Registration Statement No. 333-61263
Filed Pursuant to Rule 424(b)(3)
FCNB CORP
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
November 4, 1998
TO THE SHAREHOLDERS OF FCNB CORP:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of FCNB Corp, a Maryland corporation ("FCNB"), will be held on
Wednesday, November 4, 1998 at 3:00 P.M. local time, at the headquarters of
FCNB, 7200 FCNB Court, Frederick, Maryland, for the following purposes:
(1) To consider and vote upon a proposal to approve the Agreement and Plan
of Reorganization and Merger, dated as of June 23, 1998 (the "Agreement"), a
copy of which is attached as Exhibit A to the accompanying Combined Proxy
Statement/Prospectus, by and between FCNB, its wholly owned subsidiary, FCNB
Bank (the "Bank") and Capital Bank, National Association, a national banking
association ("Capital"), pursuant to which (i) Capital will be merged with and
into the Bank (the "Merger"); and (ii) each outstanding share of common stock,
par value $6.00 per share, of Capital ("Capital Common Stock"), will be
automatically converted into the number of shares of the common stock, par value
$1.00 per share, of FCNB ("FCNB Common Stock") determined by dividing forty
dollars ($40.00) by the value of a share of FCNB Common Stock as determined
pursuant to the Agreement, subject to adjustment and limitation as described in
the Agreement. Cash will be paid in lieu of fractional shares.
(2) To transact such other business as may properly come before the Meeting
or any adjournment or postponement thereof.
The Board of Directors of FCNB has fixed the close of business on September
8, 1998 as the record date for determining shareholders entitled to notice of,
and vote at, the Meeting and any adjournments thereof.
The Combined Proxy Statement/Prospectus is set forth on the following pages
and a proxy card is enclosed herewith. To ensure that your vote is counted,
please complete, sign, date and return the proxy card in the enclosed,
postage-paid return envelope, whether or not you plan to attend the Meeting in
person. If you attend the Meeting, you may revoke your proxy and vote your
shares in person. However, attendance at the Meeting will not of itself
constitute revocation of a proxy. If your shares are not registered in your own
name, you will need additional documentation from your recordholder in order to
vote personally at the Meeting.
By Order of the Board of Directors
/s/ Helen G. Hahn
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Helen G. Hahn, Secretary
September 9, 1998
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PLEASE COMPLETE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
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<PAGE>
CAPITAL BANK, NATIONAL ASSOCIATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
October 15, 1998
TO THE SHAREHOLDERS OF CAPITAL BANK, NATIONAL ASSOCIATION:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of Capital Bank, National Association, a national banking association
("Capital"), will be held on Thursday, October 15, 1998 at 4:00 P.M. local time,
at the main office of Capital, One Church Street, Rockville, Maryland, for the
following purposes:
(1) To consider and vote upon a proposal to approve the Agreement and Plan
of Reorganization and Merger, dated as of June 23, 1998 (the "Agreement"), a
copy of which is attached as Exhibit A to the accompanying Combined Proxy
Statement/Prospectus, by and between Capital and FCNB Corp, a Maryland
corporation ("FCNB"), and its wholly owned subsidiary, FCNB Bank (the "Bank"),
pursuant to which (i) Capital will be merged with and into the Bank (the
"Merger"); and (ii) each outstanding share of common stock, par value $6.00 per
share, of Capital ("Capital Common Stock"), will be automatically converted into
the number of shares of the common stock, par value $1.00 per share, of FCNB
("FCNB Common Stock") determined by dividing forty dollars ($40.00) by the value
of a share of FCNB Common Stock as determined pursuant to the Agreement, subject
to adjustment and limitation as described in the Agreement. Cash will be paid in
lieu of fractional shares.
(2) To transact such other business as may properly come before the Meeting
or any adjournment or postponement thereof.
Shareholders of Capital will be entitled to exercise statutory dissenters'
appraisal rights in connection with the Merger.
The Board of Directors of Capital has fixed the close of business on August
31, 1998 as the record date for determining shareholders entitled to notice of,
and vote at, the Meeting and any adjournments thereof.
The Combined Proxy Statement/Prospectus is set forth on the following pages
and a proxy card is enclosed herewith. To ensure that your vote is counted,
please complete, sign, date and return the proxy card in the enclosed,
postage-paid return envelope, whether or not you plan to attend the Meeting in
person. If you attend the Meeting, you may revoke your proxy and vote your
shares in person. However, attendance at the Meeting will not of itself
constitute revocation of a proxy. If your shares are not registered in your own
name, you will need additional documentation from your recordholder in order to
vote personally at the Meeting.
By Order of the Board of Directors
/s/ Stephen N. Ashman
----------------------------------
Stephen N. Ashman, President
September 9, 1998
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PLEASE COMPLETE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
================================================================================
<PAGE>
COMBINED PROXY STATEMENT/PROSPECTUS
Proxy Statement
for
Special Meetings of Shareholders of
FCNB Corp Capital Bank, National Association
TO BE HELD ON
November 4, 1998 October 15, 1998
FCNB Corp
Prospectus
Relating to 1,987,357 Shares of Common Stock, $1.00 par value
----------------------------------------
This combined Proxy Statement and Prospectus (the "Proxy Statement") is
being furnished to the holders of the common stock, par value $6.00 per share
(the "Capital Common Stock"), of Capital Bank, National Association ("Capital"),
and the holders of the common stock, par value $1.00 per share (the "FCNB Common
Stock"), of FCNB Corp, a Maryland corporation ("FCNB"), in connection with the
solicitation of proxies by the Boards of Directors of Capital and FCNB for use
at the Special Meeting of Shareholders of Capital (the "Capital Shareholder
Meeting") to be held on Thursday, October 15, 1998, or at any adjourument or
postponement thereof, and at the Special Meeting of Shareholders of FCNB (the
"FCNB Shareholder Meeting," and collectively with the Capital Shareholder
Meeting, the "Meetings") to be held on November 4, 1998, or at any postponement
or adjournment thereof, and is initially being mailed to holders of FCNB Common
Stock on or about September 9, 1998, and to holders of Capital Common Stock, by
certified mail, on or about September 9, 1998.
The purposes of the Meetings are to: (1) consider and vote upon the
proposal to approve the Agreement and Plan of Reorganization and Merger (the
"Agreement") by and between FCNB, Capital, and FCNB's wholly owned Maryland
chartered commercial bank subsidiary, FCNB Bank (the "Bank"), pursuant to which
Capital will be merged with and into the Bank (the "Merger"), and each
outstanding share of Capital Common Stock will be converted into the number of
shares of FCNB Common Stock determined by dividing forty dollars ($40.00) by the
value of a share of FCNB Common Stock as determined pursuant to the Agreement,
provided, however, that except as described herein under "The Merger --
Termination" in no event shall the Conversion Ratio (hereinafter defined) exceed
1.8576 shares of FCNB Common Stock for each share of Capital Common Stock, or be
lower than 1.5199 shares of FCNB Common Stock for each share of Capital Common
Stock (in each case as adjusted for the four for three stock split in the form
of a dividend paid on the FCNB Common Stock on August 14, 1998 to recordholders
as of August 7, 1998 (the "Stock Split"); and (2) transact such other business
as may properly come before the Meetings or any adjournment or postponement
thereof.
For purposes of determining the number of shares of FCNB Common Stock into
which each share of Capital Common Stock will be converted, the value of a share
of FCNB Common Stock is equal to the average of the closing price for FCNB
Common Stock for the twenty trading days immediately preceding the date which is
five business days immediately prior to the Closing Date (hereinafter defined)
under the Agreement, as reported on the Nasdaq National Market ("Nasdaq"),
subject to adjustment and limitation as set forth in the Agreement and discussed
herein. See "The Merger -- Consideration to be Received by Holders of Capital
Common Stock."
This Proxy Statement also constitutes the Prospectus relating to the
issuance of up to 1,987,357 shares of the FCNB Common Stock to holders of
Capital Common Stock, pursuant to the Agreement.
The date of this Proxy Statement is September 2, 1998.
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NEITHER THE SECURITIES NOR THE TRANSACTION DESCRIBED HEREIN HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE
COMPTROLLER OF THE CURRENCY OR ANY OTHER FEDERAL REGULATORY AGENCY, NOR
HAS THE COMMISSION, THE COMPTROLLER OR ANY SUCH AGENCY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE FAIRNESS OR MERITS OF
THE TRANSACTIONS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE. THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE MARYLAND COMMISSIONER OF FINANCIAL REGULATION OR ANY
OTHER REGULATORY AGENCY OF ANY STATE, NOR HAS THE COMMISSIONER OR ANY
SUCH AGENCY PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION OF THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR GIVE ANY
INFORMATION NOT CONTAINED IN THIS PROXY STATEMENT AND, IF MADE OR
GIVEN, SUCH REPRESENTATION OR INFORMATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY CAPITAL OR FCNB.
UNDER THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION, THE PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF
REORGANIZATION AND MERGER CONSTITUTES AN OFFER OF THE FCNB COMMON STOCK
TO HOLDERS OF CAPITAL COMMON STOCK. THE DELIVERY OF THIS PROXY
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT NOR THE ISSUANCE OF ANY
SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CAPITAL OR
FCNB SINCE THE DATE HEREOF.
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AVAILABLE INFORMATION
FCNB is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission, 450 Fifth Street, NW,
Washington, DC 20549, and at the regional offices of the Commission located at
Seven World Trade Center, Suite 1300, New York, NY 10048, and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission,
Washington, DC 20549, at the prescribed rates.
Capital is subject to the informational reporting requirements of the
Exchange Act, and in accordance therewith files periodic reports, proxy
statements and other information with the Office of the Comptroller of the
Currency (the "Comptroller"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Comptroller, 250 E Street, S.W., Washington, DC.
No person has been authorized to give any information or make any
representation other than those contained in this Proxy Statement and, if given
or made, such information or representations must not be relied upon as having
been authorized by FCNB or Capital. Neither the delivery of this Proxy Statement
nor any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of FCNB or Capital
since the date of this Proxy Statement. This Proxy Statement does not constitute
an offer to sell or a solicitation of an offer to buy any securities offered
hereby in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make such offer or solicitation.
DOCUMENTS DELIVERED AND INCORPORATED BY REFERENCE
This Proxy Statement is being delivered to shareholders of Capital and FCNB
accompanied by Capital's Annual Report on Form 10-KSB for the year ended
December 31, 1997 and Capital's Annual Report to Shareholders and by Capital's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998.
The following documents filed by FCNB with the Commission are incorporated
herein by reference:
(1) FCNB's Annual Report on Form 10-K for the year ended December 31,
1997;
(2) FCNB's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998 and June 30, 1998;
(3) FCNB's Current Reports on Form 8-K dated June 9, 1998, June 23, 1998,
July 14, 1998 and September 2, 1998;
(4) The description of FCNB Common Stock contained in FCNB's Registration
Statement on Form 8-A filed April 24, 1997; and
(5) All other reports filed pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act by FCNB since the end of the year covered in its
Annual Report referred to in (1) above.
The following documents filed by Capital with the Comptroller, and which
have been filed as exhibits to the Registration Statement on Form S-4 filed by
FCNB with respect to the Merger, are incorporated herein by reference:
(1) Capital's Annual Report on Form 10-KSB for the year ended December 31,
1997;
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(2) Capital's Quarterly Reports on Form 10-QSB for the quarters ended
March 31, 1998 and June 30, 1998; and
(3) All other reports filed pursuant to Section 13(c) or 15(d) of the
Exchange Act by Capital since the end of the year covered in its
Annual Report referred to in (1) above.
All documents filed by FCNB pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Proxy Statement and prior to final
adjournment of the Meetings shall be deemed to be incorporated by reference in
this Proxy Statement and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement herein or in
any supplement hereto, modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed to constitute a part hereof,
except as so modified or superseded.
FCNB WILL PROVIDE COPIES OF ANY OF THE FCNB DOCUMENTS INCORPORATED BY
REFERENCE HEREIN AND NOT DELIVERED HEREWITH (NOT INCLUDING EXHIBITS UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN), TO ANY PERSON
RECEIVING A COPY OF THIS PROXY STATEMENT, WITHOUT CHARGE, UPON WRITTEN OR ORAL
REQUEST DIRECTED TO MARK A. SEVERSON, SENIOR VICE PRESIDENT AND TREASURER, FCNB
CORP, 7200 FCNB CORP, FREDERICK, MARYLAND 21703, (301) 662-2191. IN ORDER TO
INSURE TIMELY DELIVERY OF DOCUMENTS INCORPORATED BY REFERENCE, ANY REQUEST
SHOULD BE RECEIVED BY FCNB NO LATER THAN OCTOBER 28, 1998.
CAPITAL WILL PROVIDE COPIES OF ANY OF THE CAPITAL DOCUMENTS INCORPORATED BY
REFERENCE HEREIN AND NOT DELIVERED HEREWITH (NOT INCLUDING EXHIBITS UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN), TO ANY PERSON
RECEIVING A COPY OF THIS PROXY STATEMENT, WITHOUT CHARGE, UPON WRITTEN OR ORAL
REQUEST DIRECTED TO STEPHEN N. ASHMAN, CAPITAL BANK, NATIONAL ASSOCIATION, ONE
CHURCH STREET, ROCKVILLE, MARYLAND 20850, (301) 279-8900. IN ORDER TO INSURE
TIMELY DELIVERY OF DOCUMENTS INCORPORATED BY REFERENCE, ANY REQUEST SHOULD BE
RECEIVED BY CAPITAL NO LATER THAN OCTOBER 7, 1998.
Forward Looking Statements. This Proxy Statement contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), with respect to the financial
condition, results of operations and business of FCNB following consummation of
the Merger, including statements relating to cost savings, and business
enhancements anticipated to be realized as a result of the Merger, and the
impact of the Merger on FCNB's financial performance, and also including
statements of goals, intentions, and expectations, regarding or based upon
general economic conditions, interest rates, developments in national and local
markets, and other matters, and which, by their nature, are subject to
significant uncertainties. Factors which may cause actual results to differ from
those contemplated by these forward looking statements include, but are not
limited to, the following: expected cost savings may not be fully realized;
deposit attrition, customer loss and revenue loss following the Merger may be
greater than anticipated; the cost of, or difficulties related to integration of
Capital into FCNB may be greater than anticipated; changes in the general
interest rate environment, reduce interest rate margins; or changes in economic
conditions in general, nationally or regionally, may result in a deterioration
of credit quality, among other things. Additionally, FCNB's future financial
performance may be adversely impacted by the inability of FCNB to cause its
information, communications and environmental systems to be capable of correctly
recognizing and processing dates after December 31, 1999 ("Y2K Compliant") as
currently anticipated, and in any event prior to January 1,2000. Factors which
may cause actual results to differ from current Y2K compliance plans include
increased costs of achieving Y2K Compliance, delayed timeframes for implementing
and testing Y2K compliance measures, and delays by FCNB's vendors in becoming
42k Compliant, or the inability of such vendors to become Y2K Compliant prior to
January 1,2000. Additionally, FCNB's performance may be adversely affected by
the failure of its customers or governmental authorities to become Y2K Compliant
prior to January 1,2000. assumptions on which statements in this Proxy Statement
are based, actual future results may differ materially from those contemplated
by such statements.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information.............................................................................................. 3
Documents Delivered and Incorporated by Reference.................................................................. 3
Summary Information................................................................................................ 6
Selected Consolidated Financial and Other Data.....................................................................12
The Meetings.......................................................................................................17
The Merger.........................................................................................................19
Unaudited Pro Forma Combined Financial Information.................................................................35
FCNB Corp..........................................................................................................43
Comparison of Shareholder Rights and Certain Provisions of the Articles of Incorporation of FCNB...................46
Capital Bank, National Association.................................................................................49
Legal Matters......................................................................................................49
Experts............................................................................................................49
Exhibit A - Agreement and Plan of Reorganization and Merger.......................................................A-1
Exhibit B - Fairness Opinion of Friedman, Billings, Ramsey & Company, Inc.........................................B-1
Exhibit C - Section 214a of the National Bank Act; Banking Circular 259...........................................C-1
Exhibit D - Capital's Annual Report on Form 10-KSB for the Year Ended December 31, 1997...........................D-1
Exhibit E - Capital's Quarterly Report on Form 10-QSB for the Period Ended June 30, 1998..........................E-1
</TABLE>
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SUMMARY INFORMATION
The following summary information does not purport to be complete and is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Proxy Statement, including the exhibits hereto and
the documents incorporated by reference herein. Shareholders of both Capital and
FCNB are urged to carefully read this Proxy Statement in its entirety.
THE PARTIES TO THE MERGER
FCNB. FCNB is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and as of June 30, 1998 had
approximately $1.02 billion in total assets and $80.97 million of shareholders'
equity. FCNB's principal subsidiary, FCNB Bank, currently operates twenty-eight
offices in Frederick, Anne Arundel, Baltimore, Carroll, Howard, Montgomery and
Prince George's Counties, Maryland. FCNB's principal executive offices are
located at 7200 FCNB Court, Frederick, Maryland 21703, and its telephone number
is (301) 662-2191.
For additional information concerning FCNB, its business, financial
condition, and results of operations, see "Available Information;" "Documents
Delivered and Incorporated by Reference;" "Selected Consolidated Financial and
Other Data" and "FCNB Corp."
