SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission file number
June 30, 1997 015645
FCNB Corp
(Exact name of registrant as specified in its charter)
MARYLAND 521479635
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7200 FCNB Court, Frederick, Maryland 21703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(301) 6622191
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $1 par value per
share, 5,372,197 shares outstanding as of July 31, 1997.
1
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PART I FINANCIAL INFORMATION Item 1. Financial Statements
FCNB CORP AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited) (Unaudited)
(Dollars in thousands, except per share June 30, 1997 December 31, 1996
amounts)
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 30,506 $ 31,023
Interest-bearing deposits in other banks 828 1,065
Federal funds sold 16,918 12,438
- -----------------------------------------------------------------------------
Cash and cash equivalents 48,252 44,526
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Loans held for sale 26 3,162
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Investment securities held to maturity at
amortized cost-fair value of $40,115
in 1997 and $33,740 in 1996 39,947 33,525
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Investment securities available for sale -
at fair value 182,051 162,860
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Loans 533,635 498,391
Less: Allowance for credit losses (5,649) (5,123)
Unearned income (202) (396)
- -----------------------------------------------------------------------------
Net loans 527,784 492,872
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Bank premises and equipment 23,059 22,691
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Other assets 28,496 19,533
- -----------------------------------------------------------------------------
Total Assets 849,615 $779,169
=============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 78,920 $ 76,365
Interest-bearing deposits 529,271 510,709
- -----------------------------------------------------------------------------
Total deposits 608,191 587,074
- -----------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 38,090 40,739
Other short-term borrowings 126,140 76,516
Accrued interest and other liabilities 5,122 5,730
- -----------------------------------------------------------------------------
Total liabilities 777,543 710,059
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SHAREHOLDERS' EQUITY
Preferred stock, per share par value $1.00;
1,000,000 shares authorized; none outstanding -- --
Common stock, per share par value $1.00;
20,000,000 shares authorized; 5,358,560
shares issued and outstanding in 1997
and 5,364,560 in 1996 5,359 5,365
Surplus 26,492 26,652
Retained earnings 39,034 36,589
Net unrealized gain on securities
available for sale 1,187 504
- --------------------------------------------------------------------------------
Total shareholders' equity 72,072 69,110
- --------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $849,615 $779,169
================================================================================
2
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<TABLE>
<CAPTION>
FCNB CORP AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended June 30, 1997 and 1996
(Dollars in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------
For Three Months For Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $11,831 $10,404 $23,181 $21,173
Interest and dividends on investments:
Taxable 3,250 2,187 6,206 4,291
Tax exempt 90 135 184 284
Dividends 141 138 290 258
Interest on federal funds 97 180 249 460
Other interest income 38 35 71 112
- ---------------------------------------------------------------------------------------------------
Total interest income 15,447 13,079 30,181 26,578
- ---------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 5,481 4,945 10,748 10,170
Interest on federal funds purchased and
securities sold under agreements to
repurchase 553 217 1,221 507
Interest on other short-term borrowings 1,352 580 2,373 1,041
Interest on long-term debt -- 128 -- 146
- ---------------------------------------------------------------------------------------------------
Total interest expense(1) 7,386 5,870 14,342 11,864
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Net interest income 8,061 7,209 15,839 14,714
Provision for credit losses 231 72 462 144
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Net interest income after provision
for credit losses 7,830 7,137 15,377 14,570
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Noninterest income:
Service fees 715 610 1,342 1,176
Net securities gains 57 96 144 161
Gain on sale of loans 88 133 236 222
Other operating income 592 336 1,023 629
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Total noninterest income 1,452 1,175 2,745 2,188
- ---------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 3,134 2,838 6,237 5,659
Occupancy expenses 524 643 1,144 1,245
Equipment expenses 478 432 1,001 800
Merger related expenses 109 26 460 1,900
Other operating expenses 1,619 1,518 3,240 2,931
- ---------------------------------------------------------------------------------------------------
Total noninterest expenses 5,864 5,457 12,082 12,535
- ---------------------------------------------------------------------------------------------------
Income before provision for income taxes 3,418 2,855 6,040 4,223
- ---------------------------------------------------------------------------------------------------
Provision for income taxes:
Income tax expense 1,211 1,002 1,983 1,578
Deferred income tax effect of pre-1988 thrift
Reserve for credit losses -- -- -- 1,601
- ---------------------------------------------------------------------------------------------------
Provision for income taxes 1,211 1,002 1,983 3,179
===================================================================================================
Net Income $2,207 $1,853 $4,057 $1,044
===================================================================================================
Net income per share $0.41 $0.34 $0.76 $0.19
===================================================================================================
Dividends declared per share $0.15 $0.14 $0.30 $0.26
===================================================================================================
Weighted average number
of shares outstanding 5,358,560 5,387,854 5,360,880 5,389,317
==================================================================================================
(1) Total interest expense has been reduced by $12,000 and $108,000 for
capitalized construction period interest for the three and six month periods
ended June 30, 1996, respectively, while no adjustment was required for the
three and six month periods ended June 30, 1997.
