to a a three year restriction period and certain other
conditions, is awarded to the Plan's participants following their purchase of
the shares granted under the stock option plan. Compensation expense, reflecting
the fair value of the restricted shares on the date the stock options were
initially granted, is recognized ratably over a four year period, commencing on
the date the stock options were granted and ending with the expiration of the
three year restriction period. Compensation expense recognized under this Plan
for years ended December 31, 1996, 1995, and 1994 totaled $52,000, $35,000, and
$19,000, respectively. Had compensation expense been determined based on the
fair value of each option granted on the date of grant using an option-pricing
model as prescribed in FASB Statement 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995
- -----------------------------------------------------------------------------------------------
Net Income:
<S> <C> <C>
As reported $5,867 $6,998
Pro forma $5,678 6,998
Earnings per share:
As reported $1.09 $1.31
Pro forma $1.06 $1.31
- -----------------------------------------------------------------------------------------------
The Plan provides that 413,438 shares of the Company's common stock will be
reserved for the granting of both incentive stock options (ISO) and
non-qualified stock options (NQSO) to purchase these shares. At December 31,
1996, reserved shares remaining for future grants under this plan totaled
297,503. The exercise price per share for incentive stock option and
non-qualified stock options shall be not less than the fair market vale of a
share of commong stock on the date on which such ISO or NQSO is granted, subject
to adjustments for the effects of any stock splits or stock dividends, and may
be exercised commencing after one year from the date of grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
- -----------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995
- -----------------------------------------------------------------------------------------------
Dividend Yield 2.5% 2.5%
Expected Volatility 49.66% 53.87%
Risk Free Interest Rate 5.585% 6.420%
Expected Life, in years 10 10
- -----------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $10.37 $10.87
===============================================================================================
The following is a summary of transactions during the three years ended December
31, 1996, 1995 and 1994.
- ----------------------------------------------------------------------------------------------------
Options Issued Weighted-Average
and Outstanding Exercise Price
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1993 169,459 $6.70
- ----------------------------------------------------------------------------------------------------
Exercised (3,482) 11.49
Terminated (6,362) 13.15
Granted 17,059 18.22
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1994 176,674 7.49
- ----------------------------------------------------------------------------------------------------
Exercised (28,480) 4.57
Granted 19,021 21.00
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1995 167,215 9.52
- ----------------------------------------------------------------------------------------------------
Exercise (96,199) 4.65
Terminated (780) 17.02
Granted 21,287 20.50
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 91,523 $17.13
=====================================================================================================
At December 31, 1996, the 91,523 options issued and outstanding had exercise
prices ranging from $6.58 to $21.00 and had a weighted-
39
average remaining contractual life of 68 months. Of those options issued and
outstanding, there were 70.236 and 148,194 options exercisable with
weighted-average exercise prices of $16.11 and $8.05 at December 31, 1996 and
1995, respectively.
Note 12. Income taxes:
Significant components of the Company's deferred tax assets and liabilities are
as follows:
- ----------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------
(dollars in thousands)
Provision for credit losses $1,612 $1,779
Net securities losses 250 250
Income from CMO residual interests 18 46
Deferred compensation 438 393
Postretirement benefits251 248
Provision for foreclosed properties 204 86
Deferred Fees 704 629
Other 280 180
- ----------------------------------------------------------------------------------------------------
Total deferred tax asset 3,757 3,611
Valuation allowance for deferred tax assets -- --
- ----------------------------------------------------------------------------------------------------
Deferred tax assets after valuation allowance 3,757 3,611
- ----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities available for sale 308 307
Other 178 243
- ----------------------------------------------------------------------------------------------------
Total deferred tax liabilities 486 550
- ----------------------------------------------------------------------------------------------------
Net deferred tax assets $3,271 $3,061
====================================================================================================
</TABLE>
40
<PAGE>
A reconciliation of the maximum statutory income tax to the provision for income
taxes attributable to continuing operations included in the consolidated
statements of income, is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Income before income tax $9,112 $10,886 $10,044
Tax rate 35% 35% 35%
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax at statutory rate 3,189 3,810 3,515
Increases (decreases)
in tax resulting from:
Tax-exempt interest income (160) (394) (605)
State income taxes, net of federal
income tax benefit 267 367 330
Benefit of federal surtax exemption (82) (92) (80)
Other 31 197 112
- ------------------------------------------------------------------------------------------------------------------------------------
$3,245 $ 3,888 $ 3,272
====================================================================================================================================
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Taxes currently payable:
Federal $2,923 $3,440 $2,734
State 447 658 538
- ------------------------------------------------------------------------------------------------------------------------------------
Total taxes currently payable 3,370 4,098 3,272
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities (benefits):
Federal (102) (170) 15
State (23) (40) (15)
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax
liabilities (benefits) 125 (210) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $3,245 $3,888 $3,272
====================================================================================================================================
Included in the above amounts are income taxes of $75,000 in 1996, $48,000 in
1995, and $145,000 in 1994 related to net security gains.