As of August 31, 1998 there were 7,898,664 shares of FCNB Common Stock
outstanding,as adjusted for the Stock Split. FCNB Common Stock is quoted on the
Nasdaq National Market ("Nasdaq") under the symbol "FCNB".
Capital. Capital is a national banking association, organized under federal
law. As of June 30, 1998, it had approximately $167.17 million in total assets
and $11.74 million of shareholder's equity. Capital operates one office in
Rockville, Maryland, one office in Tysons Corner, Fairfax County, Virginia, and
two offices in the District of Columbia. Capital's principal executive offices
are located at One Church Street, Rockville, Maryland 20850, and its telephone
number is (301) 279-8900.
For additional information concerning Capital, its business, financial
condition, and results of operations, see "Available Information;" "Documents
Delivered and Incorporated by Reference;" "Selected Consolidated Financial and
Other Data;" and "Capital Bank, National Association"
As of August 31, 1998, there were 1,000,752 shares of Capital Common Stock
outstanding.
THE MERGER
General. Capital and FCNB, together with the Bank, have entered into an
Agreement and Plan of Reorganization and Merger (the "Agreement") pursuant to
which Capital will be merged with and into the Bank (the "Merger"). In
connection with the Merger, each outstanding share of Capital Common Stock will,
automatically and without further action, be converted into the number of shares
of FCNB Common Stock determined by dividing forty dollars ($40.00) by the value
of a share of FCNB Common Stock, as determined in accordance with the Agreement
(the "Conversion Ratio"), subject to adjustments and limitations set forth in
the Agreement and as described herein.
The maximum number of shares of FCNB Common Stock into which each share of
Capital Common Stock (the "Maximum Conversion Ratio") may be converted is 1.8576
shares, and the minimum number of shares of FCNB Common Stock into which each
share of Capital Common Stock may be converted is 1.5199 shares (in each case as
adjusted for the Stock Split) (the "Minimum Conversion Ratio"), except as
discussed under "The Merger -- Termination," herein. If the value of a share of
FCNB Common Stock as determined in accordance with the Agreement is such that
the number of shares into which each share of Capital Common Stock would be
converted would exceed the Maximum Conversion Ratio, or be less than the Minimum
Conversion Ratio, each share of Capital Common Stock
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would be converted at the Maximum Conversion Ratio or Minimum Conversion Ratio,
as appropriate.
The value of a share of FCNB Common Stock for the purposes of determining
the Conversion Ratio is equal to the average of the per share closing price for
FCNB Common Stock for the twenty trading days immediately preceding the date
which is five business days prior to the Closing Date under the Agreement, as
reported on Nasdaq (the "Price Determination Period"). If there are no trades on
any trading day during the Price Determination Period, or if Nasdaq does not
report a closing price, the closing price for any such day shall be the average
of the closing bid price and closing asked price as reported on Nasdaq. The
value of a share of FCNB Common Stock will be proportionally adjusted to reflect
any stock dividend paid by FCNB, or any combination or subdivision of the FCNB
Common Stock, prior to Closing. All references to the Conversion Ratio, Maximum
Conversion Ratio, Minimum Conversion Ratio, and the value of a share of FCNB
Common Stock for purposes of the Agreement contained herein have been adjusted
to reflect the Stock Split.
The maximum number of shares of FCNB Common Stock issuable to holders of
Capital Common Stock (assuming the maximum Conversion Ratio (as adjusted for the
Stock Split) of 1.8576 and the exercise of all outstanding options to acquire
Capital Common Stock) is approximately 1,987,357 shares, or approximately 20.11%
of the shares of FCNB Common Stock outstanding following the Merger. The minimum
number of shares of FCNB Common Stock issuable to holders of Capital Common
Stock (assuming the Minimum Conversion Ratio (as adjusted for the Stock Split)
of 1.5199 and the exercise of all outstanding options to acquire Capital Common
Stock) is approximately 1,626,068 shares, or approximately 17.08% of the shares
of FCNB Common Stock outstanding following the Merger.
Each share of FCNB Common Stock outstanding immediately prior to the Merger
will be unchanged by the Merger, and will continue to represent one share of
FCNB Common Stock. See "The Merger -- Consideration to be Received by Holders of
Capital Common Stock," "Description of FCNB Common Stock."
Holders of FCNB Common Stock will experience dilution in book value per
share of between $0.41 and $0.76 per share, or between 3.99% and 7.40%,
depending on the actual Conversion Ratio, as a result of the Merger, based upon
the pro forma combination of FCNB's and Capital's balance sheets at June 30,
1998. See "Unaudited Pro Forma Combined Financial Information". Such pro forma
information has not, however, been adjusted to reflect any of the improvements,
operating efficiencies, or increased growth and earnings potential that FCNB
anticipates as a result of the Merger. FCNB shareholders will experience
dilution of their percentage ownership interest in FCNB, and in their relative
voting power.
Option Agreement. As an inducement to FCNB entering into the Agreement, and
as a condition to its obligation to consummate the Merger, Capital and FCNB have
entered into the Stock Option Agreement (the "Option Agreement") pursuant to
which Capital has granted FCNB the option (the "Option) to purchase up to
248,278 shares of Capital Common Stock (19.9% of the outstanding shares of
Capital Common Stock following exercise of the Option), subject to adjustment,
at an exercise price of $35.00 per share. Exercise of the Option is permitted
only upon the occurrence of certain events set forth in the Option Agreement.
See "The Merger -- The Stock Option Agreement."
Closing Date. Under the Agreement, the Closing of the Merger will occur on
a date specified in writing by FCNB and Capital (the "Closing Date"), which date
shall be as soon as practicable, but not more than fifteen (15) days, after the
last condition precedent to the consummation of the Merger set forth in the
Agreement has been fulfilled or waived. See "The Merger -- Conditions to the
Merger."
Reasons for the Merger. The respective Boards of Directors of FCNB, the
Bank and Capital are in unanimous agreement that the proposed Merger of Capital
with and into the Bank is in the best interests of each of their respective
companies. The acquisition of Capital will enable FCNB to expand its market
into, or increase its presence in, the banking markets in which Capital
operates. FCNB believes that the acquisition of Capital will enable it to
maintain its internally generated growth in assets, and to add to aggregate and
per share earnings, although there can be no assurance that the Merger will
increase FCNB's earnings or asset growth rates. Capital's Board of Directors
(the
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"Capital Board") has concluded that the proposed Merger is fair to, and in the
best interests of, Capital and Capital's shareholders. In considering the terms
and conditions of the Merger, the Capital Board considered, among other things:
the financial terms of the Merger; the financial condition and historical
performance of FCNB; the opinion of its financial advisor as to the fairness,
from a financial point of view, of the terms of the Merger to the Capital
shareholders; and the operational and competitive benefits of the Merger. See
"The Merger -- Reasons for the Merger" and "-- Background of the Merger."
Recommendations of the Board of Directors. The respective Boards of
Directors of FCNB and Capital have each unanimously approved the proposed Merger
and recommend that the shareholders of their respective companies vote "FOR" the
proposed Merger.
Opinion of Capital Financial Advisor. Capital has received the opinion of
Friedman, Billings, Ramsey & Company, Inc. ("FBR"), an investment banking firm
experienced in the valuation of banking, thrift, and financial services
companies in connection with the merger of such institutions. The opinion of
FBR, a copy of which is attached hereto as Exhibit B, and which shareholders of
Capital are urged to read in its entirety, is that, as of the date of the Proxy
Statement, and based upon the assumptions contained in the opinion, the Merger
is fair to the holders of Capital Common Stock from a financial point of view.
FBR also acted as Capital's financial advisor and assisted in the identification
of prospective merger or acquiror candidates, and will receive compensation
contingent upon the consummation of the Merger. See "The Merger -- Opinion of
Capital Financial Advisor."
Special Meetings and Vote Required. The Capital Shareholder Meeting at
which the Merger will be considered will be held on Thursday, October 15, 1998
at 4:00 P.M. local time, at the main office of the Bank, One Church Street,
Rockville, Maryland. Holders of record on August 31, 1998 (the "Capital Record
Date") will be entitled to notice of and to vote at the Capital Shareholder
Meeting. The presence, in person or by proxy, of at least a majority of the
total number of shares of Capital Common Stock entitled to vote is necessary to
constitute a quorum at the Capital Shareholder Meeting.
The affirmative vote of at least two-thirds of the outstanding Capital
Common Stock is required to approve the Merger. Each share of Capital Common
Stock is entitled to one vote in respect of the Merger. See "The Meetings -- The
Capital Shareholder Meeting."
As of the Capital Record Date, there were 1,000,752 shares of Capital
Common Stock outstanding, of which 999,826 are entitled to vote at the Capital
Shareholder Meeting. As of August 31, 1998, the directors and executive officers
of Capital beneficially owned, and are entitled to vote, an aggregate of 246,682
shares (24.65%) of the issued and outstanding Capital Common Stock. Such persons
have entered into an agreement which, with limited exceptions, requires them to
vote in favor of the Merger. See "The Merger -- Certain Related Agreements and
Interests of Certain Persons." See "The Capital Shareholder Meeting -- Purpose
of the Capital Shareholder Meeting and Vote Required."
The FCNB Shareholder Meeting at which the Merger will be considered will be
held on Wednesday, November 4, 1998 at 3:00 P.M. local time, at FCNB
headquarters, 7200 FCNB Court, Frederick, Maryland. Holders of record on
September 8, 1998 (the "FCNB Record Date") will be entitled to notice of and to
vote at the FCNB Shareholder Meeting. The presence, in person or by proxy, of at
least a majority of the total number of shares entitled to vote is necessary to
constitute a quorum at the FCNB Shareholder Meeting.
The affirmative vote of at least two-thirds of all votes entitled to be
cast at the FCNB Shareholder Meeting is required to approve the Merger. Each
share of FCNB Common Stock is entitled to one vote. As of the FCNB Record Date,
there were 7,905,445 shares of FCNB Common Stock outstanding and entitled to
vote. As of the FCNB Record Date, directors and executive officers of FCNB
beneficially owning an aggregate of 818,978 shares (10.36%) of the issued and
outstanding FCNB Common Stock have indicated that they intend to vote in favor
of the Merger.
-9-
<PAGE>
Voting and Revocation of Proxies. Shares of Capital Common Stock
represented by properly executed proxies received at or prior to the Capital
Shareholder Meeting and not subsequently revoked will be voted as directed by
shareholders. Shares as to which the "ABSTAIN" box has been marked, and shares
held in street name by brokers for which no voting instructions are given
("broker non-votes"), will be treated as shares present and entitled to vote for
quorum purposes, but will have the effect of a vote against the Merger. IN THE
ABSENCE OF SPECIFIC INSTRUCTIONS, PROPERLY EXECUTED PROXIES RECEIVED BY CAPITAL
WILL BE VOTED FOR THE PROPOSAL TO APPROVE THE MERGER.
Any holder of Capital Common Stock who has delivered a proxy may revoke it
at any time prior to the exercise of the authority granted thereby by delivering
written notice of such revocation to Stephen N. Ashman, President of Capital,
prior to the Capital Shareholder Meeting, by granting and delivering a later
dated proxy, or by attending the Capital Shareholder Meeting and voting the
shares in person.
Shares of FCNB Common Stock represented by properly executed proxies
received at or prior to the FCNB Shareholder Meeting and not subsequently
revoked will be voted as directed by shareholders. Shares as to which the
"ABSTAIN" box has been marked and broker non-votes will be treated as shares
present and entitled to vote for quorum purposes, but will have the effect of a
vote against the Merger. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROPERLY
EXECUTED PROXIES RECEIVED BY FCNB WILL BE VOTED FOR THE PROPOSALS TO APPROVE THE
MERGER.
Any holder of FCNB Common Stock who has delivered a proxy may revoke it at
any time prior to the exercise of the authority granted thereby by delivering
written notice of such revocation to Helen G. Hahn, Secretary of FCNB, prior to
the FCNB Shareholder Meeting, by granting and delivering a later dated proxy, or
by attending the FCNB Shareholder Meeting and voting the shares in person.
If your shares of Capital Common Stock or FCNB Common Stock are not
registered in your name, you will need additional documentation from your
recordholder to vote the shares in person at the Capital Shareholder Meeting or
FCNB Shareholder Meeting.
Conditions to the Merger. The consummation of the Merger is subject to
numerous conditions, including but not limited to, obtaining the approval by the
requisite vote of the shareholders of Capital and FCNB, receipt of certain
regulatory approvals, and the receipt of certain tax and accounting opinions and
letters. See "The Merger -- Conditions to the Merger."
Dissenters' Rights. Under Section 214a of the National Bank Act, holders of
Capital Common Stock will be entitled to dissent from the Merger and obtain
payment in cash of the appraised value of such holder's shares of Capital Common
Stock, if the number of shares as to which dissenters' rights are exercised
exceeds 9.9% of the outstanding shares, FCNB may be entitled to terminate the
Merger. A copy of Section 214a of the National Bank Act and Banking Circular 259
issued by the Office of the Comptroller of the Currency are attached as Exhibit
C hereto. Holders of FCNB Common Stock will not be entitled to dissent from the
Merger or obtain the payment of the fair value of such holders' shares of FCNB
Common Stock. See "The Merger -- Dissenters' Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is anticipated that the Merger will constitute a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended, and that
shareholders of Capital will not recognize gain or loss as a result of the
conversion of their shares of Capital Common Stock into shares of FCNB Common
Stock, except to the extent they receive cash in lieu of fractional shares of
FCNB Common Stock. Capital and FCNB have received an opinion of Kevin P.
Kennedy, Esquire, special tax counsel to FCNB, as to certain anticipated federal
income tax consequences of the Merger. For a more extensive discussion of the
anticipated federal income tax consequences of the Merger to shareholders of
Capital and to Capital and FCNB, see "The Merger -- Certain Federal Income Tax
Consequences."
-10-
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the management and Board of Directors of Capital have
interests in the Merger that are in addition to their interests as shareholders
of Capital. In particular, Mr. Stephen Ashman, President of Capital has entered
into an agreement with FCNB and the Bank terminating his employment contract
with Capital, and providing for the payout of certain amounts thereunder to
which he is entitled as a result of the Merger. Additionally, each of the
directors of Capital have entered into the Support Agreement and certain
Non-Competition Agreements with FCNB and the Bank. See "The Merger -- Certain
Related Agreements and Interests of Certain Persons."
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a pooling of
interests under generally accepted accounting principles. See "The Merger --
Accounting Treatment."
COMPARISON OF SHAREHOLDER RIGHTS
Upon consummation of the Merger, holders of Capital Common Stock, whose
rights are presently governed by the National Bank Act and Capital's Articles of
Association, as amended, and Bylaws, will become shareholders of FCNB, a
Maryland business corporation. Accordingly, their rights will be governed by the
Maryland General Corporation Law (the "MGCL") and the Articles of Incorporation,
as amended, and Bylaws of FCNB. Certain differences in shareholders' rights
arise from differences between the Articles of Association or Incorporation and
Bylaws of Capital and FCNB, including, among other things, the number of
authorized shares of capital stock, the voting rights of certain shareholders,
the notice requirements for nominations of directors and presentation of new
business at meetings of shareholders, the number and term of directors, and
removal and vacancies on the Boards of Directors. See "Comparison of Shareholder
Rights and Certain Provisions of the Articles of Incorporation of FCNB."
EXCHANGE OF CAPITAL STOCK CERTIFICATES
The conversion of Capital Common Stock into FCNB Common Stock will occur
automatically upon effectiveness of the Merger, except that until exchanged for
FCNB Common Stock certificates, the holders of Capital Common Stock certificates
will not be entitled to receive dividends or other distributions on FCNB Common
Stock. Promptly after the effectiveness of the Merger, FCNB or FCNB's transfer
agent (the "Exchange Agent") will mail each Capital shareholder information
regarding the exchange of his or her shares of Capital Common Stock.
CAPITAL SHAREHOLDERS SHOULD NOT FORWARD CAPITAL STOCK CERTIFICATES TO
CAPITAL, FCNB OR THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS.
CAPITAL SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED FORM
OF PROXY.
MARKET FOR COMMON STOCK
The FCNB Common Stock is traded by eight market makers and is quoted on
Nasdaq under the symbol "FCNB". The Capital Common Stock has historically been
traded only on a limited basis in privately negotiated transactions. No dealers
offer to make a market in Capital Common Stock, and it is not quoted on Nasdaq
or any other organized market.
The following table sets forth the last trade prices per share of FCNB
Common Stock as reported on Nasdaq on June 22, 1998, the last business day
preceding the public announcement of the Merger and the last known trading price
of the Capital Common Stock prior to June 23, 1998. Based upon the last trade
price of FCNB Common Stock shown below, and adjusting for the Stock Split, each
share of Capital Common Stock would be converted into 1.6864 shares of FCNB
Common Stock. The equivalent per share price shown below is the product of
multiplying the
-11-
<PAGE>
assumed Conversion Ratio of 1.6864 shares by the last trade price of FCNB Common
Stock on June 22, 1998, as adjusted for the Stock Split, of $23.72 per share.