</TABLE>
3
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<TABLE>
<CAPTION>
FCNB CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(Dollars in thousands)
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,057 $1,044
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 725 688
Provision for credit losses 462 144
Provision for deferred income taxes (benefits) (91) 20
Net premium amortization (discount accretion)
on investment securities -- 23
Accretion of net loan origination fees (318) (270)
Net securities gains (144) (161)
Net loss on disposition of bank
premises and equipment -- 10
Net gain on sale of foreclosed properties -- (19)
Decrease (Increase) in other assets (9,087) (1,846)
Decrease (Increase) in loans held for sale(1) 3,136 (9)
Increase (Decrease) in accrued interest and other liabilities (608) (150)
- -------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (1,868) (526)
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities - available for sale 29,157 1,095
Proceeds from maturities of investment securities - available for sale 21,464 6,622
Proceeds from maturities of investment securities - held to maturity 2,641 8,984
Purchases of investment securities - available for sale (77,602) (41,433)
Purchases of investment securities - held to maturity -- (2,493)
Net decrease (increase) in loans (35,213) (29,256)
Purchases of bank premises and equipment (1,033) (3,932)
Investment in foreclosed properties (183) (867)
Proceeds from dispositions of foreclosed properties 70 193
- -------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (60,699) (61,087)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing
deposits, NOW accounts, money market accounts, and
savings accounts (1,514) 13,665
Net increase in time deposits 22,631 25,168
Net increase (decrease) in short-term borrowings 46,975 18,698
Proceeds from long-term debt -- 500
Proceeds from sale of stock 26 423
Repurchase of common stock (213) (183)
Dividend reinvestment plan -- (7)
Dividends paid (1,612) (1,418)
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 66,293 56,846
- -------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 3,726 (4,767)
Cash and cash equivalents:
Beginning of period 44,526 46,363
- -------------------------------------------------------------------------------------------------------
End of period $48,252 $41,596
=======================================================================================================
(Continued)
4
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FCNB CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(Dollars in thousands)
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental disclosures:
Interest paid $13,906 $11,742
- -------------------------------------------------------------------------------------------------------
Income taxes paid $ 1,532 $ 2,892
- -------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing and
financing activities:
Foreclosed properties acquired in settlement of loans $ 157 $ 106
- -------------------------------------------------------------------------------------------------------
Bank premises transferred to other assets -- $ 1,235
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loans held for sale are generally held for periods of ninety days or less.
5
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FCNB CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - The accompanying unaudited consolidated financial statements for FCNB
Corp (the "Company") have been prepared in accordance with the instructions for
Form 10Q and, therefore, do not include all information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial statements have been prepared utilizing the interim basis
of reporting and, as such, reflect all adjustments which are normal and
recurring in nature and are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented. The financial data for
the period ended June 30, 1996 contained in these unaudited consolidated
financial statements includes the effects of the pooling-of-interest transaction
with Laurel Bancorp, Inc. ("Laurel"). The period ended June 30, 1996 includes
the results of operations from Laurel for the period December 1, 1995 to January
26, 1996, the effective date of the merger. The net income for Laurel for the
month ended December 31, 1995 was $124,000 and is not considered to be a
material amount relative to the consolidated net income. The results of
operations for the interim periods are not necessarily indicative of the results
for the full year.
Note 2 - Merger and Acquisitions: On March 7, 1997, the Company merged its two
wholly-owned banking subsidiaries, FCNB Bank and Elkridge Bank, with FCNB Bank
surviving.
On April 30, 1996, the Company consummated its merger of Harbor Investment
Corporation ("Harbor"), the holding company for Odenton Federal Savings and Loan
Association, Odenton, Maryland, with and into the Company. This transaction
included approximately $35.0 million in assets, the assumption of approximately
$31.4 million in liabilities at a purchase price of $6.67 million. This
transaction was accounted for as a purchase and $3.21 million of goodwill was
recorded. The Company has decided to amortize the goodwill, using the
straight-line method over a 25 year period. The Company's results of operations
reflect earnings from Harbor only since the date of the acquisition. The pro
forma combined information for the Harbor transaction is disclosed in the table
below.