Note 13. Other operating expenses:
Other operating expenses in the consolidated statements of income include the
following:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
FDIC and general insurance $ 410 $ 897 $1,274
Professional and directors fees 1,284 1,122 1,062
Advertising and public relations 890 703 682
Credit and collection expense 252 134 183
Postage and supplies 1,059 914 825
Net loss on foreclosed properties 83 352 347
Other 1,988 1,950 1,719
- ------------------------------------------------------------------------------------------------------------------------------------
$5,966 $6,072 $6,092
====================================================================================================================================
41
<PAGE>
Changes in the allowance for foreclosed properties are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of year $536 $286 $325
Provision charged to income -- 352 261
Losses charged to the allowance (32) (102) (300)
Other transfers net of allowance on properties
acquired with purchased entity (112) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $392 $536 $286
====================================================================================================================================
Note 14. Shareholders' equity:
</TABLE>
Dividends:
The amount of dividends that the Company's affiliates can pay to the Company
without approval from the Federal Reserve Board during 1997 is limited to their
net profits for 1997, plus $5,596,000.
Preferred stock:
The Board of Directors has the authority to issue preferred stock in one or more
classes or series, with such designations, voting powers, preferences,
participation, redemption, sinking fund, conversion, dividend and other optional
or special rights, and such restrictions, limitations and qualifications as the
Board of Directors may determine.
Repurchase plan:
On March 28, 1996, the Board of Directors authorized a stock repurchase program.
Pursuant to the terms of this program, the Company may repurchase up to 80,000
shares of its common stock in open market transactions during the two year
period ending March 27, 1998. Not more than 120,000 additional shares of common
stock can be repurchased between March 28, 1998 and March 27, 2001. All
repurchases are limited to an aggregate maximum expenditure of approximately
$4,000,000. Repurchases will be made in the open market, from time to time, in
the discretion of management, based upon market, business, legal, regulatory,
accounting and other factors. There is no minimum number of shares which the
Company is obligated to repurchase. The total number of shares purchased was
30,000 as of December 31, 1996.
Capital:
The Company and Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and Banks must meet specific capital guidelines that involve
quantitative measures of the Company's and Banks' assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes that the Company
and Banks meet all capital adequacy requirements to which it is subject as of
December 31, 1996.
As of December 31, 1996, the most recent notification from the regulatory agency
categorized the Banks as adequately capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately capitalized the
Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification which management believes have changed the Bank's
category.