There can be no assurance as to the actual number of shares of FCNB Common Stock
into which each share of Capital Common Stock may be converted, or that the
actual Conversion Ratio will not be more or less than 1.6864 shares of FCNB
Common Stock per share of Capital Common Stock.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Price at FCNB Common Stock Capital Common Stock Equivalent Per Share Price
June 22, 1998 $23.72 $14.00 $40.00
</TABLE>
As a result of the inherent uncertainty prior to the Closing Date as to the
actual Conversion Ratio at which shares of Capital Common Stock will be
converted and the value of a share of FCNB Common Stock for purposes of
determining the Conversion Ratio, there can be no assurance that the equivalent
per share value realized by a holder of Capital Common Stock will not be greater
than, or less than, forty dollars ($40.00) per share.
In the event that the value of a share of FCNB Common Stock, as calculated
for purposes of determining the Conversion Ratio, exceeds approximately
twenty-six dollars and thirty-two cents ($26.32) per share, then each share of
Capital Common Stock will be converted at the Minimum Conversion Ratio. As a
result, the value of FCNB Common Stock received by holders of Capital Common
Stock WOULD EXCEED forty dollars ($40.00) per share. In the event that the value
of a share of FCNB Common Stock, as calculated for purposes of determining the
Conversion Ratio, is less than approximately twenty-one dollars and fifty-three
cents ($21.53) per share, then each share of Capital Common Stock will be
converted at the Maximum Conversion Ratio. IN THAT EVENT, THE VALUE OF FCNB
COMMON STOCK RECEIVED BY HOLDERS OF CAPITAL COMMON STOCK WOULD BE LESS THAN
FORTY DOLLARS ($40.00) PER SHARE. There can be no assurance as to the value of a
share of FCNB Common Stock during the Price Determination Period or as to the
actual Conversion Ratio at which shares of Capital Common Stock will be
converted.
-12-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated financial data for
FCNB for the five fiscal years ended December 31, 1997 and the six month periods
ended June 30, 1998 and 1997, selected consolidated financial data for Capital
for the five fiscal years ended December 31, 1997 and for the six month periods
ended June 30, 1998 and 1997, and unaudited pro forma consolidated information
reflecting the consolidation of Capital and FCNB. The data presented for the six
month periods for Capital and FCNB is derived from unaudited financial
statements and includes, in the opinion of management, all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the data for such period. The results for the interim periods ended June 30,
1998 for Capital and FCNB are not necessarily indicative of the results which
may be expected for any other interim period or for the full year. The selected
consolidated financial and other data of Capital and FCNB set forth below does
not purport to be complete and should be read in conjunction with, and is
qualified in its entirety by, the more detailed information, including the
consolidated financial statements of FCNB and related notes, appearing in its
1997 Annual Report to Shareholders, incorporated by reference herein, and the
consolidated financial statements of Capital included in its 1997 Annual Report
to Shareholders, delivered herewith and incorporated by reference herein.
-13-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA FOR FCNB
<TABLE>
<CAPTION>
At or for the six
months ended June 30, At or for the years ended December 31,
------------------------ ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income $ 34,265 $ 30,181 $ 63,191 $ 54,653 $ 51,126 $ 43,892 $ 41,691
Total interest expense(1) 17,495 14,342 31,012 25,014 22,759 17,010 16,054
------------------------ ----------------------------------------------------------
Net interest income 16,770 15,839 32,179 29,639 28,367 26,882 25,637
Provision for credit losses 450 462 1,329 318 710 525 765
------------------------ ----------------------------------------------------------
Net interest income after
provision for credit losses 16,320 15,377 30,850 29,321 27,657 26,357 24,872
Net securities gains (losses) 313 144 580 193 123 375 (1,183)
Noninterest income (excluding net
securities gains (losses)) 3,490 2,601 5,540 4,068 3,795 2,503 4,497
Noninterest expenses 13,109 12,082 23,949 24,470 20,689 19,191 18,013
------------------------ ----------------------------------------------------------
Income before provision for
income taxes 7,014 6,040 13,021 9,112 10,886 10,044 10,173
Provision for income taxes 2,214 1,983 4,218 3,245 3,888 3,272 3,301
------------------------ ----------------------------------------------------------
Net income 4,800 4,057 $ 8,803 $ 5,867 $ 6,998 $ 6,772 $ 6,872
Other comprehensive income
(loss), net of taxes 695 683 2,912 (26) 2,680 (3,285) 1,135
------------------------ ----------------------------------------------------------
Comprehensive income $ 5,495 $ 4,740 $ 11,715 $ 5,841 $ 9,678 $ 3,487 $ 8,007
======================== ==========================================================
Net income before merger-related
expenses $ 4,834 $ 4,342 $ 9,088 $ 7,778 $ 7,301 $ 6,999 $ 6,872
======================== ==========================================================
PER SHARE DATA:(2)
Basic earnings $ 0.61 $ 0.52 $ 1.12 $ 0.74 $ 0.89 $ 0.86 $ 0.88
Diluted earnings 0.61 0.52 1.12 0.74 0.89 0.86 0.88
Cash dividends declared 0.263 0.204 0.428 0.368 0.375 0.330 0.263
Book value at period-end 10.27 9.17 9.83 8.78 8.52 7.64 7.47
Shares outstanding at
period-end 7,887,257 7,859,221 7,883,045 7,868,021 7,770,929 7,729,159 7,719,749
Weighted average shares
outstanding:
Basic 7,886,671 7,862,624 7,871,824 7,893,303 7,841,505 7,855,109 7,822,380
Diluted 7,921,303 7,877,009 7,891,428 7,911,215 7,861,071 7,873,581 7,831,051
BALANCE SHEET DATA (AT
PERIOD-END):
Total assets $1,021,646 $849,615 $918,084 $779,169 $660,984 $627,050 $603,497
Total loans, net of unearned
income 587,022 533,433 574,105 497,995 439,794 390,177 336,916
Total deposits 681,570 608,191 616,512 587,074 529,988 505,202 485,543
Federal funds purchased and
securities sold under
agreements to repurchase 65,129 38,090 65,163 40,739 21,043 25,103 32,304
Other short-term borrowings 187,136 126,140 152,138 76,516 32,426 26,089 13,776
Long-term debt -- -- -- -- 5,680 7,000 10,106
Total shareholders' equity 80,977 72,072 77,518 69,110 66,219 59,037 57,689
PERFORMANCE RATIOS:
Return on average total assets(3) 1.04 % 1.02 % 1.07 % 0.84 % 1.09 % 1.14 % 1.23 %
Return on average total assets
before merger-related expenses(3) 1.05 1.09 1.09 1.11 1.14 1.17 1.23
Return on average shareholders'
equity(3) 12.22 11.69 12.25 8.92 11.21 11.79 12.73
Return on average shareholder's
equity before merger-related
expenses(3) 12.31 12.51 12.65 11.82 11.70 12.18 12.73
Average equity to average assets 8.53 8.72 8.65 9.39 9.73 9.63 9.67
Cash dividends declared to net
income 43.13 39.64 38.77 49.86 41.61 36.62 30.32
</TABLE>
- ----------------------------------
(1) Net of $108,000 and $300,000 of capitalized construction period interest in
1996 and 1995, respectively.
(2) Adjusted to reflect the Stock Split.
(3) Information for the six month periods is annualized.
-14-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA FOR CAPITAL
<TABLE>
<CAPTION>
At or for the six
months ended June 30, At or for the years ended December 31,
----------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income $ 6,308 $ 5,442 $11,436 $ 9,104 $ 7,287 $ 6,186 $ 5,403
Total interest expense 2,705 2,153 4,709 3,555 2,817 1,999 1,943
----------------------- ----------------------------------------------------------
Net interest income 3,603 3,289 6,727 5,549 4,470 4,187 3,460
Provision for credit losses 120 95 195 90 370 180 270
----------------------- ----------------------------------------------------------
Net interest income after
provision for credit losses 3,483 3,194 6,532 5,459 4,100 4,007 3,190
Net securities gains (losses) -- 2 -- -- -- 2 88
Noninterest income (excluding net
securities gains (losses)) 445 368 846 731 776 791 890
Noninterest expenses 2,580 2,563 5,344 4,668 4,305 3,894 3,777
----------------------- ----------------------------------------------------------
Income before provision for
income taxes 1,348 1,001 2,034 1,522 571 906 391
Provision for income taxes 526 400 811 591 (705) (200) (390)
----------------------- ----------------------------------------------------------
Net income 822 601 1,223 931 1,276 1,106 781
Other comprehensive income (loss) (8) (42) (15) -- 195 (150) --
----------------------- ----------------------------------------------------------
Comprehensive income $ 814 $ 559 $ 1,208 $ 931 $ 1,471 $ 956 $ 781
======================= ==========================================================
PER SHARE DATA:
Basic earnings $ 0.83 $ 0.62 $ 1.26 $ 0.97 $ 1.42 $ 1.35 $ 0.97
Diluted earnings 0.82 0.61 1.22 0.96 1.42 1.35 0.97
Cash dividends declared -- -- -- -- -- -- --
Book value at period-end 11.74 10.32 10.98 9.74 8.79 7.27 6.06
Shares outstanding at
period-end 999,752 972,717 973,392 971,117 955,292 790,407 790,240
Weighted shares outstanding
Basic 984,577 971,706 972,360 960,200 896,881 818,584 808,374
Diluted 1,003,041 992,443 999,493 969,897 900,185 820,013 808,374
BALANCE SHEET DATA (AT
PERIOD-END):
Total assets $167,172 $140,487 $161,487 $ 128,434 $105,588 $ 84,848 $ 77,835
Total loans, net of unearned
income 105,957 93,026 100,463 85,831 61,489 55,637 55,038
Total deposits 135,243 119,667 128,974 103,636 85,096 70,850 67,159
Federal funds purchased and
securities sold under
agreements to repurchase 18,133 9,407 19,664 14,464 11,208 4,793 5,273
Other short-term borrowings 887 898 1,249 430 400 3,126 191
Long-term debt -- -- -- -- -- -- --
Total shareholders' equity 11,735 10,035 10,691 9,457 8,396 5,746 4,789
PERFORMANCE RATIOS:
Return on average total
assets(1) 1.03 % 0.91 % 0.88 % 0.83 % 1.41 % 1.40 % 1.10 %
Return on average
shareholders' equity(1) 14.71 12.38 12.16 10.59 17.72 20.74 18.23
Average Equity to Average Assets(1) 7.02 7.34 7.20 7.79 7.93 6.76 6.02
Cash dividends declared to net
income -- -- -- -- -- -- --
</TABLE>
- ----------------------------------
(1) Information for the six month periods is annualized.
-15-
<PAGE>
PRO FORMA COMBINED SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At or for the six
months ended June 30, At or for the years ended December 31,
----------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income $ 40,573 $ 35,623 $74,627 $ 63,757 $ 58,413 $ 50,078 $ 47,094
Total interest expense(1) 20,200 16,495 35,721 28,569 25,576 19,009 17,997
----------------------- ----------------------------------------------------------
Net interest income 20,373 19,128 38,906 35,188 32,837 31,069 29,097
Provision for credit losses 570 557 1,524 408 1,080 705 1,035
----------------------- ----------------------------------------------------------
Net interest income after
provision for credit losses 19,803 18,571 37,382 34,780 31,757 30,364 28,062
Net securities gains (losses) 313 146 580 193 123 377 (1,095)
Noninterest income (excluding net
securities gains (losses)) 3,935 2,969 6,386 4,799 4,571 3,294 5,387
Noninterest expenses 15,689 14,645 29,293 29,138 24,994 23,085 21,790
----------------------- ----------------------------------------------------------
Income before provision for
income taxes 8,362 7,041 15,055 10,634 11,457 10,950 10,564
Provision for income taxes 2,740 2,383 5,029 3,836 3,183 3,072 2,911
----------------------- ----------------------------------------------------------
Net income 5,622 4,658 10,026 6,798 8,274 7,878 7,653
Other comprehensive income
(loss), net of taxes 687 641 2,897 (26) 2,875 (3,435) 1,135
----------------------- ----------------------------------------------------------
Comprehensive income $ 6,309 $ 5,299 $12,923 $ 6,772 $ 11,149 $ 4,443 $ 8,788
======================= ==========================================================
Net income before merger-related
expenses $ 5,656 $ 4,943 $10,311 $ 8,709 $ 8,577 $ 8,105 $ 7,653
======================= ==========================================================
PER SHARE DATA:(2)
Basic earnings $ 0.59 $ 0.49 $ 1.05 $ 0.71 $ 0.88 $ 0.85 $ 0.83
Diluted earnings 0.58 0.49 1.05 0.71 0.88 0.85 0.83
Cash dividends declared 0.217 0.169 0.354 0.305 0.314 0.281 0.224
Book value at period-end 9.68 8.64 9.26 8.27 7.95 7.15 6.90
Shares outstanding at
period-end 9,573,239 9,499,611 9,524,574 9,505,713 9,381,934 9,062,101 9,052,410
Weighted average shares
outstanding
Basic 9,547,061 9,501,309 9,511,612 9,512,584 9,354,005 9,235,569 9,185,622
Diluted 9,612,831 9,550,665 9,576,973 9,546,849 9,379,143 9,256,451 9,194,293
BALANCE SHEET DATA
(AT PERIOD-END):
Total assets $1,188,818 $ 990,102 $1,079,571 $ 907,603 $ 766,572 $ 711,898 $ 681,332
Total loans, net of unearned
income 692,979 626,459 674,568 583,826 501,283 445,814 391,954
Total deposits 816,813 727,858 745,486 690,710 615,084 576,052 552,702
Federal funds purchased and
securities sold under agreements
to repurchase 83,262 47,497 84,827 55,203 32,251 29,896 37,577
Other short-term borrowings 183,023 127,038 153,387 76,946 32,826 29,215 13,967
Long-term debt -- -- -- -- 5,680 7,000 10,106
Total shareholders' equity 92,712 82,107 88,209 78,567 74,615 64,783 62,748
PERFORMANCE RATIOS:
Return on average total
assets(3) 1.04 % 1.00 % 1.03 % 0.84 % 1.13 % 1.17 % 1.21 %
Return on average total assets
before merger-related expenses(3) 1.05 1.07 1.06 1.07 1.17 1.20 1.21
Return on average shareholders'
equity(3) 12.53 11.78 12.24 9.12 11.89 12.55 13.13
Return on average
shareholder's equity before
merger-related expenses(3) 12.61 12.50 12.59 11.68 12.32 12.91 13.13
Average equity to average assets 8.31 8.53 8.44 9.16 9.51 9.30 9.25
Cash dividends declared to net
income 36.82 34.53 34.04 43.03 35.21 31.48 27.23
</TABLE>
- ----------------------------------
(1) Net of $108,000 and $300,000 of capitalized construction period interest in
1996 and 1995, respectively.
(2) Adjusted to reflect the Stock Split. Additionally, the amounts shown
reflect the conversion of Capital Common Stock at an assumed Conversion
Ratio of 1.6864 shares of FCNB Common Stock per share of Capital Common
Stock. See "Pro Forma Combined Financial Information" for information
regarding the impact on pro forma combined earnings per share if the
Minimum Conversion Ratio nd Maximum Conversion Ratio are in effect.
(3) Information for the six month periods is annualized.
For additional information regarding the impact on pro forma combined and pro
forma equivalent per share cash dividends and book value see "Comparative
Historical and Pro Forma Data."