The results of operations for the Company in the six month period ended June 30,
1996 include total income and net income of Laurel for the period December 1,
1995 to January 26, 1996, the effective date of the merger totaling $1,510,000
and $261,000, respectively. The results of operations for the Company and the
pro forma combined information related to the Harbor merger as if its
acquisition had occurred on January 1, 1996 are as follows:
Pro forma
For the Three Months Ended June 30, 1996 Company Harbor Combined
- ---------------------------------------- ------- ------ --------
Total income $14,254 $259 $14,513
Net income 1,853 22 1,875
Net income per share 0.34 0.35
For the Six Months Ended June 30, 1996
Total income $28,766 $1,037 $29,803
Net income 1,044 89 1,133
Net income per share 0.19 0.21
Note 3 - Investments: Using the criteria specified in Statement 115, the Company
classifies its investments in debt and equity securities at June 30, 1997 and
December 31, 1996 into two categories: held-to-maturity and available-for-sale.
Securities classified as held-to-maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed using the interest method over their contractual
lives.
Securities classified as available-for-sale are equity securities with readily
determinable fair values and those debt securities that the Company intends to
hold for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and 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.
6
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As of June 30, 1997, the gross unrealized losses in the Company's investment
portfolio were $368,000 in the held-to-maturity investment portfolio and
$643,000 in the available-for-sale investment portfolio compared to $472,000 and
$714,000, respectively, as of December 31, 1996. Since the Company's
held-to-maturity investment portfolio includes fixed rate investment securities
that have below current market interest rates, the future operating results of
the Company would be negatively impacted in an increasing rate environment. This
reduction in net interest income would result when the cost of funding the
Company's operations increases, while the income earned on the held-to-maturity
portfolio remains constant.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at June 30, 1997 are as follows:
HELD-TO-MATURITY PORTFOLIO
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30,1997 Cost Gains Losses Value
- --------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasury and other U.S.
government agencies and
corporations $13,499 $ 10 $ -- $ 13,509
State and political subdivisions 4,948 391 2 5,337
Mortgage-backed debt securities 21,500 135 366 21,269
- --------------------------------------------------------------------------------
$39,947 $536 $368 $40,115
================================================================================
The amortized cost and estimated fair value of securities classified as
available-for-sale at June 30,1997 are as follows:
AVAILABLE-FOR-SALE PORTFOLIO
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30,1997 Cost Gains Losses Value
- --------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasury and other U.S.
government agencies and
corporations $ 40,142 $ 225 $ 43 $ 40,324
Corporate bonds 12,295 36 56 12,275
Mortgage-backed debt securities 113,281 716 537 113,460
Equity securities 15,195 804 7 15,992
- --------------------------------------------------------------------------------
$ 180,913 $1,781 $643 $182,051
================================================================================
The gross realized gains on securities sold from the available-for-sale
portfolio for the first six months of 1997 and 1996 are $230,000 and $200,000,
respectively. The gross realized losses on securities sold from the
available-for-sale portfolio for the same periods are $86,000 and $39,000,
respectively.
The amortized cost and estimated fair value of securities classified as
held-to-maturity and available-for-sale at June 30, 1997 summarized by
contractual maturity, are as follows:
Held-to-maturity Available-for-sale
- --------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
June 30,1997 Cost Value Costs Value
- --------------------------------------------------------------------------------
(dollars in thousands)
Due in one year or less $ 3,330 $ 3,347 $ 15,696 $ 15,714
Due after one through five years 13,798 14,084 26,849 26,957
Due after five through ten years 1,219 1,314 9,892 9,928
Due after ten years 100 101 -- --
Mortgage-backed debt securities 21,500 21,269 113,281 113,460
Equity securities -- -- 15,195 15,992
- --------------------------------------------------------------------------------
$39,947 $40,115 $180,913 $182,051
================================================================================
7
<PAGE>
Actual maturities may differ from the contractual maturities reflected in the
preceding table because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Mortgage-backed securities
have no stated maturity and primarily reflect investments in various
Pass-through and Participation Certificates issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation,
respectively. Repayment of mortgage-backed securities is dependent on the
contractual repayment terms of the underlying mortgages collateralizing these
obligations and the current level of interest rates.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at December 31, 1996 are as follows:
HELD-TO-MATURITY 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 $ 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
================================================================================
The amortized cost and estimated fair value of securities classified as
available-for-sale at December 31, 1996 are as follows:
AVAILABLE-FOR-SALE PORTFOLIO
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- --------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasury and other U.S.