42
<PAGE>
The Company and Banks' actual capital amounts and ratios are also presented in
the following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996: (dollars in thousands)
- -----------------------
Total Capital
(to Risk-Weighted Assets):
<S> <C> <C> <C> <C> <C> <C>
FCNB Corp $70,221 13.57% $41,384 8.0% N/A N/A
FCNB Bank $40,220 10.79% $29,811 8.0% $37,264 10.0%
Elkridge Bank $21,728 15.24% $11,405 8.0% $14,257 10.0%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $65,098 12.58% $20,692 4.0% N/A N/A
FCNB Bank $37,007 9.93% $14,906 4.0% $22,359 6.0%
Elkridge Bank $19,907 13.96% $5,703 4.0% $8,554 6.0%
Tier I Capital
(To Average Assets):
FCNB Corp $65,098 8.74% $22,351 3.0% N/A N/A
FCNB Bank $37,007 7.10% $15,641 3.0% $26,068 5.0%
Elkridge Bank $19,907 9.16% $6,516 3.0% $10,861 5.0%
As of December 31, 1995:
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $64,087 14.12% $36,309 8.0% N/A N/A
FCNB Bank $39,346 11.63% $27,070 8.0% $33,837 10.0%
Elkridge Bank $25,955 22.71% $9,144 8.0% $11,431 10.0%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $58,845 12.97% $18,154 4.0% N/A N/A
FCNB Bank $35,838 10.59% $13,535 4.0% $20,302 6.0%
Elkridge Bank $24,526 21.46% $4,572 4.0% $6,858 6.0%
Tier I Capital
(To Average Assets):
FCNB Corp $58,845 8.91% $19,811 3.0% N/A N/A
FCNB Bank $35,838 7.83% $13,732 3.0% $22,887 5.0%
Elkridge Bank $24,526 12.56% $5,857 3.0% $9,762 5.0%
====================================================================================================================================
</TABLE>
N/A = Not applicable
Dividend reinvestment plan:
The Company maintains a Dividend Reinvestment and Stock Purchase Plan for all
Shareholders of the Company. This Plan provides that 165,375 shares of the
Company's common stock will be reserved for issuance under the Plan. At December
31, 1996, reserved shares remaining for future issuance under this plan totaled
81,821. The terms of this Plan allow participating Shareholders to purchase
additional shares of common stock in the Company by reinvesting the dividends
paid on shares registered in their name, by making optional cash payments, or
both. Shares purchased under the Plan with reinvested dividends can be acquired
at 97% of current market prices. Shares
43
<PAGE>
purchased under the optional cash payment method can be purchased at current
market prices. Optional cash payments to this Plan are limited and may not
exceed $2,500 in any calendar quarter.
Contributions to the Plan will be used by a designated agent to acquire common
shares of the Company at current market prices. The Company reserves the right
to amend, modify, suspend or terminate this Plan at any time at its discretion.
Special Bad Debt Deduction:
The thrift institutions acquired by the Company were allowed special bad debt
deductions limited generally to 8% of otherwise taxable income for the year
beginning December 1, 1987 and thereafter. If the amounts which qualify as
deductions for income tax purposes are later used for purposes other than to
absorb loan losses, including distributions in liquidation, they will be subject
to income tax at the applicable current rates. Retained earnings at December 31,
1996, 1995, and 1994 include $4,136,000, for which no provision for income tax
has been provided. The unrecorded deferred income tax liability on the above
amount was approximately $1,601,000.
Note 15. Fair value of financial instruments:
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards No. 107, the estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $44,526 $44,526 $ 46,363 $ 46,363
Loans held for sale 3,162 3,162 2,362 2,362
Investment securities 196,385 196,600 142,498 143,179
Net loans 492,872 496,564 434,552 441,333
- ------------------------------------------------------------------------------------------------------------------------------------
Total financial assets $736,945 $740,852 $625,775 $633,237
====================================================================================================================================
FINANCIAL LIABILITIES
Deposits $587,074 $587,832 $529,988 $533,110
Short-term borrowings 117,255 116,360 53,469 53,323
Long-term debt -- -- 5,680 5,680
- ------------------------------------------------------------------------------------------------------------------------------------
Total financial liabilities $704,329 $704,192 $589,137 $592,113
====================================================================================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments as of December 31, 1996 and 1995:
Cash and cash equivalents:
The fair value of cash and cash equivalents is estimated to approximate the
carrying amounts.
Loans held for sale:
Fair value is estimated to equal the carrying amount due to their short holding
period.
Investment securities:
Fair values are based on quoted market prices.
Loans:
Fair values are estimated for portfolios of loans with similar financial
characteristics. Each portfolio is further segmented into fixed and adjustable
rate interest terms by performing and nonperforming categories.
44
<PAGE>
The fair value of performing loans with original maturities greater than one
year is calculated by discounting estimated cash flows using current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. The estimated cash flows do not anticipate
prepayments. The fair value of performing loans with original maturities of one
year or less is considered equal to the carrying amount.
Fair value for nonperforming loans is based on estimated cash flows which are
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount rates
are judgmentally determined using available market information and specific
borrower information.