-16-
<PAGE>
COMPARATIVE HISTORICAL AND PRO FORMA DATA
<TABLE>
<CAPTION>
At or for the six
months ended June
30, At or for the years ended December 31,
------------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
FCNB Common Stock(1)
Basic Earnings per Common Share:
Historical: $ 0.61 $ 0.52 $1.12 $ 0.74 $0.89 $0.86 $0.88
Pro forma combined - Minimum Conversion 0.60 0.50 1.07 0.73 0.90 0.87 0.85
Ratio:
Pro forma combined - 1.6864 Conversion 0.59 0.49 1.05 0.71 0.88 0.85 0.83
Ratio:
Pro forma combined - Maximum Conversion 0.58 0.48 1.04 0.70 0.87 0.84 0.82
Ratio:
Diluted Earnings per Common Share
Historical 0.61 0.52 1.12 0.74 0.89 0.86 0.88
Pro forma equivalent - Minimum 0.60 0.50 1.07 0.72 0.90 0.86 0.84
Conversion Ratio
Pro forma equivalent - 1.6864 0.58 0.49 1.05 0.71 0.88 0.85 0.83
Conversion Ratio
Pro forma equivalent - Maximum 0.57 0.48 1.03 0.70 0.87 0.84 0.82
Conversion Ratio
Dividends per Common Share:
Historical 0.26 0.20 0.43 0.37 0.38 0.33 0.26
Pro forma combined - Minimum Conversion 0.22 0.17 0.36 0.31 0.32 0.29 0.23
Ratio
Pro forma combined - 1.6864 Conversion 0.22 0.17 0.35 0.31 0.31 0.28 0.22
Ratio
Pro forma combined - Maximum Conversion 0.21 0.17 0.35 0.30 0.31 0.28 0.22
Ratio
Book value per Common Share (period end):
Historical 10.27 9.17 9.83 8.78 8.52 7.64 7.47
Pro forma combined - Minimum Conversion 9.86 8.79 9.42 8.41 8.09 7.25 7.00
Ratio
Pro forma combined - 1.6864 Conversion 9.68 8.64 9.26 8.27 7.95 7.15 6.90
Ratio
Pro forma combined - Maximum Conversion 9.51 8.49 9.10 8.12 7.82 7.04 6.80
Ratio
Capital Common Stock(1)
Basic Earnings per Common Share:
Historical: $0.83 $0.62 $1.26 $0.97 $1.42 $1.35 $0.97
Pro forma equivalent - Minimum 0.91 0.76 1.63 1.11 1.37 1.32 1.29
Conversion Ratio:
Pro forma equivalent - 1.6864 0.99 0.83 1.77 1.20 1.48 1.43 1.40
Conversion Ratio:
Pro forma equivalent - Maximum 1.08 0.89 1.93 1.30 1.62 1.56 1.52
Conversion Ratio:
Diluted Earnings per Common Share
Historical 0.82 0.61 1.22 0.96 1.42 1.35 0.97
Pro forma equivalent - Minimum 0.91 0.76 1.63 1.09 1.37 1.31 1.28
Conversion Ratio
Pro forma equivalent - 1.6864 0.98 0.83 1.77 1.20 1.48 1.43 1.40
Conversion Ratio
Pro forma equivalent - Maximum 1.06 0.89 1.91 1.30 1.62 1.56 1.52
Conversion Ratio
Dividends per Common Share:
Historical -- -- -- -- -- -- --
Pro forma equivalent - Minimum 0.34 0.26 0.55 0.47 0.48 0.43 0.35
Conversion Ratio
Pro forma equivalent - 1.6864 0.37 0.29 0.60 0.51 0.53 0.47 0.38
Conversion Ratio
Pro forma equivalent - Maximum 0.40 0.31 0.65 0.56 0.57 0.51 0.41
Conversion Ratio
Book value per Common Share (period end):
Historical 11.74 10.32 10.98 9.74 8.79 7.27 6.06
Pro forma equivalent - Minimum 14.99 13.36 14.32 12.78 12.30 11.02 10.64
Conversion Ratio
Pro forma equivalent - 1.6864 16.32 14.57 15.62 13.95 13.41 12.06 11.64
Conversion Ratio
Pro forma equivalent - Maximum 17.67 15.77 16.90 15.08 14.53 13.08 12.63
Conversion Ratio
</TABLE>
---------------------------------------------
(1) Adjusted to reflect the Stock Split.
The pro forma equivalent amounts per common share for earnings, dividends, and
book value are based on a formula that multiplies the appropriate pro forma
combined amounts by the Minimum Conversion Ratio, Maximum Conversion Ratio,
and the assumed 1.6864 Conversion Ratio.
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THE MEETINGS
THE CAPITAL SHAREHOLDER MEETING
General. The Capital Shareholder Meeting of will be held at the main office
of Capital, located at One Church Street, Rockville, Maryland, on Thursday,
October 15, 1998, at 4:00 P.M. local time.
The Capital Board of has chosen the close of business on August 31, 1998 as
the record date (the "Capital Record Date") for purposes of determining the
shareholders entitled to notice of, and to vote at, the Capital Shareholder
Meeting. As of the Capital Record Date, 1,000,752 shares of Capital Common Stock
were issued and, outstanding, and there were 998,947 shares entitled to vote.
Shareholders of Capital are entitled to one vote on all matters to be acted on
at the Capital Shareholder Meeting for each share of Capital Common Stock
entitled to vote held of record by them on the Capital Record Date. The presence
at the Capital Shareholder Meeting, in person or by proxy, of the holders a
majority of the total number of outstanding shares of Capital Common Stock
entitled to vote is necessary to constitute a quorum. In the event that there
are not sufficient votes for a quorum or to approve the Merger at the Capital
Shareholder Meeting, the meeting may be adjourned in order to permit further
solicitation of proxies, provided, however, no proxyholder will vote any proxies
voted AGAINST approval of the Agreement, FOR a proposal to adjourn the Capital
Shareholder Meeting.
Purpose of the Capital Shareholder Meeting and Vote Required. The purpose
of the Capital Shareholder Meeting is to consider and vote on the proposal to
approve the Merger pursuant to which Capital will be merged with and into the
Bank and shares of Capital Common Stock will automatically, and without further
action, be converted into the number of shares of FCNB Common Stock determined
by dividing forty dollars ($40.00) by the value of a share of FCNB Common Stock
as determined pursuant to the Agreement, subject to limitation and adjustment as
set forth in the Agreement; and to transact such other business as may properly
come before the Capital Shareholder Meeting or any adjournment or postponement
thereof.
The affirmative vote of two-thirds of the outstanding shares of Capital
Common Stock is required to approve the Merger. Directors and executive officers
of Capital owning or having the power to vote or direct the voting of 246,682
shares of Capital Common Stock, or 24.65% of the Capital Common Stock entitled
as of the Capital Record Date, have entered into an agreement which, with
limited exceptions, requires them to vote in favor of the Merger. See "The
Merger -- Certain Related Agreements and Interests of Certain Persons." As a
result of an order issued by the Comptroller, 926 shares or 0.09% of the Capital
Common Stock outstanding as of the Capital Record Date are prohibited from
voting, and therefore may not be voted at the Capital Shareholder Meeting, and
may not be counted in determining a quorum. Additionally, 97,186 shares of
Capital Common Stock, constituting 9.71% of the outstanding Capital Common
Stock, are subject to an irrevocable proxy pursuant to an order of the
Comptroller, and in accordance therewith, such shares will be voted on all
matters submitted to shareholders in the same proportion as all other shares are
voted.
THE CAPITAL BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER.
Voting and Revocation of Proxies. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Capital Shareholder Meeting,
the shares represented thereby will be voted as specified by the shareholder
executing the proxy. In the absence of specific instructions, proxies received
will be voted in favor of the proposal to approve the Merger. Management does
not know of any matters that will be brought before the Capital Shareholder
Meeting, other than as described herein. If other matters are properly brought
before the Capital Shareholder Meeting, the persons named in the proxy intend to
vote such shares to which the proxies relate in accordance with their best
judgment, unless such authority is withheld. A proxy may be revoked at any time
prior to the exercise of the authority granted thereby by delivering written
notice of such revocation to Stephen N. Ashman, President of Capital, prior to
the Capital Shareholder Meeting, by granting and
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delivering a later dated proxy with respect to such shares, or by attending the
Capital Shareholder Meeting in person and voting the shares. If Capital Common
Stock which you beneficially own is not registered in your name, you will need
additional documentation from your recordholder in order to vote personally at
the Capital Shareholder Meeting.
Votes cast by proxy or in person at the Capital Shareholder Meeting will be
tabulated by the election inspectors appointed for the meeting who will
determine whether or not a quorum is present. Where, as to any matter submitted
to the Capital shareholders for a vote, proxies are marked as abstentions (or
Capital shareholders appear in person but abstain from voting), such abstentions
will be treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. Broker non-votes will also be considered
present for purposes of determining a quorum. Since approval of the Merger
requires a two-thirds majority of the outstanding shares, an abstention or
broker non-vote will have the effect of a vote against the Merger.
The enclosed proxy is being solicited on behalf of the Capital Board and
Capital will bear the entire cost of such solicitation. In addition to
solicitation by mail, officers, directors and employees of Capital may solicit
proxies by telecopier, telegram, in person or otherwise. Such persons will not
receive any additional or special remuneration or payment for such solicitation.
Additionally, officers, directors or employees of FCNB may solicit proxies by
mail, telecopier, telegram, in person or otherwise. FCNB will pay all expenses
of printing this Proxy Statement.
THE FCNB SHAREHOLDER MEETING
General. The FCNB Shareholder Meeting will be held at FCNB's headquarters,
7200 FCNB Court, Frederick, Maryland, on Wednesday, November 4, 1998, at 3:00
P.M. local time.
The Board of Directors of FCNB (the "FCNB Board") has chosen the close of
business on September 8, 1998 as the record date (the "FCNB Record Date") for
purposes of determining the shareholders entitled to notice of, and to vote at,
the FCNB Shareholder Meeting. As of the FCNB Record Date, 7,905,445 shares of
FCNB Common Stock were issued and outstanding. Shareholders of FCNB are entitled
to one vote on all matters to be acted on at the FCNB Shareholder Meeting for
each share of FCNB Common Stock held of record by them on the FCNB Record Date.
The presence at the FCNB Shareholder Meeting, in person or by proxy, of a
majority of the total number of outstanding shares of FCNB Common Stock is
necessary to constitute a quorum.
Purpose of the FCNB Shareholder Meeting and Vote Required. The purpose of
the FCNB Shareholder Meeting is to consider and vote on the proposal to approve
the Merger, pursuant to which Capital will be merged with and into the Bank and
shares of Capital Common Stock will be converted into the number of shares of
FCNB Common Stock determined by dividing forty dollars ($40.00) by the value of
a share of FCNB Common Stock as determined in accordance with the Agreement,
subject to adjustment and limitation as set forth in the Agreement; and to
transact such other business as may properly come before the FCNB Shareholder
Meeting or at any adjournment or postponement thereof.
The affirmative vote of two-thirds of the votes entitled to be cast at the
FCNB Shareholder Meeting is required to approve the Merger. Directors and
executive officers of FCNB owning or having the power to vote or direct the
voting of 818,978 shares of FCNB Common Stock have indicated their intention to
vote in favor of the Merger.
THE FCNB BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND RECOMMENDS THAT
HOLDERS OF FCNB COMMON STOCK VOTE FOR THE MERGER.
Voting and Revocation of Proxies. If the enclosed form of proxy is properly
executed and returned in time to be voted at the FCNB Shareholder Meeting, the
shares represented thereby will be voted as specified by shareholders. In the
absence of specific instructions, proxies received will be voted in favor of the
proposals to approve the Merger. Management does not know of any matters that
will be brought before the FCNB Shareholder Meeting, other than as
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described herein. If other matters are properly brought before the FCNB
Shareholder Meeting, the persons named in the proxy intend to vote such shares
to which the proxies relate in accordance with their best judgment unless such
authority is withheld. A proxy may be revoked at any time prior to the exercise
of the authority granted thereby by delivering written notice of such revocation
to Helen G. Hahn, Secretary of FCNB, prior to the FCNB Shareholder Meeting, by
granting and delivering a later dated proxy with respect to such shares, or by
attending the FCNB Shareholder Meeting in person and voting the shares.
Votes cast by proxy or in person at the FCNB Shareholder Meeting will be
tabulated by the election inspectors appointed for the meeting who will
determine whether or not a quorum is present. Where, as to any matter submitted
to the FCNB shareholders for a vote, proxies are marked as abstentions (or FCNB
shareholders appear in person but abstain from voting), such abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. Broker non-votes will also be considered
present for purposes of determining a quorum. Since approval of the Merger
requires a two-thirds majority of the votes entitled to be cast, an abstention
or broker non-vote will have the effect of a vote against the Merger.
The enclosed proxy is being solicited on behalf of the FCNB Board and FCNB
shall bear the entire cost of such solicitation. In addition to solicitation by
mail, officers, directors and employees of FCNB may solicit proxies by
telecopier, telegram, in person or otherwise. Such persons will not receive any
additional or special remuneration or payment for such solicitation.
THE MERGER
Capital, FCNB and the Bank entered into the Agreement on June 23, 1998.
Following shareholder approval of the Merger, and the satisfaction or waiver of
certain other conditions to the Merger, Capital will be merged into the Bank.
The following brief description of the Merger and the Agreement does not purport
to be a comprehensive description of all facets of the Merger or the
transactional or other documents prepared in connection therewith, and is
qualified in its entirety by reference to the Agreement in the form of Exhibit A
attached hereto and made a part hereof, to which shareholders of both FCNB and
Capital are urged to refer, and the other documents referred to herein.
THE AGREEMENT
The Agreement provides that Capital will be merged with and into the Bank,
a Maryland chartered commercial bank, with the Bank surviving the Merger.
Pursuant to the Agreement, upon effectiveness of the Merger, each of the
outstanding shares of Capital Common Stock will automatically be converted into
the number of shares of FCNB Common Stock determined by dividing forty dollars
($40.00) by the value of a share of FCNB Common Stock, as determined pursuant to
the Agreement, subject to adjustment and limitation as set forth in the
Agreement and as described below. See "The Merger -- Consideration to be
Received by Holders of Capital Common Stock," and "FCNB Corp -- Description of
FCNB Capital Stock." Each of the shares of FCNB Common Stock outstanding prior
to the effectiveness of the Merger will be unchanged, and will continue to
represent shares of FCNB Common Stock.
THE BOARDS OF DIRECTORS OF CAPITAL AND FCNB HAVE UNANIMOUSLY APPROVED THE
MERGER AND RECOMMEND THAT THEIR RESPECTIVE SHAREHOLDERS VOTE "FOR" THE MERGER.
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<PAGE>
CONSIDERATION TO BE RECEIVED BY HOLDERS OF CAPITAL COMMON STOCK
Conversion of Capital Common Stock. Pursuant to the Agreement, upon
effectiveness of the Merger, each share of Capital Common Stock, except for
shares held by Capital in treasury or by dissenting shareholders, will
automatically, and without further action, be converted into the number of
shares of FCNB Common Stock determined by dividing forty dollars ($40.00) by the
value of a share of FCNB Common Stock, as determined in accordance with the
Agreement (the "Conversion Ratio"), provided, however, that in no event shall
the Conversion Ratio (as adjusted for the Stock Split) exceed 1.8576 shares of
FCNB Common Stock for each share of Capital Common Stock (the "Maximum
Conversion Ratio") or be lower than 1.5199 shares of FCNB Common Stock for each
share of Capital Common Stock (the "Minimum Conversion Ratio") except as
discussed below under "The Merger -- Termination". In the event that the
Conversion Ratio, calculated as set forth above, is higher or lower than the
Maximum Conversion Ratio or Minimum Conversion Ratio, as the case may be, then
shares of Capital Common Stock will be converted into shares of FCNB Common
Stock at the Maximum Conversion Ratio, or the Minimum Conversion Ratio, as
appropriate. The Maximum Conversion Ratio and the Minimum Conversion Ratio will
be proportionately adjusted to reflect any dividend on the FCNB Common Stock
payable in shares of FCNB Common Stock, or subdivision or combination of the
FCNB Common Stock, after the date hereof and prior to the Closing Date.
No fractional shares of FCNB Common Stock will be issued in connection with
the Merger. Holders of Capital Common Stock entitled to receive fractional
shares of FCNB Common Stock will receive cash in lieu of such fractional shares,
without interest, based upon the value of a share of FCNB Common Stock as
calculated pursuant to the Agreement.
The value of a share of FCNB Common Stock for the purposes of determining
the Conversion Ratio is the average of the per share closing price for FCNB
Common Stock for the twenty trading days immediately preceding the date which is
five business days prior to the Closing Date, as reported on Nasdaq (the "Price
Determination Period"). If there are no trades on any trading day during the
Price Determination Period, or if Nasdaq does not report a closing price, the
closing price for any such day shall be the average of the closing bid price and
closing asked price as reported on Nasdaq. The value of a share of FCNB Common
Stock will be proportionally adjusted to reflect any stock dividend paid by
FCNB, or any combination or subdivision of the FCNB Common Stock, prior to
Closing. All references to the Conversion Ratio, Maximum Conversion Ratio,
Minimum Conversion Ratio, and the value of a share of FCNB Common Stock for
purposes of the Agreement contained herein have been adjusted to reflect the
Stock Split.
The maximum number of shares of FCNB Common Stock which can be issued to
holders of Capital Common Stock, based upon the number of shares outstanding as
of the Capital Record Date and assuming the exercise of all options outstanding
pursuant to the Capital 1988 Stock Option Plan (the "Capital Option Plan"), is
approximately 1,987,357 shares, or approximately 20.11% of the issued and
outstanding shares of FCNB Common Stock following the Merger, or approximately
19.55% of the shares of FCNB Common Stock assuming the exercise of all
outstanding options to acquire FCNB Common Stock. The minimum number of shares
of FCNB Common Stock which can be issued to holders of Capital Common Stock,
assuming the exercise of all options outstanding pursuant to the Capital Option
Plan, is approximately 1,626,068 shares, or approximately 17.08% of the issued
and outstanding shares of FCNB Common Stock following the Merger, or
approximately 16.59% of the FCNB Common Stock assuming the exercise of all
outstanding options to acquire FCNB Common Stock.
Each share of FCNB Common Stock outstanding immediately prior to the Merger
will be unchanged by the Merger, and will continue to represent one share of
FCNB Common Stock. See "FCNB Corp -- Description of FCNB Capital Stock."
Holders of FCNB Common Stock will experience dilution in book value per
share of between $0.41 and $0.76 per share, or between 3.99% and 7.40%,
depending on the actual Conversion Ratio, as a result of the Merger, based upon
the pro forma combination of FCNB's and Capital's balance sheets at June 30,
1998. See "Unaudited Pro Forma Combined Financial Information". Such pro forma
information has not, however, been adjusted to reflect any of the
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<PAGE>
improvements, operating efficiencies, or increased growth and earnings potential
that FCNB anticipates as a result of the Merger. See "Unaudited Pro Forma
Combined Financial Information" and "The Merger -- Recommendation of the FCNB
Board." FCNB shareholders will experience dilution of their percentage ownership
interest in FCNB, and in their relative voting power.