government agencies and
corporations $ 34,300 $ 379 $ 42 $ 34,637
Corporate Bonds 6,925 56 32 6,949
Mortgage-backed debt securities 107,741 636 628 107,749
Equity securities 13,080 457 12 13,525
- --------------------------------------------------------------------------------
$162,046 $1,528 $714 $162,860
================================================================================
Note 4 - Recent Accounting Pronouncements: The FASB has issued Statements of
Financial Accounting Standards No. 128 "Earnings Per Share" in February 1997,
No. 130 "Reporting Comprehensive Income" in June 1997, and No. 131 "Disclosures
about Segments of an Enterprise and Related Information" with effective dates of
December 15, 1997 for each pronouncement. The Company has determined that the
adoption of these Statements will not have a material effect on its disclosures.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
This section of the report contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to the Company's beliefs, expectations, anticipations and
plans regarding, among other things, general economic trends, interest rates,
product expansions and other matters. Such statements are subject to numerous
uncertainties, such as federal monetary policy, inflation, employment,
profitability and consumer confidence levels, both nationally and in the
Company's market area, the health of the real estate and construction market in
the Company's market area, the Company's ability to develop and market new
products and to enter new markets, competitive challenges in the Company's
market, legislative changes and other factors, and as such, there can be no
assurance that future events will develop in accordance with the forward looking
statements contained herein.
8
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The following discussion and related financial data for the Company provides
an overview of the financial condition and results of operations of the Company
and its wholly-owned subsidiaries, which is presented on a consolidated basis.
The principal subsidiary of the Company is FCNB Bank. For the first six months,
the Company reported earnings of $4.06 million in 1997 and $1.04 million in
1996. However, net income before merger related costs were $4.34 million in 1997
compared to $3.94 million for the same period in 1996. The financial results for
the first half of 1996 were unfavorably impacted by the deferred income tax
effect totaling $1.60 million on the pre-1988 thrift reserves for credit losses
and $1.90 million in merger related expenses.
Return on average assets and return on average equity are key measures of
earnings performance. Return on average assets measures the ability of a bank to
utilize its assets in generating income. Return on average assets annualized for
the six months ended June 30, 1997 was 1.02%, and 1.09% before merger related
costs, compared to annualized rates of .31% and 1.18%, respectively, for the
same period in 1996. The annualized return on average shareholders' equity,
which measures the income earned on the capital invested, for the six months
ended June 30, 1997 was 11.69%, and 12.51% before merger related costs, compared
to annualized rates of 3.22% and 12.15%, respectively for the six months ended
June 30, 1996.
The annualized return on average assets for the second quarter of 1997
before and after one time merger related costs were 1.13% and 1.09%,
respectively, compared to 1.10% and 1.09%, respectively, for the same period in
1996. The annualized return on average stockholders' equity before and after
one-time merger related costs was 13.05% and 12.64%, respectively, compared to
11.62% and 11.38%, respectively, for the same period in 1996.
In the ordinary course of its business, the Company routinely explores
opportunities for additional growth and expansion of its core banking business
and related activities, by acquisition of existing branches, by merger with
other institutions, and by de novo branching, both within the Company's existing
market, and in new markets. There can be no assurance that any growth or
expansion will have a positive impact on the Company's earnings, dividends, book
value or market value.
Net Interest Income
Net interest income represents the Company's gross profit from lending and
investment activities, and is the most significant component of the Company's
earnings. Net interest income is the difference between interest and related fee
income on earning assets (primarily loans and investment securities) and the
cost of funds (primarily deposits and shortterm borrowings) supporting them. To
facilitate the analysis of net interest income, the table on page 15 is
presented on a taxable equivalent basis to adjust for the tax-exempt status of
certain loans and investment securities. This adjustment, based on the statutory
federal income tax rate of 34%, increases the tax-exempt income to an amount
representing an estimate of what would have been earned if that income were
fully taxable.
Taxable equivalent net interest income for the first half of 1997 totaled
$15.95 million, increasing 11.1% from the $14.35 million recorded for the same
period in 1996. The Company's average interest-earning assets increased 18.4% to
$733.91 million from June 30, 1996. This increase was primarily funded with a
21.4% increase in the Company's average interest-bearing liabilities, and an
11.4% increase in its average noninterest-bearing deposits for the same period.
For the second quarter of 1997, the net interest income totaled $8.12
million, increasing by 11.8% from the $7.27 million realized in the same period
in 1996.
The Company's net interest margin (taxable equivalent net interest income as
a percent of average interest-earning assets) was 4.35% and 4.63% for the first
six months of 1997 and 1996, respectively. The net interest margin is impacted
by the change in the spread between yields on earning assets and rates paid on
interest-bearing liabilities. This spread decreased by 19 basis points in the
first half of 1997 when compared to the same period in the prior year. The yield
on earning assets decreased 12 basis points to 8.26%, while the rates paid on
interest-bearing liabilities increased 7 basis points to 4.42%.
For the second quarter of 1997, the net interest margin was 4.38% compared
to 4.60% in 1996. The spread during the period decreased 14 basis points which
was principally caused by the increase in rates paid on interest-bearing
liabilities being greater than the increase in the yields earned on the
investment and loan portfolios. The yield on earning assets increased 3 basis
points to 8.36% while the rates paid on interest-bearing liabilities increased
by 17 basis points to 4.49%.