Management has made estimates of fair value discount rates that it believes to
be reasonable. However, because there is no market for many of these financial
instruments, management has no basis to determine whether the fair value
presented for loans would be indicative of the value negotiated in an actual
sale.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW accounts and money market accounts, is equal to
the amount payable on demand at the reporting date (that is, their carrying
amounts). The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
Short-term borrowings:
The fair value of short-term borrowings is determined using rates currently
available to the Company for debt with similar terms and remaining maturities.
Long-term debt:
The fair value of long-term debt is considered to be the same as the carrying
amount since it is an adjustable interest rate instrument.
Note 16. Transactions with related parties:
In the normal course of banking business, loans are made to officers and
directors of the Company, as well as to their associates. Such loans are made in
the ordinary course of business with substantially the same terms (including
interest rates and collateral) as those prevailing at the time for comparable
transactions with other persons. They do not involve more than normal risk of
collectability or present other unfavorable features. An analysis of the
activity during 1996 is as follows:
- --------------------------------------------------------------------------------
(dollars in thousands)
Balance at December 31, 1995 $ 8,779
- --------------------------------------------------------------------------------
New loans 6,565
Repayments (6,790)
- --------------------------------------------------------------------------------
Balance at December 31, 1996 $ 8,554
================================================================================
A Director of the Company is president and a principal stockholder of a
construction firm which served as construction manager in connection with the
development of the Company's new headquarters facility. This firm was paid
approximately $300,000 to $400,000 in total compensation for its services on the
project, which had a total cost of $8.2 million.
Note 17. Commitments and Contingencies:
Financial instruments:
The Company is a party to financial instruments in the normal course of business
to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit, which
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the consolidated financial statements.
45
<PAGE>
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
A summary of the contract amounts of the Company's exposure under commitments to
extend credit, and standby letters of credit are as follows:
- --------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------
(dollars in thousands)
Financial instruments whose
amounts represent credit risk:
Commitments to extend credit $104,047 $73,406
Standby letters of credit 7,790 8,648
================================================================================
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Certain
commitments have fixed expiration dates, or other termination clauses, and may
require payment of a fee. Many of the commitments are expected to expire without
being drawn upon, accordingly, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral or other
security obtained, if deemed necessary by the Company upon extension of credit,
is based on management's credit evaluation. Collateral held varies but may
include deposits held in financial institutions; U.S. Treasury securities; other
marketable securities; accounts receivable; inventory; property and equipment;
personal residences; income-producing commercial properties and land under
development.
Personal guarantees are also obtained to provide added security for certain
commitments.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to guarantee the installation of real property improvements and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company holds collateral and obtains personal guarantees supporting those
commitments for which collateral or other security is deemed necessary.
Legal Proceedings:
The Company is subject to various legal proceedings which are incidental to the
ordinary course of business. In the opinion of the management of the Company,
there are no material pending legal proceedings to which the Company is a party
or which involves any of its property.
46
<PAGE>
Note 18. FCNB Corp (Parent Company) condensed financial information:
FCNB Corp (Parent Company)
Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
<S> <C> <C>
Cash $ 6,488 $ 1,557
Receivable from subsidiary banks 357 450
Investment securities available for sale-at fair value 2,034 855
Investment in subsidiaries 60,861 63,699
Other assets 187 190
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $69,927 $66,751
====================================================================================================================================
LIABILITIES AND Shareholders' EQUITY
Liabilities $ 817 $ 532
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock 5,365 5,298
Surplus 26,652 26,733
Retained earnings 36,589 33,658
Net unrealized gain (loss) on securities available for sale 504 530
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' equity 69,110 66,219
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and Shareholders' equity $69,927 $66,751
====================================================================================================================================
</TABLE>
FCNB Corp (Parent Company)
Statements of Income
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Income:
<S> <C> <C> <C>
Dividends from subsidiary banks $10,638 $3,382 $5,317
Net securities gains 82 47 308
Other income, principally interest 189 53 53
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 10,909 3,482 5,678