In the event that the value of a share of FCNB Common Stock, as calculated
for purposes of determining the Conversion Ratio and as adjusted for the Stock
Split, exceeds approximately twenty-six dollars and thirty-two cents ($26.32)
per share, then each share of Capital Common Stock will be converted at the
Minimum Conversion Ratio. As a result, the value of FCNB Common Stock received
by holders of Capital Common Stock WOULD EXCEED forty dollars ($40.00) per
share. In the event that the value of a share of FCNB Common Stock, as
calculated for purposes of determining the Conversion Ratio and as adjusted for
the Stock Split, is less than approximately twenty-one dollars and fifty-three
cents ($21.53) per share, then each share of Capital Common Stock will be
converted at the Maximum Conversion Ratio. In that event, the value of FCNB
Common Stock received by holders of Capital Common Stock would be LESS THAN
forty dollars ($40.00) per share. There can be no assurance as to the value of a
share of FCNB Common Stock during the Price Determination Period or as to the
actual Conversion Ratio at which shares of Capital Common Stock will be
converted.
There can be no assurance that the market, trading or intrinsic value of
shares of FCNB Common Stock received by shareholders of Capital in exchange for
each share of Capital Common Stock will equal or exceed forty dollars ($40.00)
per share at or after the effectiveness of the Merger. There can be no assurance
as to the level at which shares of FCNB Common Stock can be sold, or as to
whether an active and liquid market in FCNB Common Stock can be maintained.
Options to Acquire Capital Common Stock. Pursuant to the Agreement, each of
the 69,100 options outstanding under the Capital Option Plan, if any, will be
converted into and become an option to purchase FCNB Common Stock, except that
incentive stock options held by employees who will not continue as employees of
FCNB and options held by directors of Capital will be converted into the number
of shares of FCNB Common Stock determined by subtracting the exercise price from
the forty dollars ($40.00) and dividing the result by the value of a share of
FCNB Common Stock provided that the value of a share of the FCNB Common Stock
shall not exceed twenty-six dollars and thirty-two cents ($26.32) or be less
than twenty-one dollars and fifty-three cents ($21.53), in each case as adjusted
for the Stock Split. The number of shares which each converted option shall be
exercisable for shall be equal to the number of shares of Capital Stock
multiplied by the Conversion Ratio, and the exercise price per share of FCNB
Common Stock shall be the original exercise price divided by the Conversion
Ratio.
BACKGROUND OF THE MERGER
During the last ten years, there have been significant developments in the
banking and financial services industries. These developments include an
increasing consolidation in the industry which has accelerated within the last
several years, geographic expansion by regional bank holding companies,
specialization of products and services offered by banking institutions,
increased reliance upon technology in the delivery of banking services,
increased competition from financial institutions which are not subject to bank
regulatory oversight, and increased regulatory compliance requirements for
banking institutions.
As a result of these developments and as part of the normal course of
attempting to enhance the performance of Capital, the Capital Board appointed a
special committee (the "Committee") on February 17, 1998, to consider Capital's
various strategic options. The Committee, chaired by Steven Schwartz, included
Messrs. Ashman, Bernstein, and Holtz. In March 1998, FBR met with the Committee
to update it on market conditions and discuss Capital's Strategic alternatives,
including the possibility of a sale of Capital as a means to enhance shareholder
value. In April 1998, the Committee retained FBR as its financial advisor in
connection with considering Capital's various strategic alternatives. As a
result of the discussions with FBR, the Committee elected to pursue the strategy
of identifying potential merger candidates that might be interested in acquiring
Capital. In April and May, 1998, FBR contacted 12
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institutions or their holding companies to determine their possible interest in
pursuing an acquisition of Capital, and information was provided to nine
companies. Following the provision of such information, follow-up conversations
were held by FBR with four institutions. On May 19, and May 24, 1998, FBR
presented to the Committee status reports on discussions, marketing activities
and the offers resulting from such activities. The Committee authorized FBR and
management to continue discussions with Capital to determine if a transaction
could be negotiated. In late May 1998, representatives of Capital and FCNB
conducted due diligence reviews of each other's financial conditions, business,
and operations. Concurrently, the management of Capital reviewed and revised
several drafts of the definitive agreement with the assistance of Capital's
legal counsel and financial advisor, and a draft of the definitive agreement was
delivered to each of Capital's directors for their review. On June 23, 1998, the
Capital Board reviewed the proposed transaction and the definitive agreement
with Capital's legal counsel and FBR. The Capital Board considered all factors
deemed relevant, including FBR's opinion that the Conversion Ratio is fair to
Capital's shareholders from a financial point of view, and determined that the
Merger was in the best interests of Capital and its shareholders and unanimously
approved the Merger. FCNB and Capital publicly announced the Merger on June 23,
1998.
RECOMMENDATION OF THE FCNB BOARD; REASONS FOR THE MERGER
The FCNB Board believes that the proposed Merger of Capital with and into
the Bank is in the best interests of FCNB and its shareholders. The acquisition
of Capital will enable FCNB to expand its market into, or increase its presence
in, the banking markets in which Capital operates. FCNB believes that the
acquisition of Capital will enable it to maintain its internally generated
growth in assets, and to add to aggregate and per share earnings. FCNB believes
that the market expansion and growth opportunities presented by the acquisition
of Capital will enable FCNB to enhance revenues and earnings, while maintaining
the customer and community oriented services which FCNB has historically
provided. There can be no assurance, however, that the Merger will increase
FCNB's earnings or asset growth rates.
ACCORDINGLY, THE FCNB BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND
UNANIMOUSLY RECOMMENDS THAT HOLDERS OF FCNB COMMON STOCK VOTE FOR THE APPROVAL
OF THE MERGER.
RECOMMENDATION OF THE CAPITAL BOARD; REASONS FOR THE MERGER
The Capital Board believes that the Merger is fair to, and in the best
interest of, Capital and its shareholders. ACCORDINGLY, THE CAPITAL BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF
CAPITAL COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER. See "-- Opinion of
Capital's Financial Advisor."
The terms of the Agreement, including the Conversion Ratio and the value of
the FCNB Common Stock to be received by Capital's shareholders, were the result
of arm's length negotiations between the representatives of Capital and FCNB. In
reaching its determination that the Merger and the Agreement are fair to, and in
the best interests of, Capital and its shareholders, the Capital Board consulted
with its financial advisor, as well as with Capital's management, and considered
a number of factors, including, without limitation, the following: (i) the
belief that the terms of the Agreement are attractive in that the Agreement
provides that Capital's shareholders will become shareholders of FCNB, a company
that the Capital Board believes has very positive future prospects; (ii) the
written opinion of FBR that the Conversion Ratio is fair to Capital's
shareholders from a financial point of view, (iii) the pro forma financial
information on the Merger, including, among other things, earnings per share,
dilution analysis, and ratio impact information; (iv) the sustainability of core
earnings by FCNB and potential for growth; (v) the tax free nature of the
transaction to Capital and Capital's shareholders; (vi) the historical stock
price information for both FCNB and Capital; (vii) the review by the Capital
Board of the business, operations, management, earnings and financial condition
of FCNB on both a historical and prospective basis, of (A) the enhanced
opportunities for operating efficiencies, particularly in terms of integration
of operations and support functions such as product development, asset-liability
management, marketing, data processing, loan review and finance and accounting,
that could result from the Merger and (B) the enhanced opportunities for growth
that the Merger would make possible, particularly the ability to
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respond to changing competitive, technological and regulatory environments;
(viii) the Capital Board's belief that the combined enterprise, having a greater
size and greater resources than Capital, could offer Capital's customers a
broader range of products and services than Capital presently offers as an
independent entity; (ix) the Board's review of alternatives to the Merger
(including the alternatives of remaining independent and growing internally,
remaining independent for a period of time and then selling Capital and
remaining independent and growing through future acquisitions), including the
range of possible values to Capital's shareholders obtainable through
implementation of such alternatives and the timing and likelihood of actually
receiving such values; and (x) the current and prospective economic environment
and competitive constraints facing financial institutions, including Capital and
FCNB.
In approving the Merger, the Capital Board did not identify any one factor
or group of factors as being more important or significant than any other factor
in the decision making process, although individual directors may have given one
or more factors more weight than other factors.
THE CAPITAL BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF
CAPITAL AND CAPITAL SHAREHOLDERS. THE CAPITAL BOARD UNANIMOUSLY RECOMMENDS THAT
CAPITAL SHAREHOLDERS VOTE "FOR" THE MERGER.
OPINION OF CAPITAL FINANCIAL ADVISOR
Pursuant to a letter agreement dated as of March 31, 1998 (the "FBR
Agreement"), Friedman, Billings, Ramsey & Co., Inc. ("FBR") was retained by
Capital to act as its financial advisor in connection with the Merger. At the
meeting of the Capital Board held on June 23, 1998, FBR delivered its written
opinion to the Capital Board to the effect that as of such date, an exchange
ratio based on a fixed price of $40.00 for each share of Capital Common Stock,
subject to certain terms and conditions including pricing "collars" on the
exchange ratio for FCNB Common Stock, pursuant to the Agreement (the "Exchange
Ratio") was fair, from a financial point of view, to the holders of Capital
Common Stock. FBR has reconfirmed its June 23, 1998 opinion by delivery of its
written opinion (the "FBR Opinion") to the Capital Board, dated the date of this
Proxy Statement, stating that as of the date hereof, based on the matters set
forth in such opinion and pursuant to the Agreement, the Exchange Ratio to be
received by the holders of shares of Capital Common Stock is fair to such
holders from a financial point of view.
THE FULL TEXT OF THE FBR OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS
ATTACHED AS EXHIBIT B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. THE DESCRIPTION OF THE FBR OPINION SET FORTH HEREIN IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO EXHIBIT B. CAPITAL'S SHAREHOLDERS ARE URGED TO READ
THE FBR OPINION IN ITS ENTIRETY. FBR'S OPINION IS ADDRESSED ONLY TO CAPITAL'S
BOARD OF DIRECTORS AND DIRECTED ONLY TO THE EXCHANGE RATIO TO BE RECEIVED IN THE
MERGER BY THE HOLDERS OF CAPITAL COMMON STOCK, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE
MEETING.
FBR is a nationally recognized investment banking firm and was selected by
Capital based on the firm's reputation and experience in investment banking in
general, its recognized expertise in the valuation of banking businesses and
because of its familiarity with Capital. FBR, as part of its investment banking
business, is frequently engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
In connection with rendering the opinions dated June 23, 1998 and the date
hereof, FBR, among other things: (i) reviewed the Agreement; (ii) reviewed the
Annual Report to Shareholders of Capital for the fiscal years ended December 31,
1996 and 1997, and Annual Report of Capital on Form 10-KSB filed with the Office
of the Comptroller of the Currency (the "OCC") for the fiscal years ended
December 31, 1995, 1996 and 1997, reviewed the Annual Proxy Statement of Capital
dated April 21, 1998, as well as Quarterly Reports of Capital on Form 10-QSB
filed with the OCC
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for the three month periods ended March 31, 1997, June 30, 1997, September
30, 1997, March 31, 1998 and June 30, 1998; (iii) reviewed the Annual Report to
Shareholders of FCNB for the fiscal years ended December 31, 1996 and 1997, and
Annual Reports of FCNB on Form 10-K filed with the Securities and Exchange
Commission (the "SEC") for the fiscal years ended December 31, 1996 and 1997,
reviewed the Annual Proxy Statement of FCNB dated March 20, 1998, as well as
Quarterly Reports of FCNB on Form 10-Q filed with the SEC for the three month
periods ended June 30, 1997, September 30, 1997, March 31, 1998 and June 30,
1998; (iv) reviewed the unaudited financial statements of Capital for the five
months ended May 31, 1998; (v) reviewed the reported market prices and trading
activity for FCNB common stock for the period January 1, 1995 through June 22,
1998 and September 2, 1998; (vi) discussed the financial condition, results of
operations, earnings projections, business and prospects of Capital and FCNB
with the managements of Capital and FCNB; (vii) compared the results of
operations and financial condition of Capital and FCNB with those of certain
publicly-traded financial institutions (or their holding companies) that FBR
deemed to be reasonably comparable to Capital or FCNB, as the case may be;
(viii) reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that FBR deemed to be reasonably comparable to
the Merger; (ix) reviewed the financial terms, to the extent publicly available,
of certain acquisition transactions previously entered into by FCNB; and (x)
performed such other analyses and reviewed and analyzed such other information
as FBR deemed appropriate.
In connection with rendering the FBR Opinion, as set forth herein, FBR
assumed and relied upon, without independent verification, the accuracy and
completeness of all the financial information, analyses and other information
reviewed by and discussed with it, and did not make an independent evaluation or
appraisal of the specific assets, the collateral securing assets or the
liabilities of FCNB, Capital or any of their respective subsidiaries, or the
collectibility of any such assets (relying, where relevant, on the analyses and
estimates of FCNB and Capital). With respect to the financial projections
reviewed with each company's management, FBR assumed that they reflect the best
currently available estimates and judgments of the respective managements of the
respective future financial performances of each of FCNB and Capital and of the
combined company, and that such performances will be achieved. FBR also assumed
that there has been no material change in FCNB's or Capital's assets, financial
condition, results of operations, business or prospects since the date of the
last financial statements noted above. Finally, FBR assumed without independent
verification that the aggregate consolidated allowances for loan losses for
Capital and FCNB were adequate to cover such losses, and that the conditions
precedent in the Merger Agreement are not waived.
The forecasts and projections furnished to FBR for Capital were prepared by
the management of Capital. As a matter of policy, Capital does not publicly
disclose internal management forecasts, projections or estimates of the type
furnished to FBR in connection with its analysis of the Merger, and such
forecasts, projections and estimates were not prepared with a view towards
public disclosure. These forecasts, projections and estimates were based on
numerous variables and assumptions which are inherently uncertain and which may
not be within the control of management including, without limitation, general
economic, regulatory and competitive conditions. Accordingly, actual results
could vary materially from those set forth in such forecasts, projections and
estimates.
The Capital Board imposed no limitations on FBR with respect to the
investigation made or procedures followed by FBR in rendering the FBR Opinion.
In connection with rendering such fairness opinion to the Capital Board, FBR
performed a variety of financial analyses. The following is a summary of the
material financial analyses performed by FBR, but does not purport to be a
complete description of FBR's analyses or presentation at the June 23, 1998
meeting of the Capital Board. FBR believes that its analyses must be considered
as a whole and that selecting portions of such analyses and the factors
considered therein, without considering all factors and analyses, could create
an incomplete view of the analyses and the processes underlying the FBR Opinion.
The preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analyses or summary
description. In its analyses, FBR made numerous assumptions with respect to
industry performance, business and economic conditions and various other
matters, many of which are beyond the control of Capital and FCNB. Any estimates
contained in FBR's analyses are not necessarily indicative of future results or
values, which may be significantly more or less favorable than such estimates.
Estimates of values of companies do not purport to be appraisals or necessarily
reflect the prices at which the companies or their securities may actually be
sold.
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Summary of Terms of Proposed Transactions. FBR reviewed the terms of the
proposed Merger, including the form of consideration. The Exchange Ratio at a
price of $40.00 per share for Capital Common Stock represents a multiple of (i)
31.7x Capital's earnings per share for the twelve months ended March 31, 1998;
(ii) 27.7x Capital's earnings per share for the twelve months ended March 31,
1998 after adjustment for one-time expense due to fire damage at one of
Capital's branches; (iii) 21.8x management's estimate of Capital's 1998 earnings
per share; (iv) 3.77x Capital's book value per share as of March 31, 1998; and
(v) 3.77x Capital's tangible book value per share as of March 31, 1998. The
Exchange Ratio also represented a tangible book premium to core deposits of
24.53% based on Capital's tangible book value at March 31, 1998.
Comparable Transaction Analysis. FBR reviewed certain information relating
to transactions announced since January 1, 1997 involving the acquisition of
banks nationwide ("Nationwide Transactions"); banks in the District of Columbia,
Maryland and Virginia ("Regional Transactions"); banks nationwide in which the
seller's return on average equity ("ROAE") is between 12% and 14% ("Seller's
ROAE Comparable Transactions"); and banks nationwide with assets between $100
million and $200 million (the "Asset Comparable Transactions" and collectively,
the "Comparable Groups"). In conjunction with its analysis, FBR reviewed
valuation multiples based on price to book value, price to tangible book value,
price to latest twelve months earnings per share and the premium over tangible
book value as a percentage of core deposits. FBR compared FCNB's pending
acquisition of Capital to transactions involving the Comparable Groups over the
period from January 1, 1997 through June 22, 1998. FBR computed the foregoing
ratios for the Merger based on the a price per share of $40.00 for Capital
Common Stock. The Comparable Groups included the following numbers of
transactions: Nationwide Transactions (516); the Regional Transactions (21);
Seller's ROAE Comparable Transactions (83); and Asset Comparable Transactions
(113). FBR's computations yielded the following median multiples at announcement
for the Nationwide Transactions, the Regional Transactions, the Seller's ROAE
Comparable Transactions and the Asset Comparable Transactions, respectively, as
compared with the following indicated multiples for Capital at announcement of
the Merger: (i) price to book value multiples of 2.29x, 2.64x, 2.45 and 2.51x,
compared with 3.77x for the Merger; (ii) price to tangible book value multiples
of 2.36x, 2.72x, 2.56x and 2.53x, compared with 3.77x for the Merger; (iii)
price to latest twelve months earnings multiples of 19.8x, 21.1x, 19.8x and
20.7x, compared with 31.7x for last twelve months earnings and 27.7x adjusted
last twelve months earnings for the Merger; and (iv) core deposit premiums of
16.20%, 21.93%, 19.01% and 19.84%, compared with an indicated deposit premium in
the Merger of 24.53%.