The rate of interest earned on interest-earning assets and the rate paid on
interest-bearing liabilities, while significantly affected by the actions taken
by the Federal Reserve to control economic growth, are influenced by competitive
factors within the Company's market. Competitive pressures during late 1996 and
early 1997 for both loans and the funding sources needed to satisfy loan demand
within the Company's market area and transactions related to leveraging the
Company's capital position caused its net interest spread to narrow. The
management of the
9
<PAGE>
Company feels that the competitive pressures in this market will cause the net
interest spread to continue to be under pressure during 1997. Therefore, the
Company is currently pursuing operating efficiencies through improved technology
and is evaluating new products and services in an effort to enhance its level of
noninterest income. There can be no assurance that these benefits will be
realized.
Management of the Company employs extensive computer simulations to model
the impact of rising and falling interest rates. These simulations are based on
numerous assumptions management determines from their strategic planning process
and are run on a monthly basis using a shock analysis technique to determine the
effects on the Company's net income assuming an immediate increase or decrease
in interest rates. The Company has an interest rate risk management policy that
seeks to limit the amount of deterioration in net income, associated with an
assumed gradual change in interest rates of +/- 100 and +/- 200 basis point
change in interest rates, to no more than 10% and 20% of net income,
respectively.
Noninterest Income
Noninterest income increased $557,000 (25.5%) for the six months ended June
30, 1997, when compared to the same period in 1996. This increase was partially
attributable to the increase in service fee income of $166,000 that was due to
an increase in the volume of deposit accounts maintained. The gains recognized
on sales of loans into the secondary mortgage market in 1997 totaled $236,000
compared to the $222,000 recognized during 1996. Security gains decreased in
1997 to $144,000 from the $161,000 realized in 1996. The increase in other
operating income of $394,000 was primarily attributable to the Company
implementing a Bank Owned Life Insurance program.
For the second quarter of 1997, noninterest income increased by $277,000.
This increase was primarily caused by the $156,000 of income generated from the
Bank Owned Life Insurance program along with the increase in service fee income
of $105,000.
The Company is adding new products and services to enhance its level of
noninterest income in an effort to mitigate the effect of its decreasing net
interest spread. Some of these products are fee-based and, accordingly, the
income from these products is less sensitive to fluctuations in the level of
interest rates. The Company has an arrangement with BankMark, a third party
provider of mutual funds and annuities, to offer these products to its
customers. The arrangement enables the Company to earn commissions on the sale
of mutual funds and annuities while providing customers access to alternative
investment products. In January 1997, the Company began to offer asset
management and trust services. Additionally, revenue from service charges on
deposit accounts will continue to increase as the volume of accounts maintained
expands.
Noninterest income from gains realized on the sale of mortgage loans is
directly affected by the volume of mortgage loans settled, which is
significantly influenced by increases and decreases in the level of interest
rates. In periods of rising interest rates mortgage loan production typically
declines, whereas in periods of declining interest rates mortgage loan
production increases. As a result, this source of noninterest income is highly
influenced by the level and direction of future interest rate changes. Servicing
income on mortgage loans originated and sold however, is expected to make a
smaller contribution to noninterest income since the Company is currently not
retaining servicing rights on mortgages sold.
The Company's management is committed to developing and offering innovative,
market-driven products and services that will generate additional sources of
noninterest income. However, the future results of any of these products or
services cannot be predicted at this time.
Noninterest Expenses
Noninterest expenses, excluding merger related expenses, increased $987,000
(9.3%) for the first six months of 1997, when compared to the first six months
of 1996.
Total salaries and employee benefits increased $578,000 (10.2%) over the
first half of 1996. The increase in salaries and employee benefits is
attributable to the increased wages of the employees, the increased costs of
health and pension benefits, and the additional staffing for the Odenton branch
acquired in April 1996, the opening of the headquarters branch in March 1996 and
the opening of the Asset Management and Trust Division in January 1997.
Occupancy expenses decreased $101,000 (8.1%) while equipment expenses
increased $201,000 (25.1%) over the first six months of 1996. The decrease in
occupancy expenses primarily relates to the reclassification of the Company's
Operations Center to other real estate owned when the operations were relocated
to the new headquarters facility. The increase in equipment expenses is
primarily associated with increased depreciation, and higher ATM and
communication expenses.
10
<PAGE>
Other operating expenses increased $309,000 (10.5%) compared to the first
half of 1996. The increase in operating expenses is primarily caused by the new
data processing outsourcing arrangement, which was put into place in November
1996. The Company has an arrangement, which allows the Company to grow
substantially over the next five years with little increase in the data
processing costs over that time period.