Expenses 843 634 573
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes
and equity in undistributed
(excess distributions of) earnings of subsidiaries 10,066 2,848 5,105
Provision for income taxes (benefits) (141) (92) (32)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
(excess distributions of) earnings of subsidiaries 10,207 2,940 5,137
Equity in undistributed (excess distributions of) earnings
of subsidiaries (4,340) 4,058 1,635
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 5,867 $6,998 $6,772
====================================================================================================================================
</TABLE>
47
<PAGE>
FCNB Corp (Parent Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $5,867 $6,998 $6,772
Adjustments to reconcile net income to
net cash provided by operating activities:
(Equity in undistributed) excess distribution of
earnings of subsidiaries 4,340 (4,058) (1,635)
Noncash charitable contribution 64 -- 31
Net securities gains (82) (47) (308)
Decrease (increase) in receivable from
subsidiary banks 93 1,258 (1,525)
Decrease in other assets 120 177 355
Increase in other liabilities 306 269 116
Other -- -- 10
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,708 4,597 3,816
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of investment securities
available for sale 140 68 414
Purchase of investment securities
available for sale (1,360) (173) (310)
Investment in subsidiary (1,490) (2,284) (500)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (2,710) (2,389) (396)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in short-term borrowings -- -- 6
Dividend reinvestment plan (11) (11) (13)
Proceeds from issuance of common stock 449 130 96
Repurchase of common stock (580) -- --
Cash dividends paid (2,925) (2,912) (2,480)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (3,067) (2,793) (2,391)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 4,931 (585) 1,029
Beginning cash 1,557 2,142 1,113
- ------------------------------------------------------------------------------------------------------------------------------------
Ending cash $6,488 $1,557 $2,142
====================================================================================================================================
Supplemental schedule of noncash investing and financing activities:
Surplus from stock options granted $117 $80 $41
====================================================================================================================================
Fair value adjustment for securities available
for sale, net of applicable deferred income tax effects $(36) $(58) $(293)
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value adjustment for securities available
for sale held in subsidiary banks,
net of deferred income tax effects $10 $2,738 $(2,992)
====================================================================================================================================
</TABLE>
48
<PAGE>
Note 19. Quarterly results of operations (unaudited):
The following is a summary of the Company's unaudited quarterly results of
operations.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 December 31 September 30(2) June 30 March 31(1)
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income $14,243 $13,832 $13,079 $13,499
Net interest income 7,501 7,424 7,209 7,505
Provision for credit losses 102 72 72 72
Net securities gains 22 10 96 65
Income before income taxes 2,939 1,950 2,855 1,368
Net income (loss) 1,902 2,921 1,853 (809)
Earnings (loss) per share .35 .55 .34 (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
1995 December 31 September 30(2) June 30 March 31(1)
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Interest income $12,864 $13,146 $12,894 $12,222
Net interest income 7,149 7,393 6,897 6,928
Provision for credit losses 432 23 112 143
Net securities gains 59 8 42 14
Income before income taxes 2,432 3,347 2,587 2,520
Net income 1,486 2,113 1,718 1,681
Earnings per share .28 .39 .32 .32
- ------------------------------------------------------------------------------------------------------------------------------------
(1) During the quarter ended March 31, 1996, the Company recognized a current period income tax provision totaling $1,601,000, for
the tax effects of certain pre-1988 tax reserves for bad debts originally deducted by Laurel.
(2) During the quarter ended September 30, 1996, certain tax laws were enacted that allowed the Company to reverse the provision for
income taxes recognized on certain pre-1988 tax reserves in the first quarter of 1996. Additionally, the Company was assessed
approximately $813,000 to recapitalize the Savings Association Insurance Fund (SAIF). The combined effect of these matters
served to increase net income in the third quarter of 1996 by approximately $1.1 million.
Market For Registrant's Common Equity And Related Stockholder Matters
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------------------------------------------------------------
Quarterly stock prices and dividends Price Range Dividend
High Low Declared
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $22.00 $17.75 $.12
Second Quarter 19.50 17.25 .14
Third Quarter 20.00 17.00 .14
Fourth Quarter 20.75 19.25 .14
- ------------------------------------------------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------------------------------------------------
Quarterly stock prices and dividends Price Range Dividend
High Low Declared
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter $20.50 $18.77 $.20
Second Quarter 21.00 18.50 .12
Third Quarter 21.50 19.50 .11
Fourth Quarter 22.00 19.75 .12
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The stock prices are the high and low sale prices as recorded on the NASDAQ
National Market. The Company trades on the NASDAQ National Market under the
symbol FCNB.