Discounted Earnings Stream and Terminal Value Analysis. Using a discounted
earnings stream and terminal value analysis, FBR estimated the future stream of
earnings flows that Capital could be expected to produce through the year 2002,
under various circumstances, assuming Capital performed in accordance with the
earnings forecasts of Capital management. To approximate the terminal value of
the Capital Common Stock at the end of a four-year period (December 31, 2002),
FBR applied price to earnings multiples ranging from 19.5 to 22.0, applied
multiples of book value ranging from 220% to 270% and applied premiums over
tangible book value as a percentage of core deposits of 16.0% to 21.0%. The net
income streams, dividend streams and terminal values were then discounted to
present values using a discount rate of 12.5%. When a 12.5% discount rate was
applied to price to book value merger multiples of 220% to 270%, the analysis
indicated a reference range between $26.74 and $32.82 per share of Capital
Common Stock. When the same discount rate of 12.5% was applied to price to
earnings per share merger multiples of 19.5 times to 22.0 times, the analysis
indicated a reference range between $34.21 and $38.60 per share of Capital
Common Stock. When the same discount rate of 12.5% was applied to tangible book
premium to core deposits merger multiples of 16.0% to 21.0%, the analysis
indicated a reference range between $33.29 and $39.89 per share of Capital
Common Stock.
Pro Forma Merger Analysis. FBR performed pro forma merger analyses that
combined Capital's and FCNB's current and projected income statements and
balance sheets based on earnings forecasts of Capital and FCNB, respectively.
Assumptions and analyses of the accounting treatment, acquisition adjustments,
operating efficiencies and other adjustments were made to arrive at a base case
pro forma analysis to determine the effect of the Merger on FCNB. FBR noted
that, based on the Exchange Ratio and the net impact of merger related charges
and other one-time expenses, the impact of the Merger on FCNB's pro forma
earnings per share and tangible book value per share did not
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appear to be material. The actual results achieved by the combined company will
vary from the projected results and such variations may be material.
Analysis of Selected Publicly Traded Companies. In preparing its
presentation, FBR used publicly available information to compare selected
financial and market trading information, including book value, tangible book
value, earnings, asset quality ratios, loan loss reserve levels, profitability
and capital adequacy, for FCNB and selected other publicly traded commercial
banks located in a similar region of the United States. This peer group
consisted of commercial bank holding companies with total assets between $500
million and $1.5 billion in the MidAtlantic region of the United States. FBR
reviewed the historical financial information for FCNB and the peer group
between December 31, 1995 and March 31, 1998. According to the analysis, FCNB
compared favorably to the peer group when looking at asset quality, loan loss
reserve levels, capital adequacy, earnings performance and operating efficiency.
In connection with rendering the FBR Opinion, FBR confirmed the
appropriateness of its reliance on the analyses used to render its June 23, 1998
opinion by performing procedures to update certain of such analyses and by
reviewing the assumptions upon which such analyses were based and the factors
considered in connection therewith. The FBR Opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to it as of, the date of such opinion. Events occurring after the date
of the FBR Opinion could materially affect the assumptions used in preparing
such opinion.
Pursuant to the FBR Agreement, Capital retained FBR to act as its
independent financial advisor in connection with the Merger. In the event the
Merger is consummated, the Company will pay FBR a success fee (the "Success
Fee") equal to: (i) sixty-five basis points (0.65%) of the fair market value (as
defined below) of the first $37.5 million of aggregate consideration received by
the Company's shareholders as of the closing of the Sale Transaction; and (ii)
five percent (5%) of the fair market value of any aggregate consideration
received by the Company's shareholders as of the closing of the Sale Transaction
in excess of $37.5 million. The Success Fee shall be payable as follows: (A) 25%
of the anticipated Success Fee was paid upon the signing of the Merger Agreement
with a Purchaser Entity, which amount shall be returned to Capital if the Merger
is not consummated for any reason other than the breach of the agreement of sale
by Capital; and (B) the remainder of such Success Fee shall be due to FBR in
immediately available funds at the closing of the Merger. Capital also has
agreed to reimburse FBR for its reasonable out-of-pocket expenses in connection
with its engagement and to indemnify FBR and its affiliates and their respective
partners, directors, officers, employees, agents and controlling persons against
certain expenses and liabilities, including liabilities under applicable
securities laws.
FBR has advised Capital that, in the ordinary course of its business as a
full-service securities firm, FBR may, subject to certain restrictions, actively
trade the equity securities of Capital and/or FCNB for its own account or for
the accounts of its customers, and, accordingly, may at any time hold a long or
short position in such securities.
CONDITIONS TO THE MERGER
The obligation of Capital to consummate the Merger is subject to various
conditions, including the following: (i) the continued accuracy of the
representations and warranties of FCNB; (ii) the performance, in all material
respects, of all of the covenants and agreements of FCNB under the Agreement;
(iii) the approval of the Merger by the shareholders of both Capital and FCNB;
(iv) the effectiveness of the Registration Statement (of which this Proxy
Statement forms a part) on Form S-4 relating to the FCNB Common Stock; (v) the
receipt of a satisfactory opinion as to the federal income tax consequences of
the Merger; (vi) the absence of any material adverse change in the business,
operations, assets, financial condition, prospects or results of operations of
FCNB or the Bank; (vii) the approval for quotation on Nasdaq, upon notice of
issuance, of the shares of FCNB Common Stock to be issued to Capital
shareholders in connection with the Merger; and (viii) the absence of any order,
decree, or injunction (or proceeding seeking any of the foregoing) enjoining or
prohibiting consummation of the Merger and the transactions contemplated by the
Agreement.
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The obligation of FCNB and the Bank to consummate the Merger is subject to
various conditions, including the following: (i) the continued accuracy of the
representations and warranties of Capital; (ii) the performance, in all material
respects, of the obligations of Capital under the Agreement; (iii) the receipt
of all requisite regulatory approvals, which approvals shall not contain
conditions other than those as are generally imposed, and which do not, in the
reasonable judgment of FCNB, make it inadvisable to consummate the Merger; (iv)
the approval of the Merger by the shareholders of Capital and FCNB; (v) the
receipt of an opinion of FCNB's independent accountants, or FCNB's otherwise
satisfying itself, that the Merger can be accounted for as a pooling of
interests; (vi) the absence of any material adverse change in the business,
operations, assets, financial condition, prospects or results of operations of
Capital; (vii) the absence of any injunction, proceeding, statute or regulation
preventing consummation of the Merger or making it unlawful, or in the
reasonable judgment of FCNB, inadvisable, to consummate the Merger; (viii) the
absence of previously undisclosed litigation which, if successful, would in the
reasonable judgement of FCNB, have a material adverse effect on the financial
condition, operations, business or prospects of Capital; (ix) the execution of
Support Agreements by each of the directors of Capital; (x) the amendment of the
Capital Shareholder Protection Rights Plan to exclude FCNB and the Bank from the
operation thereof as a result of the Agreement and the transactions contemplated
by the Agreement; (xi) the execution of noncompetition agreements by the
directors of Capital; and (xii) the receipt of a satisfactory opinion as to the
federal income tax consequences of the Merger. See "The Merger -- Termination,"
"-- Certain Related Agreements and Interests of Certain Persons," "-- Accounting
Treatment," and "-- Certain Federal Income Tax Consequences."
Pending effectiveness of the Merger, Capital is required to conduct its
business in the ordinary course, and in substantially the same manner as it has
conducted business to date. Additionally, Capital has agreed not to take certain
actions, including, but not limited to paying any dividends, redeeming,
repurchasing or issuing any shares of Capital Common Stock or capital stock of
any subsidiary, except for the issuance of shares of Capital Common Stock upon
the exercise of options outstanding under the Capital Option Plan; incurring any
obligations or liabilities except in the ordinary course of business; granting
any salary increases or bonuses except bonuses in accordance with past practice
at year end which have been accrued for, or which have been previously disclosed
to FCNB; effecting any merger, sale of assets or other transaction not in the
ordinary course of business; taking any action which would cause the rights
attached to the Capital Common Stock to become exercisable or detach; or
soliciting or authorizing any inquiries or proposals with respect to any
extraordinary transactions other than the Merger, except that the Capital Board
may consider, negotiate, communicate or provide information with respect to
(collectively "communications") an Unsolicited Acquisition Proposal (as
hereinafter defined) received prior to the Effective Time, which it in good
faith determines its fiduciary duty under Maryland law requires such
communications. Any such determination must be based on the written opinion of
Capital's counsel that the Board's fiduciary duty requires such communications
because, based on the opinion of Capital's financial advisor, such proposal is
more favorable to the shareholders of Capital than the Merger. An Unsolicited
Acquisition Proposal is any proposal for a merger, consolidation, share purchase
or exchange, or purchase and assumption transaction or similar extraordinary
transaction involving Capital or all of its assets, which is received by Capital
without violation of its agreement not to further seek or encourage any
proposals for such transactions.
The Agreement provides that as promptly as practicable after the date of
the Agreement and Capital's furnishing any information regarding Capital
required to be included, FCNB will file the Registration Statement with the
Commission and applications or notices with the Board of Governors of the
Federal Reserve (the "Federal Reserve"), the Maryland Commissioner of Financial
Regulation, the Comptroller of the Currency and any other appropriate state or
federal regulatory agency for approval of the Merger. As of the date hereof, all
notices and applications have been filed, but no approvals have been received to
date.
THE OPTION AGREEMENT
Pursuant to the Option Agreement, Capital has granted FCNB the option (the
"Option"), exercisable only in certain circumstances that have not yet occurred,
to acquire up to 248,278 shares, or 19.9% of the aggregate shares, of Capital
Common Stock that would be outstanding immediately after the issuance of shares
in respect of the Option (and
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without reference to other options, warrants or rights to acquire Capital Common
Stock outstanding as of the date of grant of the Option), at an exercise price
of $35.00 per share.
The Option is exercisable in whole or in part, but subject to any required
regulatory approvals, at any time after a "Purchase Event" shall occur. A
Purchase Event, as defined in the Option Agreement, is any of the following: (1)
Capital, without having received FCNB's prior written consent, which may be
withheld in the sole discretion of FCNB, enters into an agreement with any
person to: (i) acquire, merge or consolidate, or enter into any similar
transaction, with Capital; (ii) purchase, lease or otherwise acquire all or
substantially all of the assets of Capital; or (iii) purchase or otherwise
acquire securities representing 15% or more of the voting power of Capital; (2)
any person acquires beneficial ownership or the right to acquire beneficial
ownership of 15% or more of the outstanding shares of Capital Common Stock (the
term "beneficial ownership" for purposes of the Option Agreement has the meaning
assigned thereto in Section 13(d) of the Exchange Act and the regulations
promulgated thereunder); or (3) any person shall have made a bona fide proposal
to Capital by public announcement or written communication that is or becomes
the subject of public disclosure to acquire Capital by merger, share exchange,
consolidation, purchase of all or substantially all of its assets or any other
similar transaction, and following such bona fide proposal: (i) the shareholders
of Capital vote not to approve the Agreement at the Capital Shareholder Meeting
or the Capital Board withdraws, modifies or changes its recommendation to the
shareholders of Capital in a manner detrimental to approval of the Merger by
shareholders of Capital; or (ii) the Capital Shareholder Meeting shall not have
been held prior to the termination of the Agreement.
If a Purchase Event occurs, and Capital has entered into an agreement with
respect to the acquisition, merger or consolidation of Capital, the sale of all
or substantially all of the assets of Capital, or similar business combination
transaction, or other transaction inconsistent with the consummation of the
Agreement (an "other transaction"), then, at the election of FCNB, and in lieu
of the exercise of the Option, and subject to the receipt of any required
regulatory approvals, notices or certifications, FCNB may require the purchase
of the Option from FCNB at any time before or after the effectiveness of such
other transaction, at a cash price equal to the excess of the per share value of
the other transaction over the Exercise Price multiplied by the number of shares
subject to this Option. Capital has agreed that it will cause the other party,
and its parent company, if any, to the other transaction to expressly assume as
an obligation of such other party the obligation to make the described payment
described.
The Option shall expire and terminate, to the extent not previously
exercised, upon the earlier of: (i) the Effective Time; (ii) upon termination of
the Agreement in accordance with the provisions thereof, other than a
termination based upon, following or in connection with either: (a) a material
breach by Capital of a Specified Covenant (as defined below); or (b) the failure
of Capital to obtain shareholder approval of the Agreement by the vote required
under applicable law, if either (a) or (b) follows the occurrence of a Purchase
Event; or (iii) 12 months after termination of the Agreement based upon a
material breach by Capital of a Specified Covenant or the failure of Capital to
obtain shareholder approval of the Agreement by the vote required under
applicable law, in either case following the occurrence of a Purchase Event.
"Specified Covenant" means any material representation, warranty, covenant or
agreement contained in the Agreement.
The grant of the Option by Capital was a condition and inducement to FCNB's
willingness to enter into the Agreement. Exercise of the Option may tend to make
the acquisition of a controlling interest in Capital more expensive to any
prospective acquiror of Capital, other than FCNB, and therefore may decrease the
likelihood that another prospective acquiror will seek a business combination
with Capital, and may increase the probability that the Merger will consummated,
even if another business combination would be beneficial to holders of Capital
Common Stock.
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TERMINATION
The Agreement may be terminated, and the Merger abandoned, at any time
prior to the effectiveness of the Merger, whether or not such termination occurs
before or after approval of the Merger by the shareholders of Capital and FCNB,
and without further action by shareholders of Capital and FCNB, in the following
circumstances: (i) by mutual consent of Capital and FCNB; (ii) unilaterally by
either Capital or FCNB at any time after April 30, 1999, except that if Capital
engages in communications regarding an Unsolicited Acquisition Proposal it may
not terminate under this provision; (iii) unilaterally, by either Capital or
FCNB in the event of a material breach by the other of any representation,
warranty or agreement contained in the Agreement if such breach has not been, or
cannot be cured within 30 days of delivery of written notice of the breach; (iv)
unilaterally, by either Capital or FCNB if any government or regulatory approval
required for consummation of the Merger is denied by final non-appealable order,
or any denial shall not have been appealed in a timely manner; (v) by either
FCNB or Capital, if any condition precedent to the obligation of that party to
consummate the merger cannot be satisfied by April 30, 1999, provided that the
terminating party must not be in breach of a material representation, warranty
or agreement; (vi) unilaterally, by either Capital or FCNB, in the event that
the Merger is not approved at, respectively, the Capital Shareholder Meeting or
the FCNB Shareholder Meeting; or (vii) by Capital, if at Closing, the value of a
share of FCNB Common Stock, as determined during the Price Determination Period
and as adjusted for the Stock Split, is less than $17.94, unless FCNB, within
five days of receipt of notice of termination, advises Capital of its election
to increase the Conversion Ratio to 2.2287 shares of FCNB Common Stock for each
share of Capital Common Stock. If the Agreement is terminated under any of the
foregoing circumstances, neither Capital nor FCNB shall have any liability or
obligation to the other relating to the Agreement, other than with respect to
confidentiality of documents and expenses, and except in the event of a wilful
breach of a material provision.
AMENDMENT AND WAIVER
Any of the terms and conditions of the Agreement may be amended or modified
by Capital and FCNB in writing, at any time before or after approval by the
shareholders of Capital or FCNB, except that no amendment or modification after
approval by the shareholders of Capital may reduce the value or change the form
of consideration to be received by shareholders of Capital. Any term or
condition of the Agreement may be waived at any time, in writing, by the party
which, or the shareholders of which, is entitled to the benefit of such waived
term or condition. FCNB and Capital have each waived certain provisions of the
Agreement. See "The Merger -- Conditions to the Merger."
EFFECTIVENESS OF THE MERGER
The Closing Date of the Merger shall take place within 15 days of the
receipt of all required approvals and authorizations of government and
regulatory authorities and the expiration of all applicable waiting periods, and
the satisfaction or waiver of all conditions to the Merger. The Merger shall
become effective upon the later of the filing of Articles of Merger with the
Maryland Department of Assessments and Taxation or the date indicated in such
Articles of Merger. It is expected that the Merger will become effective within
one business day of the Closing.
SURRENDER OF CERTIFICATES
Upon effectiveness of the Merger, certificates which formerly represented
shares of Capital Common Stock will represent the number of shares of FCNB
Common Stock into which shares shall have been converted, except that until
exchanged for FCNB Common Stock certificates, the holders of Capital Common
Stock certificates will not be entitled to receive dividends or other
distributions or payments on FCNB Common Stock.