For the second quarter of 1997, salaries and benefits increased $296,000
(10.4%), occupancy expenses decreased $119,000 (18.5%), equipment expenses
increased $46,000 (10.6%), and other operating expenses increased $101,000
(6.7%). The increase in salaries and benefits costs is primarily related to the
increased number of employees, which increased by 20 from 335 as of June 30,
1996.
Income Taxes
The Company's effective tax rates for the first half of 1997 and 1996 were
32.8% and 75.3%, respectively. The effective tax rate for 1996 is considerably
higher than the effective tax rate experienced in 1997 due to the
nondeductibility of certain merger related costs. Also, included in the income
tax expense for 1996 is the deferred income tax effect of pre-1988 thrift
reserves for credit losses. If these items are excluded from the income tax
expense calculation the effective tax rate is 35.6%. The Company's income tax
expense also differs from the amount computed at statutory rates primarily due
to taxexempt interest from certain loans and investment securities and the Bank
Owned Life Insurance program.
For the second quarter of 1997 and 1996, the effective tax rates were 35.4%
and 35.1%, respectively.
Allowance for Credit Losses and Problem Assets
The Company follows the guidance of Statement of Financial Accounting
Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan"
as amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." It requires that impaired loans within
its scope be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable market
price, or the fair value of the collateral if the loan is collateral dependent.
SFAS 114 excludes smaller balance and homogeneous loans from impairment
reporting. Therefore, the Company has designated consumer, credit card and
residential mortgage loans to be excluded for this purpose. From the remaining
loan portfolio, loans rated as doubtful or worse, classified as nonaccrual, and
troubled debt restructurings are considered to be impaired. Loans are placed on
nonaccrual when a loan is specifically determined to be impaired or when
principal or interest is delinquent for 90 days or more. Any unpaid interest
previously accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received. Up to this
point, slow payment on a loan is considered, by the Company, to only be a
minimum delay. The Company has identified commercial real estate and commercial
and industrial type loans as the major risk classifications to be used in the
application of SFAS 114.
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
June 30,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Impaired loans with specific allocation
of allowance for credit losses $1,970 $4,300
Specific allocation of allowance
for credit losses 556 885
Other impaired loans 1,090 2,500
Average recorded investment in
impaired loans 3,097 6,870
Interest income recognized on
impaired loans based on cash
payments received 69 141
- --------------------------------------------------------------------------------
11
<PAGE>
Additional information concerning the Company's recorded investment in
nonaccrual loans, for which impairment had not been recognized are as follows:
June 30,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans $ -- $893
Interest income not recognized due
to loans in nonaccrual status -- 46
- --------------------------------------------------------------------------------
The Company maintains its allowance for credit losses at a level deemed
sufficient to provide for estimated potential losses in the credit extension
process. Management reviews the adequacy of the allowance each quarter,
considering factors such as current and future economic conditions and their
anticipated impact on specific borrowers and industry groups, the growth and
composition of the loan portfolio, the level of classified and problem assets,
historical loss experience, and the collectability of specific loans. Allowances
for impaired loans is generally determined based on collateral values or the
present value of estimated cash flows.
The provision for credit losses is charged to income in an amount necessary
to maintain the allowance at the level management believes is appropriate.
The allowance for credit losses was $5.65 million, or 1.06% of total loans,
net of unearned income, at June 30, 1997, compared to $5.45 million, or 1.16% as
of June 30, 1996, and $5.12 million, or 1.03% as of December 31, 1996. The
allowance for credit losses to nonperforming loans was 92.9%, 83.6% and 71.5% as
of June 30, 1997, June 30, 1996 and December 31, 1996, respectively.
Total nonperforming assets as of June 30, 1997 were $9.18 million, a $1.35
million decrease from the level of nonperforming assets as of June 30, 1996, and
a $1.11 million decrease from the level as of December 31, 1996. Total
nonperforming assets as of June 30, 1997, including properties acquired through
foreclosure, represent 1.08% of total assets, compared to 1.47% and 1.32% as of
June 30, 1996 and December 31, 1996, respectively.
Nonperforming assets at June 30, 1997 included $3.11 million of nonaccrual
loans, $2.98 million of loans past due 90 days or more, $1.33 million of
foreclosed commercial properties, $569,000 of foreclosed residential properties
and $1.19 million for the Company's vacated Operations Center transferred to
other real estate owned.