49
<PAGE>
<TABLE>
<CAPTION>
Number of shareholders of record, December 31, 1996 3,336
PRINCIPAL AFFILIATES
Balance Sheet
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996
(Dollars in thousands) Assets Liabilities and Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FCNB Bank Cash and due from banks $ 21,273 Total deposits $416,404
7200 FCNB Court Earning assets 505,262 Short-term borrowings 96,282
Frederick, MD 21703 Accrued interest and
(301) 662-2191 other liabilities
16 Offices Allowance for credit losses (3,213)
Other Assets 31,613 Shareholders' equity 37,747
--------------------------------------------------------------------------------------
Total liabilities
Other assets $554,935 and equity $554,935
--------------------------------------------------------------------------------------
Net income $5,435
- ------------------------------------------------------------------------------------------------------------------------------------
Elkridge Bank Cash and due from banks $ 9,750 Total deposits $177,159
6810 Deerpath Road Earning assets 203,749 Short-term borrowings 20,973
Suite #325 Accrued interest and
Elkridge, MD 21227 other liabilities 839
(410) 579-5800
5 Offices Allowance for credit losses (1,910)
Other Assets 10,500 Shareholders' equity 23,118
--------------------------------------------------------------------------------------
Total liabilities
Other assets $222,089 and equity $222,089
--------------------------------------------------------------------------------------
Net income $863
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Annual Meeting of Shareholders
Tuesday, April 15, 1997 - 7:00 p.m.
7200 FCNB Court
Frederick, Maryland 21703
Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone (800) 937-5449
50
<PAGE>
Analyst Contact
Mark A. Severson
Senior Vice President and Treasurer
Phone (301 or 800) 662-2191
Shareholder Contact
Kristen Howes
Senior Shareholders Relations Officer
Phone (301 or 800) 662-2191
Availability of 10-K Report
The annual report on Form 10-K filed with the Securities and Exchange Commission
is available without charge upon written request to: Mark A. Severson, Vice
President and Treasurer, FCNB CORP, 7200 FCNB Court, Frederick, Maryland 21703.
Profile
FCNB CORP is a two bank holding company organized under the laws of the State of
Maryland. FCNB Bank, a state-chartered commercial bank under the laws of the
State of Maryland was converted from a national bank in June 1993, and was
originally chartered in 1818. Elkridge Bank, a state-chartered commercial bank
under the laws of the State of Maryland was converted from a national bank in
March 1995, and was originally chartered in 1961. The Banks are engaged in a
general commercial and retail banking business serving individuals and
businesses in Frederick, Carroll, Howard, Prince George's, Anne Arundel and
Montgomery counties located in Maryland. The deposits of the Banks are insured
by the FDIC. FCNB Corp trades on the NASDAQ Stock market under the symbol
"FCNB".
The following brokers are registered as market makers of FCNB Corp Common Stock:
Ferris, Baker, Watts & Co. Ryan, Beck & Co.
365 West Patrick Street 3 Parkway
Frederick, MD 21701 Philadelphia, PA 19102
(301) 662-6488 (800) 342-2325
Legg Mason Wood Walker, Inc. Wheat First Securities, Inc.
30 West Patrick Street 18 West Patrick Street
Frederick, MD 21701 Frederick, MD 21701
(301) 663-8833 (301) 662-0002
(800) 456-7801
F.J. Morrisey & Co., Inc.
1700 Market Street, Suite 1420 Janney Montgomery Scott, Inc.
Philadelphia, PA 19102 1801 Market Street
(215) 563-8500 Philadelphia, PA 19103
(215) 665-6000
Sandler O'Neill & Partners, L.P.
Two World Trade Center Herzog, Heine, Geduld, Inc.
104th Floor 26 Broadway, 2nd Floor
New York, NY 10048 New York, NY 10004
(800) 635-6860 (212) 908-4000
51
<PAGE>
Corporate Headquarters
- ----------------------
Subsidiaries
------------
FCNB Corp (MD) FCNB Bank (MD)*
7200 FCNB Court 7200 FCNB Court
Frederick, Maryland 21703 Frederick, Maryland 21703
(301) 662-2191 (301) 662-2191
Elkridge Bank (MD)*
6810 Deerpath Road
Suite #325
Elkridge, Maryland 21227
(410) 579-5800
* The Banks are the principal subsidiaries of FCNB Corp as of December 31, 1996.