Promptly following effectiveness of the Merger, FCNB or American Stock
Transfer and Trust Company, FCNB's transfer agent (the "Exchange Agent"), will
mail each Capital shareholder information regarding the exchange of his or her
shares of Capital Common Stock including procedures to be followed in the event
that a Capital Shareholder has lost his or her certificates. CAPITAL
SHAREHOLDERS SHOULD NOT DELIVER CERTIFICATES REPRESENTING
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CAPITAL COMMON STOCK TO CAPITAL, FCNB OR THE EXCHANGE AGENT UNTIL THEY HAVE
RECEIVED TRANSMITTAL FORMS, AND SHOULD NOT RETURN CERTIFICATES FOR CAPITAL
COMMON STOCK WITH THE ENCLOSED FORM OF PROXY. Upon surrender of certificates
representing shares of Capital Common Stock, the Exchange Agent will issue to
such shareholder one or more certificates representing the number of whole
shares of FCNB Common Stock into which such shareholder's shares shall have been
converted, together with a check representing payment, without interest, of cash
in lieu of any fractional share of FCNB Common Stock to which such shareholder
may be entitled, and, if appropriate, a check representing payment, without
interest, of any dividend or other cash payment or distribution on such
shareholder's shares of FCNB Common Stock which may have been withheld as a
result of such shareholder's failure to earlier surrender his or her Capital
share certificates for redemption.
If any shareholder of Capital shall not have surrendered his or her
certificates for exchange within two years of the effectiveness of the Merger,
the shares to which such shareholder would be entitled may, at the option of
FCNB, be sold and the proceeds of such sale, together with any cash in lieu of
fractional shares and previously accrued dividends, held in a non-interest
bearing account for such shareholder's benefit. Such shareholder's only right
shall be to collect, without interest, and subject to applicable laws of
escheat, such net proceeds, cash and accumulated dividends, upon surrender of
his or her Capital Common Stock certificates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Capital and FCNB have received an opinion from Kevin P. Kennedy, Esquire,
special tax counsel to FCNB in respect of the Merger, as to certain federal
income tax consequences of the Merger. The opinion provides that the Merger of
Capital with and into FCNB pursuant to the Agreement will qualify as a
reorganization under Section 368(a)(1)(A) of the Internal Revenue Code of 1986,
as amended. The following is a description of the expected federal income tax
consequences of the Merger to FCNB, Capital and the shareholders of Capital.
No gain or loss will be recognized by Capital upon consummation of the
Merger.
No gain or loss will be recognized by FCNB upon the receipt of Capital
assets in exchange for FCNB Common Stock, cash and the assumption of Capital's
liabilities. The federal income tax basis of the assets of Capital in the hands
of FCNB will be the same as the tax basis of such assets in the hands of Capital
immediately prior to the effective time of the Merger. The holding period of the
assets of Capital transferred to FCNB will include the period during which such
assets were held by Capital prior to the effective time of the Merger.
No gain or loss will be recognized by the shareholders of Capital on the
receipt of shares of FCNB Common Stock pursuant to the Merger. The federal
income tax basis of the shares of FCNB Common Stock received by a shareholder of
Capital will be the same as the basis of the Capital Stock surrendered in
exchange therefor. The holding period of the FCNB Common Stock received by a
shareholder of Capital will be the same as the holding period of the Capital
stock surrendered in exchange therefor provided the stock was held by the
shareholder as a capital asset.
Cash received by shareholders of Capital in lieu of fractional shares of
FCNB Common Stock will be treated as received by such shareholders as
distributions in redemption of such shares in full payment in exchange for the
stock redeemed.
No gain or loss will be recognized by holders of options to purchase
Capital Common Stock which were granted pursuant to the Capital Option Plan
solely as a result of the assumption by FCNB of such options.
The opinion of Mr. Kennedy is not binding on the IRS and the IRS could
disagree with the conclusions reached therein. In the event of such
disagreement, there is no assurance that the IRS would not prevail in a judicial
or administrative proceeding.
As a result of the complexity of the tax laws and the impact of each
shareholder's particular circumstances
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upon the tax consequences of the Merger, the information set forth above
regarding the federal income tax consequences of the Merger is not intended to
be individualized tax or legal advice to the shareholders of Capital. EACH
SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX OR FINANCIAL COUNSEL AS TO THE
SPECIFIC FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES OF THE MERGER, IF ANY, TO
SUCH SHAREHOLDER.
Holders of options to purchase Capital Common Stock whose options will be
cancelled in exchange for shares of FCNB Common Stock may have special tax
consequences. Such holders will be considered to have exercised their options.
The tax consequences to the holders of such options will depend upon a number of
factors, which will vary from holder to holder. The tax consequences could
include (and with respect to any options which are "non-statutory options," will
likely include) the recognition of personal service income. Personal service
income is generally subject to taxation under the Federal Insurance
Contributions Act ("FICA"), which includes both social security and Medicare
taxes, in addition to Federal income taxation. HOLDERS OF OPTIONS TO PURCHASE
CAPITAL COMMON STOCK WHO RECEIVE FCNB COMMON STOCK IN CANCELLATION OF THEIR
OPTIONS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE RECEIPT OF FCNB COMMON STOCK.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a pooling of
interests under generally accepted accounting principles. The obligations of
FCNB and the Bank to consummate the Merger is conditioned upon the receipt by
FCNB of an opinion of its independent accountants or FCNB otherwise satisfying
itself that the Merger can be accounted for as a pooling of interests, under
generally accepted accounting principles, if consummated in accordance with the
Agreement. Under the pooling of interests method of accounting, the historical
basis of the assets and liabilities of the Bank and Capital will be combined at
the Closing and carried forward at their previously recorded amounts. Income and
other financial statements of FCNB issued after consummation of the Merger will
be restated retroactively to reflect the consolidated operations of the Bank and
Capital as if the Merger had taken place prior to the periods covered by such
financial statements.
In order for the Merger to qualify for pooling of interests accounting
treatment, substantially all of the outstanding Capital Common Stock must be
exchanged for FCNB Common Stock. In the event that any of the conditions to the
pooling of interests method of accounting treatment are not satisfied, the
Merger would not qualify for the pooling of interests method of accounting, and
a condition to the consummation of the Merger would not be fulfilled. See "The
Merger -- Conditions to the Merger."
Under generally accepted accounting principles, the pooling of interests
method records neither the acquiring of assets nor the obtaining of capital.
Therefore, all costs incurred to effect a combination accounted for as a pooling
of interests are expenses of the combined enterprise rather than additions to
assets or reductions to shareholders' equity. Accordingly, the costs incurred in
connection with the Merger will be charged to expense and deducted in
determining the results of operations of the combined entity.
Expenses of a pooling of interests typically include, but are not limited
to, registration fees and expenses, proxy solicitation costs, legal and
accounting fees, salaries and other expenses related to services of employees,
and costs of combining operations of the previously separate companies. In
connection with the Merger, additional accounting adjustments and accruals will
be required to recognize the following specific one-time costs associated with
the Merger. These adjustments and accruals will cause significant reductions to
the combined entity's results of operations for the initial period following
consummation of the Merger.
Capital has an employment agreement with its President, and FCNB has
entered into an agreement regarding the termination of that agreement. See "The
Merger -- Certain Related Agreements and Interests of Certain Persons." This
agreement provide for change in control payment upon a change in control of
Capital, which will occur upon consummation of the Merger. This liability, which
will be paid in accordance with the provisions of the employment termination
agreement between Mr. Ashman, FCNB and the Bank, will be recognized through a
charge to "salaries and
-32-
<PAGE>
employee benefits" of approximately $350,000. The after-tax effect of
recognizing this liability will reduce the combined entity's results of
operations by approximately $210,000 in the initial period following
consummation of the Merger.
Additionally, Capital is obligated to pay Friedman, Billings, Ramsey &
Company, Inc., a consulting fee following consummation of the Merger. This
liability will be recognized through a charge to "other operating expenses" of
approximately $485,000. The after-tax effect of recognizing this liability will
reduce the combined entity's results of operations by approximately $315,000 in
the initial period following consummation of the Merger.
CERTAIN RELATED AGREEMENTS AND INTERESTS OF CERTAIN PERSONS
Support Agreement. As a condition to the obligation of FCNB and the Bank to
consummate the Agreement, each of the directors of Capital has entered into an
agreement with respect to the voting of shares of Capital Common Stock which
they own or control in their individual capacities (the "Support Agreement").
Pursuant to the Support Agreement, the directors and executive officers of
Capital have agreed, subject to limited exceptions regarding Unsolicited
Acquisition Proposals, they will vote an aggregate of 246,682 shares of Capital
Common Stock which they possess the power to vote or direct the voting of, or
approximately 24.65% of the total number of shares of Capital Common Stock
outstanding, in favor of the Merger, and against any other merger,
consolidation, share exchange, business combination or other extraordinary
transaction involving Capital. See "The Merger -- Termination." See "The Capital
Shareholder Meeting -- Purpose of the Capital Shareholder Meeting and Vote
Required."
Management and Operations of FCNB Following the Merger. Following
effectiveness of the Merger, the officers and directors of FCNB and the Bank as
of the effectiveness of the Merger will continue to serve as the officers and
directors of FCNB and the Bank. It is anticipated that most of the employees of
Capital other than the President of Capital will become employees of the Bank.
FCNB has agreed that all employees of Capital who continue as employees of FCNB
will be provided with benefits which, on the whole are substantially similar to
those provided by FCNB to its similarly situated employees.
Capital Option Plan. Capital maintains a stock option plan (the "Capital
Option Plan"), which provides for the grant to employees, officers and
directors, of options to purchase Capital Common Stock. As of the date hereof,
options to acquire an aggregate of 69,100 shares of Capital Common Stock were
outstanding, at a weighted exercise price of $11.05, including options to
purchase 14,000 shares held by Mr. Ashman, with a weighted average exercise
price of $8.64. All incentive options held by employees of Capital who will
continue as employees of FCNB will be converted into options to acquire FCNB
Common Stock. Options held by directors and non-continuing employees will be
converted at the Effective Time into shares of FCNB Common Stock having a value
equal to the excess of forty dollars ($40.00) over the exercise price, subject
to limitation as discussed above. See "The Merger -- Consideration to be
Received by Holders of Capital Common Stock." Holders of options to acquire
Capital Common Stock will not be entitled to vote the shares underlying the
options at the Capital Shareholder Meeting except to the extent that such
options have been exercised prior to the Capital Record Date.
Employment Termination Agreement. FCNB and Stephen Ashman, President of
Capital have entered into an agreement regarding the payment of termination of
Mr. Ashman's employment contract with Capital and the payment of the amounts to
which he would be entitled thereunder. FCNB and Mr. Ashman have agreed that FCNB
shall pay, or cause the Bank to pay, Mr. Ashman his base salary, at an annual
rate of $175,000, for the remainder of 1998, (if the Effective Time is during
1998) at the Effective Time in a lump sum, and pay his remaining base salary for
1999, the final year of his existing employment agreement, in a lump sum at an
annual rate of $185,000, during the first week of January 1999 or at the
Effective Time, whichever is later. Mr. Ashman will also receive bonus
compensation to which he would otherwise have been entitled of $141,000, payable
in January 1999, and $50,000 payable in January 2000, and approximately $16,000,
representing the cash value of certain benefits to which Mr. Ashman would have
been entitled. Mr. Ashman will also receive, in January 2000, a change in
control payment of $100,000 provided for by his existing employment contract,
provided that Mr. Ashman shall not be entitled to receive the change in control
payment
-33-
<PAGE>
if, prior to its payment, he materially breaches the Non-Compete.
Non-Competition Agreements. As a condition to the obligation of FCNB and
the Bank to consummate the Merger, each director of Capital has entered into an
agreement restricting such director's ability to engage in activities in
competition with FCNB and the Bank from the Effective Time at the Merger until
June 30, 2000 (the "Non-Compete").
The Non-Compete provides that from and after the Effective Time of the
Merger until June 30, 2000 (the "Covenant Period"), subject to limited
exceptions for certain existing and advisory relationships and similar
prospective employee or officer relationships, the director shall not, directly
or indirectly, engage or participate in the ownership, management, operation,
control or financing of, or otherwise be connected with or have any interest in,
whether as organizer, director, advisory director, officer, employee,
consultant, partner, contractor, stockholder (other than as a holder of less
than 3% of the capital stock of a financial institution reporting under the
Securities Exchange Act of 1934), or otherwise, of any financial institution
competitive with FCNB or the Bank which has a branch or loan production office
(or in the case of financial institutions other than banking (including thrift)
institutions, an office) in the District of Columbia, the counties of
Montgomery, Prince George's and Frederick in Maryland, the counties of
Arlington, Fairfax and Loudoun in Virginia and the Cities of Fairfax and
Alexandria in Virginia (the "Designated Area"), including but not limited to any
entity engaged in, or which controls any entity engaged in, retail banking
services, commercial banking services, deposit production, loan production or
commercial lending services and mortgage banking services. The Non-Compete also
contains provisions regarding the use and disclosure of confidential or other
non-public information of FCNB and Capital, the solicitation of customers of
Capital and the solicitation and hiring of employees of Capital during the
Covenant Period.
Indemnification of Directors. FCNB has acknowledged and agreed that all
rights of indemnification, and all limitations on liability, which were
applicable to Capital's directors, officers and employees under its Articles of
Association, Bylaws or other governing documents, continue in full force and
effect with respect to matters arising prior to the Effective Time, and that
FCNB will honor such obligations to the extent the Bank, as successor to
Capital, does not.
RESTRICTIONS ON RESALE OF FCNB COMMON STOCK BY CONTROLLING PERSONS
The FCNB Common Stock issued in connection with the Merger will be freely
transferable under the Securities Act of 1933 as amended (the "Securities Act"),
except for shares issued to any Capital shareholders who may be deemed to be
affiliates of Capital under Rule 145 promulgated pursuant to the Securities Act.
DISSENTERS' RIGHTS
Under Section 214a of the National Bank Act, holders of Capital Common
Stock will be entitled to dissent from the Merger and obtain payment in cash of
the appraised fair value of such holder's shares of Capital Common Stock. Set
forth below is a summary of the procedures which must be followed by holders of
Capital Common Stock in order to perfect their dissenters' rights of appraisal.
This summary is qualified in its entirety by reference to the text of Section
214a of the National Bank Act, attached hereto as Exhibit C and made a part
hereof. Also included as a part of Exhibit C is a copy of Banking Circular 259
promulgated by the Comptroller, describing the methods used by the Comptroller
to estimate the value of a bank's shares when requested to do so by a dissenting
shareholder.
In order to receive payment as a dissenting shareholder, a shareholder must
(i) either vote against the Merger or, at or prior to the Capital Shareholder
Meeting, provide written notice of such shareholder's dissent to Capital; and
(ii) within thirty days of the consummation of the Merger, make a written demand
for payment of the fair value of such shareholder's shares. The failure of any
shareholder to vote against, or provide notice of dissent to, the Merger and to
make a written demand for payment of fair value within the thirty days following
consummation of the Merger will result in such shareholder being bound by the
terms of the Merger, and such shareholder's shares of Capital Common
-34-
<PAGE>
Stock will be converted into shares of FCNB Common Stock.
The value of dissenting shares will be determined, as of the date of the
meeting at which shareholders of Capital approve the Merger, by a committee of
three appraisers, one selected by the holders of a majority of the dissenting
shares, one selected by FCNB and the third selected by the other two appraisers.
If the value determined is unsatisfactory to any dissenting shareholder, such
shareholder may appeal to the Comptroller of the Currency, within five days of
being notified of the value set by the appraisers, for a reappraisal, which
shall be final and binding. If no appraisal is made within ninety days of the
consummation of the Merger, the Comptroller shall, upon the written request of
any interested party, make a final and binding appraisal.
A dissenting shareholder has no rights with respect to his or her shares of
Capital Common Stock or the shares of FCNB Common Stock into which such shares
would have been converted, except the right to receive the payment of fair value
upon the following of all procedures set forth above and surrender of such
shareholder's certificates.
The expenses of the Comptroller in making the reappraisal or the appraisal,
as the case may be, shall be paid by FCNB. Dissenting shareholders and FCNB each
will bear their own expenses incurred in connection with all other aspects of
the appraisal process.
Shares acquired by FCNB from dissenting shareholders will be cancelled and
returned to the status of authorized and unissued shares at their fair market
value or sold by FCNB, in accordance with the determination of the FCNB Board,
and as required by law.
Exercise of dissenters' rights by holders of Capital Common Stock will
result in the recognition of gain or loss, as the case may be, for federal
income tax purposes.
Shareholders of FCNB will not be entitled to demand the payment in cash of
the fair value of their shares of FCNB Common Stock.
-35-
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined balance sheets and the unaudited pro forma
combined statements of income of FCNB set forth below give effect, using the
pooling of interests method of accounting, to the proposed Merger of Capital
with and into the Bank based upon an exchange ratio of 1.6864 shares of FCNB
Common Stock for each share of Capital Common Stock outstanding as of each
respective period end. The unaudited pro forma balance sheets are presented as
though the proposed Merger had occurred on June 30, 1998. The unaudited pro
forma combined income statements are presented as though the proposed Merger had
occurred on January 1, 1995.
The unaudited pro forma financial information set forth below is for
illustrative purposes only, and therefore is not necessarily indicative of the
financial condition or results of operations of FCNB as they would have been had
the proposed Merger occurred during the periods presented or as they may be in
the future. The unaudited pro forma financial information set forth below is
derived from and should be read in conjunction with the consolidated financial
statements of FCNB, including the notes thereto, which are included in FCNB's
Annual Report to Shareholders for the year ended December 31, 1997 and
incorporated by reference herein, and the financial statements of Capital,
including the notes thereto, which are included in Capital's Annual Report to
Shareholders for the fiscal year ended December 31, 1997, and incorporated by
reference herein.