12
<PAGE>
Allowance for Credit Losses
- --------------------------------------------------------------------------------
Six months
ended Year ended
June 30, 1997 December 31, 1996
- --------------------------------------------------------------------------------
Average total loans outstanding during
period $513,105 $464,440
- --------------------------------------------------------------------------------
Allowance at beginning of year $ 5,123 $ 5,242
- --------------------------------------------------------------------------------
Charge-offs:
Real estate - construction -- --
Real estate - mortgage -- 136
Commercial and agricultural 239 570
Consumer 90 293
- --------------------------------------------------------------------------------
Total charge-offs 329 999
- --------------------------------------------------------------------------------
Recoveries:
Real estate - construction -- --
Real estate - mortgage -- --
Commercial and agricultural 361 20
Consumer 32 80
- --------------------------------------------------------------------------------
Total recoveries 393 100
- --------------------------------------------------------------------------------
Net charge-offs(recoveries) (64) 899
- --------------------------------------------------------------------------------
Additions to allowance charged to operating
expenses 462 318
- --------------------------------------------------------------------------------
Other transfers and allowance
on loans acquired with purchased entity -- 462
- --------------------------------------------------------------------------------
Allowance at end of period $ 5,649 $ 5,123
- --------------------------------------------------------------------------------
Ratio of net charge-offs to average total
loans (0.01)% 0.19%
- --------------------------------------------------------------------------------
Allocation of Allowance for Credit Losses
- --------------------------------------------------------------------------------
June 30, 1997 December 31, 1996
(1) (1)
- --------------------------------------------------------------------------------
Real estate - construction $ 472 12% $ 1,059 11%
Real estate - mortgage 3,193 67 2,300 67
Commercial and agricultural 577 10 855 11
Consumer 362 11 534 11
Unallocated 1,045 -- 375 --
- --------------------------------------------------------------------------------
Total Allowance $5,649 100% $ 5,123 100%
- --------------------------------------------------------------------------------
(1) Percent of loans in each category to total loans, net of unearned income.
The Company makes real estate-construction, real estate-mortgage, commercial
and agricultural, and consumer loans. The real estate-construction loans are
generally secured by the construction project and have a term of one year or
less. The real estate-mortgage loans are generally secured by the property with
a maximum loan to value ratio of 75% and a term of one to seven years. The
commercial and agricultural loans consist of secured and unsecured loans. The
unsecured commercial loans are made based on the financial strength of the
borrower and usually require personal guarantees from the principals of the
business. The collateral for the secured commercial loans may be equipment,
accounts receivable, marketable securities or deposits in the subsidiary banks
of the Company. These loans have a maximum loan to value ratio of 75% and a term
of one to five years. The consumer loan category consists of secured and
unsecured loans. The unsecured consumer loans are made on the financial strength
of the individual borrower. The collateral for the secured consumer loans may be
marketable securities, automobile, recreational vehicles or deposits in the
subsidiary banks of the Company. The usual term for these loans is three to five
years.
As of June 30, 1997, the Company had loans totaling $14.68 million that were
current but as to which there are concerns as to the ability of the borrowers to
comply with present loan repayment terms. While management of the Company does
not anticipate any loss not previously provided for on these loans, changes in
the financial condition of these borrowers may necessitate future modifications
in their loan repayment terms.
At June 30, 1997, the Company had no concentrations of loans in any one
industry exceeding 10% of its total loan portfolio. An industry for this purpose
is defined as a group of counterparts that are engaged in similar activities and
13
<PAGE>
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 June 30, 1997, classifiable
as nonaccrual, past due, restructured or problem assets.
14
<PAGE>
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differentials
The following table shows average balances of asset and liability
categories, interest income and paid, and average yields and rates for the
periods indicated:
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------
Average Interest Average Average Interest Average
daily Income1/ yield/ daily income1/ yield/
balance paid rate balance paid rate
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Interest-bearing deposits $3,034 $ 71 4.68% $2,902 $ 112 7.72%
- ---------------------------------------------------------------------------------------------------------------------
Federal funds sold 9,498 249 5.24% 18,005 440 4.89%
- ---------------------------------------------------------------------------------------------------------------------
Loans held for sale 1,146 49 8.56% 3,769 140 7.43%
- ---------------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable 202,135 6,493 6.42% 139,443 4,475 6.42%
Tax exempt 4,995 279 11.16% 7,498 430 11.47%
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities 207,130 6,772 6.54% 146,941 4,905 6.68%
- ---------------------------------------------------------------------------------------------------------------------
Loans 2 513,105 23,152 9.02% 448,293 20,371 9.09%
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 733,913 30,293 8.26% 619,910 25,968 8.38%
Noninterest-earning assets 61,166 48,788
Net effect of SFAS 115 183 104
- ---------------------------------------------------------------------------------------------------------------------
Total assets $795,262 $668,802
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits3 $519,766 10,748 4.14% $475,367 9,895 4.16%
Long-term debt 4 -- -- -- 6,008 206 6.86%
Other short-term borrowings 129,215 3,594 5.56% 52,994 1,513 5.71%
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 648,981 14,342 4.42% 534,369 11,614 4.35%
- ---------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 70,619 63,367
Noninterest-bearing liabilities 6,279 6,148
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 725,879 603,884
Shareholders' equity 69,200 64,814
Net effect of unrealized
gain (loss) on securities 183 104
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 69,383 64,918
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $795,262 $668,802
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 15,951 $14,354
- ---------------------------------------------------------------------------------------------------------------------
Net interest spread 3.84% 4.03%
- ---------------------------------------------------------------------------------------------------------------------
Net interest margin 4.35% 4.63%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Taxable equivalent adjustments of $112,000 for 1997 and $145,000 for 1996
are included in the interest income for total interest-earning assets. The
statement of income for the six month period ended June 30, 1996 includes
the results of operations for Laurel for the period from December 1, 1995 to
January 26, 1996, the effective date of the merger. To facilitate an
analysis of this table, the effects of interest income and interest expense
in the amounts of $755,000 and $358,000, respectively, for Laurel during the
month of December 1995 have been eliminated from the above analysis.