The voting securities of the Banks are owned entirely by FCNB Corp.
52
Exhibit 23
Keller Bruner & Company, L.L.C.
Certified Public Accountants
The Board of Directors
FCNB Corp
We consent to incorporation by reference of our report dated January 28, 1997
relating to the consolidated balance sheets of FCNB Corp and its subsidiaries of
December 31, 1996 and 1995, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
three year period ended December 31, 1996, which report appears on page 43 of
the 1996 FCNB Corp Annual Report, in this Annual Report on Form 10-K, and in the
following Registration Statements of FCNB Corp: Number 33-63092 on Form S-8 and
Number 33-55040 on Form S-3.
Keller Bruner & Company, L.L.C.
Frederick, Maryland
March 14, 1997
Exhibit 99C
Anderson Associates
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Laurel Bancorp, Inc.
Laurel, Maryland
We have audited the accompanying consolidated statement of the
financial condition of Laurel Bancorp, Inc. and Subsidiaries as of November 30,
1995, and the related statements of operations, shareholders' equity and cash
flows for each of the years in the two year period ended November 30, 1995.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Laurel
Bancorp, Inc. as of November 30, 1995, and the results of its operations and
cash flows for each of the years in the two year period ended November 30, 1995,
in conformity with generally accepted accounting principles.
Anderson Associates
January 17, 1996
Baltimore, Maryland
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FCNB CORP
(Registrant)
Date: March 11, 1997 By /s/A. Patrick Linton
- -------------------- ---------------------------------
A. Patrick Linton, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons in the capacities and on the dates
indicated:
PRINCIPAL EXECUTIVE OFFICER:
Date: March 11, 1997 /s/A. Patrick Linton
- -------------------- ------------------------------------
A. Patrick Linton, President,
Chief Executive Officer and
Director
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
Date: March 11, 1997 /s/Mark A. Severson
- -------------------- ------------------------------------
Mark A. Severson, Senior Vice
President and Treasurer
Date: March 11, 1997 /s/George B. Callan, Jr.
- -------------------- ------------------------------------
George B. Callan, Jr., Director
Date: March 11, 1997 /s/Miles M. Circo
- -------------------- ------------------------------------
Miles M. Circo, Director
Date: March 11, 1997 /s/Clyde C. Crum
- -------------------- ------------------------------------
Clyde C. Crum, Director
Date: March 11, 1997 /s/James S. Grimes
- -------------------- ------------------------------------
James S. Grimes, Director
<PAGE>
(SIGNATURES CONTINUED)
Date: March 11, 1997 /s/Bernard L. Grove, Jr.
- -------------------- ------------------------------------
Bernard L. Grove, Jr.,Director
Date: March 11, 1997 /s/Gail T. Guyton
- -------------------- ------------------------------------
Gail T. Guyton, Director
Date: March 11, 1997 /s/Frank L. Hewitt, III
- -------------------- ------------------------------------
Frank L. Hewitt, III, Director
Date: March 11, 1997 /s/Ramona C. Remsberg
- -------------------- ------------------------------------
Ramona C. Remsberg, Director
Date: March 11, 1997 /s/Jacob R. Ramsburg, Jr.
- --------------------------- ------------------------------------
Jacob R. Ramsburg, Jr., Director
Date: March 11, 1997 /s/Kenneth W. Rice
- -------------------- ------------------------------------
Kenneth W. Rice, Director
Date: March 11, 1997 /s/Rand D. Weinberg
- -------------------- ------------------------------------
Rand D. Weinberg, Director
Date: March 11, 1997 /s/DeWalt J. Willard, Jr.
- -------------------- ------------------------------------
DeWalt J. Willard, Jr., Director
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 31,023
<INT-BEARING-DEPOSITS> 1,065
<FED-FUNDS-SOLD> 12,438
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 162,860
<INVESTMENTS-CARRYING> 33,525
<INVESTMENTS-MARKET> 33,740
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0
0
<COMMON> 5,365
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<ALLOWANCE-DOMESTIC> 5,123
<ALLOWANCE-FOREIGN> 0
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</TABLE>