2 Nonaccruing loans, which include impaired loans, are included in the average
balances. Net loan fees included in interest income totaled $634,000 in 1997
and $585,000 in 1996.
3 The interest paid on interest-bearing deposits in 1996 includes $42,000 of
of capitalized construction period interest.
4 The interest paid on long-term debt in 1996 includes $66,000 of capitalized
construction period interest while none was paid in 1997.
15
<PAGE>
Capital Resources
The following table shows the risk-based capital and the leverage ratios for
the Company as of June 30, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------
As of June 30, 1997:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $73,056 12.49% $46,787 8.0% N/A N/A
FCNB Bank $59,618 10.26% $46,471 8.0% $58,089 10.0%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $67,407 11.53% $23,394 4.0% N/A N/A
FCNB Bank $53,969 9.29% $23,236 4.0% $34,853 6.0%
Tier I Capital
(To Average Assets):
FCNB Corp $67,407 8.51% $23,754 3.0% N/A N/A
FCNB Bank $53,969 7.57% $21,395 3.0% $35,658 5.0%
</TABLE>
16
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K.
(a) Exhibits
No. 11 Statement Regarding Computation of Per Share Earnings
No. 27 Financial Data Schedule
(b) Report on Form 8-K. None filed during the second quarter of 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FCNB CORP
(Registrant)
July 31, 1997 BY:/s/ A. Patrick Linton
-------------------------------------------
A. Patrick Linton, President,
Chief Executive Officer and
Director
July 31, 1997 BY:/s/ Mark A. Severson
-------------------------------------------
Mark A. Severson, Senior Vice President and
Treasurer
Exhibit No. 11
Statement Regarding the Computation of Per Share Earnings
1997 1996
---- ----
Earnings per Common Share:
Primary $0.76 $0.19
Primary-before merger costs $0.81 $0.73
Primary average shares
outstanding 5,390,219 5,410,241
Fully diluted $0.76 $0.19
Fully diluted-before merger costs $0.81 $0.73
Fully diluted average shares
outstanding 5,390,219 5,410,241
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<EXCHANGE-RATE> 1
<CASH> 30,506
<INT-BEARING-DEPOSITS> 828
<FED-FUNDS-SOLD> 16,918
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 182,051
<INVESTMENTS-CARRYING> 39,947
<INVESTMENTS-MARKET> 40,115
<LOANS> 533,433
<ALLOWANCE> 5,649
<TOTAL-ASSETS> 849,615
<DEPOSITS> 608,191
<SHORT-TERM> 164,230
<LIABILITIES-OTHER> 5,122
<LONG-TERM> 0
0
0
<COMMON> 5,359
<OTHER-SE> 66,713
<TOTAL-LIABILITIES-AND-EQUITY> 849,615
<INTEREST-LOAN> 23,181
<INTEREST-INVEST> 6,680
<INTEREST-OTHER> 320
<INTEREST-TOTAL> 30,181
<INTEREST-DEPOSIT> 10,748
<INTEREST-EXPENSE> 14,342
<INTEREST-INCOME-NET> 15,839
<LOAN-LOSSES> 462
<SECURITIES-GAINS> 144
<EXPENSE-OTHER> 12,082
<INCOME-PRETAX> 6,040
<INCOME-PRE-EXTRAORDINARY> 6,040
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,057
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 4.35
<LOANS-NON> 3,110
<LOANS-PAST> 2,980
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 14,680
<ALLOWANCE-OPEN> 5,123
<CHARGE-OFFS> 329
<RECOVERIES> 393
<ALLOWANCE-CLOSE> 5,649
<ALLOWANCE-DOMESTIC> 5,649
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