Under generally accepted accounting principles, all costs incurred to
effect a combination accounted for as a pooling of interests are expenses of the
combined enterprise and, accordingly, are charged to expense and deducted in
determining the results of operations of the combined entity. Specific one-time
costs associated with the Merger that will cause significant reductions to the
combined entity's results of operations in the initial period following
consummation of the Merger are discussed in the notes to the unaudited pro forma
financial information. None of these specific one-time Merger costs are
reflected in the pro forma financial information set forth below. See "The
Merger -- Accounting Treatment."
-36-
<PAGE>
FCNB CORP AND SUBSIDIARY
PRO FORMA COMBINED BALANCE SHEET (Unaudited)
JUNE 30, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
FCNB Capital Adjustments Combined
----------- ------------ ------------ ------------
ASSETS (dollars in thousands)
<S> <C> <C> <C>
Cash and due from banks $26,194 $5,738 $31,932
Interest-bearing deposits in other banks 840 -- 840
Federal funds sold 25,187 25,400 50,587
----------- ------------ ------------ ------------
Cash and cash equivalents 52,221 31,138 83,359
----------- ------------ ------------ ------------
Loans held for sale 3,945 -- 3,945
Investment securities held to maturity 38,294 -- 38,294
Investment securities available for sale - at
fair value 280,847 28,495 309,342
----------- ------------ ------------ ------------
Loans 587,067 106,236 693,303
Less: Allowance for credit losses (5,845) (1,010) (6,855)
Unearned income (45) (279) (324)
----------- ------------ ------------ ------------
Net loans 58,177 104,947 686,124
----------- ------------ ------------ ------------
Bank premises and equipment 23,178 1,244 24,422
Other assets 41,984 1,348 43,332
----------- ------------ ------------ ------------
Total assets $1,021,646 $167,172 $1,188,818
=========== ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $95,500 $25,873 $121,373
Interest-bearing deposits 586,070 109,370 695,440
----------- ------------ ------------ ------------
Total deposits 681,570 135,243 816,813
Short-term borrowings:
Federal funds purchased and
securities sold under agreements to
repurchase 65,129 18,133 83,262
Other short-term borrowings 187,136 887 188,023
Accrued interest and other liabilities 6,834 1,174 1,290 (a) 9,298
----------- ------------ ------------ ------------
Total liabilities 940,669 155,437 1,290 1,097,396
----------- ------------ ------------ ------------
SHAREHOLDERS' EQUITY
Common Stock 5,915 5,998 (4,733) (b) 7,180
Capital surplus 43,445 2,833 4,733 (b) 51,011
Retained earnings 27,506 2,882 (1,290) (a) 29,098
Accumulated other comprehensive income 4,111 22 4,133
----------- ------------ ------------ ------------
Total shareholders' equity 80,977 11,735 (1,290) 91,422
----------- ------------ ------------ ------------
Total liabilities and shareholders'
equity $1,021,646 $167,172 $ -- 1,188,818
- ----------------------------------------------- =========== ============ ============ ============
</TABLE>
The pro forma combined balance sheet has not been adjusted to reflect any of the
improvements in operating efficiencies that FCNB anticipates may occur in the
future due to the Merger.
-37-
<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Pro Forma
FCNB Capital Combined
---------- ---------- ------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $25,765 $4,951 $30,716
Interest and dividends on investment securities:
Taxable 7,628 830 8,458
Tax exempt 145 -- 145
Dividends 473 -- 473
Interest on federal funds sold 224 527 751
Other interest income 30 -- 30
---------- ---------- ------------
Total interest income 34,265 6,308 40,573
---------- ---------- ------------
Interest expense:
Interest on deposits 11,642 2,281 13,923
Interest on federal funds purchased and securities sold
under agreements to repurchase 1,174 407 1,581
Interest on other short-term borrowings 4,679 17 4,696
---------- ---------- ------------
Total interest expense 17,495 2,705 20,200
---------- ---------- ------------
Net interest income 16,770 3,603 20,373
Provision for credit losses 450 120 570
---------- ---------- ------------
Net interest income after provision for credit losses 16,320 3,483 19,803
---------- ---------- ------------
Noninterest income:
Service fees 1,542 306 1,848
Net securities gains 313 -- 313
Gain on sale of loans 332 -- 332
Other operating income 1,616 139 1,755
---------- ---------- ------------
Total noninterest income 3,803 445 4,248
---------- ---------- ------------
Noninterest expenses:
Salaries and employee benefits 7,184 1,296 8,480
Occupancy expenses 1,292 387 1,679
Equipment expenses 1,215 134 1,349
Merger related expenses 53 -- 53
Other operating expenses 3,365 763 4,128
---------- ---------- ------------
Total noninterest expenses 13,109 2,580 15,689
---------- ---------- ------------
Income before provision for income taxes 7,014 1,348 8,362
Income tax expense 2,214 526 2,740
---------- ---------- ------------
Net income 4,800 822 5,622
---------- ---------- ------------
Other comprehensive net income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 889 (8) 881
Less: reclassification adjustment for gains (losses)
included in net income, net of taxes of $119, $-- and
$119, respectively 194 -- 194
---------- ---------- ------------
Other comprehensive net income 695 (8) 687
---------- ---------- ------------
Comprehensive income $5,495 $814 $6,309
========== ========== ============
Net income - before merger related expenses $4,834 $822 $5,656
========== ========== ============
Basic earnings per share(1) $0.61 $0.83 $0.59
Diluted earnings per share(1) $0.61 $0.82 $0.58
Basic earnings per share - before merger related expenses(1) $0.61 $0.83 $0.59
Diluted earnings per share - before merger related expenses(1) $0.61 $0.82 $0.59
Basic weighted average number of shares outstanding(1) 7,886,671 984,577 9,547,061
Diluted weighted average number of shares outstanding(1) 7,921,303 1,003,041 9,612,831
------------------------------------------------------------------
</TABLE>
(1) Adjusted to reflect the Stock Split.
The pro forma combined statement of income has not been adjusted to reflect any
of the improvements in operating efficiencies that FCNB anticipates may occur in
the future due to the Merger.
-38-
<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Pro Forma
FCNB Capital Combined
----------- ------------ ------------
Interest income: (dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Interest and fees on loans $23,181 $4,459 $27,640
Interest and dividends on investment securities:
Taxable 6,206 710 6,916
Tax exempt 184 -- 184
Dividends 290 -- 290
Interest on federal funds sold 249 273 522
Other interest income 71 -- 71
----------- ------------ ------------
Total interest income 30,181 5,442 35,623
----------- ------------ ------------
Interest expense:
Interest on deposits 10,748 1,837 12,585
Interest on federal funds purchased and securities sold
under agreements to repurchase 1,221 301 1,522
Interest on other short-term borrowings 2,373 15 2,388
----------- ------------ ------------
Total interest expense 14,342 2,153 16,495
----------- ------------ ------------
Net interest income 15,839 3,289 19,128
Provision for credit losses 462 95 557
----------- ------------ ------------
Net interest income after provision for credit losses 15,377 3,194 18,571
----------- ------------ ------------
Noninterest income:
Service fees 1,342 236 1,578
Net securities gains 144 2 146
Gain on sale of loans 236 -- 236
Other operating income 1,023 132 1,155
----------- ------------ ------------
Total noninterest income 2,745 370 3,115
----------- ------------ ------------
Noninterest expense:
Salaries and employee benefits 6,237 1,208 7,445
Occupancy expenses 1,144 415 1,559
Equipment expenses 1,001 140 1,141
Merger related expenses 460 -- 460
Other operating expenses 3,240 800 4,040
----------- ------------ ------------
Total noninterest expenses 12,082 2,563 14,645
----------- ------------ ------------
Income before provision for income taxes 6,040 1,001 7,041
Income tax expense 1,983 400 2,383
----------- ------------ ------------
Net Income 4,057 601 4,658
----------- ------------ ------------
Other comprehensive net income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 773 (41) 732
Less: reclassification adjustment for gains (losses)
included in net income, net of taxes of $54, $1 and $55,
respectively 90 1 91
----------- ------------ ------------
Other comprehensive net income 683 (42) 641
----------- ------------ ------------
Comprehensive income $4,740 $559 $5,299
=========== ============ ============
Net income - before merger related expenses $4,342 $601 $4,943
=========== ============ ============
Basic earnings per share(1) $0.52 $0.62 $0.49
Diluted earnings per share(1) $0.52 $0.61 $0.49
Basic earnings per share - before merger related expenses(1) $0.55 $0.62 $0.52
Diluted earnings per share - before merger related expenses(1) $0.55 $0.61 $0.52
Basic weighted average number of shares outstanding(1) 7,862,624 971,706 9,501,309
Diluted weighted average number of shares outstanding(1) 7,877,009 992,443 9,550,665
------------------------------------------------------------------
</TABLE>
(1) Adjusted to reflect the Stock Split.
The pro forma combined statement of income has not been adjusted to reflect any
of the improvements in operating efficiencies that FCNB anticipates may occur in
the future due to the Merger.
-39-
<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma
FCNB Capital Combined
---------- ------------ ------------
Interest income: (dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Interest and fees on loans $48,562 $9,166 $57,728
Interest and dividends on investment securities:
Taxable 13,181 1,463 14,644
Tax exempt 341 - 341
Dividends 618 - 618
Interest on federal funds sold 389 807 1,196
Other interest income 100 - 100
---------- ------------ ------------
Total interest income 63,191 11,436 74,627
---------- ------------ ------------
Interest expense:
Interest on deposits 22,143 4,068 26,211
Interest on federal funds purchased and securities sold
under agreements to repurchase 2,819 609 3,428
Interest on other short-term borrowings 6,050 32 6,082
---------- ------------ ------------
Total interest expense 31,012 4,709 35,721
---------- ------------ ------------
Net interest income 32,179 6,727 38,906
Provision for credit losses 1,329 195 1,524
---------- ------------ ------------
Net interest income after provision for credit losses 30,850 6,532 37,382
---------- ------------ ------------
Noninterest income:
Service fees 2,855 548 3,403
Net securities gains 580 - 580
Gain on sale of loans 407 - 407
Other operating income 2,278 298 2,576
---------- ------------ ------------
Total noninterest income 6,120 846 6,966
---------- ------------ ------------
Noninterest expense:
Salaries and employee benefits 12,745 2,471 15,216
Occupancy expenses 2,463 807 3,270
Equipment expenses 2,027 282 2,309
Merger related expenses 460 - 460
Other operating expenses 6,254 1,784 8,038
---------- ------------ ------------
Total noninterest expenses 23,949 5,344 29,293
---------- ------------ ------------
Income before provision for income taxes 13,021 2,034 15,055
Income tax expense 4,218 811 5,029
---------- ------------ ------------
Net Income 8,803 1,223 10,026
---------- ------------ ------------
Other comprehensive net income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 3,268 (15) 3,253
Less: reclassification adjustment for gains (losses)
included in net income, net of taxes of $224 356 - 356
---------- ------------ ------------
Other comprehensive net income 2,912 (15) $2,897
---------- ------------ ------------
Comprehensive income $11,715 $1,208 $12,923
========== ============ ============
Net income - before merger related expenses $9,088 $1,223 $10,311
========== ============ ============
Basic earnings per share(1) $1.12 $1.26 $1.05
Diluted earnings per share(1) $1.12 $1.22 $1.05
Basic earnings per share - before merger related expenses(1) $1.15 $1.26 $1.08
Diluted earnings per share - before merger related expenses(1) $1.15 $1.22 $1.08
Basic weighted average number of shares outstanding(1) 7,871,824 972,360 9,511,612
Diluted weighted average number of shares outstanding(1) 7,891,428 999,493 9,576,973
- ---------------------------------------------------------------------
</TABLE>
(1) Adjusted to reflect the Stock Split.
The pro forma combined statement of income has not been adjusted to reflect any
of the improvements in operating efficiencies that FCNB anticipates may occur in
the future due to the Merger.
-40-
<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pro Forma
FCNB Capital Combined
----------- ------------- -----------
Interest income: (dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Interest and fees on loans $42,948 $7,284 $50,232
Interest and dividends on investment securities:
Taxable 9,728 1,316 11,044
Tax exempt 505 - 505
Dividends 539 - 539
Interest on federal funds sold 759 504 1,263
Other interest income 174 - 174
----------- ------------- -----------
Total interest income 54,653 9,104 63,757
----------- ------------- -----------
Interest expense:
Interest on deposits 20,549 3,007 23,556
Interest on federal funds purchased and
securities sold under agreement to repurchase 1,357 527 1,884
Interest on other short-term borrowings 2,762 21 2,783
Interest on long-term debt 346 - 346
----------- ------------- -----------
Total interest expense 25,014 3,555 28,569
----------- ------------- -----------
Net interest income 29,639 5,549 35,188
Provision for credit losses 318 90 408
----------- ------------- -----------
Net interest income after provision for credit losses 29,321 5,459 34,780
----------- ------------- -----------
Noninterest income:
Service fees 2,454 477 2,931
Net securities gains 193 - 193
Gain on sale of loans 305 - 305
Other operating income 1,309 254 1,563
----------- ------------- -----------
Total noninterest income 4,261 731 4,992
----------- ------------- -----------
Noninterest expense:
Salaries and employee benefits 11,621 2,297 13,918
Occupancy expenses 2,419 752 3,171
Equipment expenses 1,599 245 1,844
Merger related expenses 2,865 - 2,865
Other operating expenses 5,966 1,374 7,340
----------- ------------- -----------
Total noninterest expenses 24,470 4,668 29,138
----------- ------------- -----------
Income before provision for income taxes 9,112 1,522 10,634
Income tax expense 3,245 591 3,836
----------- ------------- -----------
Net Income 5,867 931 6,798
----------- ------------- -----------
Other comprehensive net income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period 92 - 92
Less: reclassification adjustment for gains
(losses) included in net income, net of taxes of $75 118 - 118
----------- ------------- -----------
Other comprehensive net income (26) - (26)
----------- ------------- -----------
Comprehensive income $5,841 $931 $6,772
=========== ============= ===========
Net income - before merger related expenses $7,778 $931 $8,709
=========== ============= ===========
Basic earnings per share(1) $0.74 $0.97 $0.71
Diluted earnings per share(1) $0.74 $0.96 $0.71
Basic earnings per share - before merger related
expenses(1) $0.99 $0.97 $0.92
Diluted earnings per share - before merger related
expenses(1) $0.99 $0.96 $0.91
Basic weighted average number of shares
outstanding(1) 7,893,303 960,200 9,512,584
Diluted weighted average number of shares
outstanding(1) 7,911,215 969,897 9,546,849
------------------------------------------------------
</TABLE>
(1) Adjusted to reflect the Stock Split.
The pro forma combined statement of income has not been adjusted to reflect any
of the improvements in operating efficiencies that FCNB anticipates may occur in
the future due to the Merger.
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<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Pro Forma
FCNB Capital Combined
----------- ------------- -----------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $39,341 $5,692 $45,033
Interest and dividends on investment securities:
Taxable 9,292 1,052 10,344
Tax exempt 1,211 - 1,211
Dividends 414 - 414
Interest on federal funds sold 457 543 1,000
Other interest income 411 - 411
----------- ------------- -----------
Total interest income 51,126 7,287 58,413
----------- ------------- -----------
Interest expense:
Interest on deposits 19,361 2,404 21,765
Interest on federal funds purchased and
securities sold 1,122 380 1,502
under agreements to repurchase
Interest on other short-term borrowings 1,882 33 1,915
Interest on long-term debt 394 - 394
----------- ------------- -----------
Total interest expense 22,759 2,817 25,576
----------- ------------- -----------
Net interest income 28,367 4,470 32,837
Provision for credit losses 710 370 1,080
----------- ------------- -----------
Net interest income after provision for credit losses 27,657 4,100 31,757
----------- ------------- -----------
Noninterest income:
Service fees 2,104 512 2,616
Net securities gains 123 - 123
Gain on sale of loans 315 - 315
Other operating income 1,376 264 1,640
----------- ------------- -----------
Total noninterest income 3,918 776 4,694
----------- ------------- -----------
Noninterest expense:
Salaries and employee benefits 11,193 2,126 13,319
Occupancy expenses 1,683 708 2,391
Equipment expenses 1,438 172 1,610
Merger related expenses 303 - 303
Other operating expenses 6,072 1,299 7,371
----------- ------------- -----------
Total noninterest expenses 20,689 4,305 24,994
----------- ------------- -----------
Income before provision for income taxes 10,886 571 11,457
Income tax expense 3,888 (705) 3,183
----------- ------------- -----------
Net Income 6,998 1,276 8,274
----------- ------------- -----------
Other comprehensive net income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period 2,755 195 2,950
Less: reclassification adjustment for gains
(losses) 75 - 75
included in net income, net of taxes of $48
----------- ------------- -----------
Other comprehensive net income 2,680 195 2,875
----------- ------------- -----------
Comprehensive income $9,678 $1,471 $11,149
=========== ============= ===========
Net income - before merger related expenses $7,301 $1,276 $8,577
=========== ============= ===========
Basic earnings per share(1) $0.89 $1.42 $0.88
Diluted earnings per share(1) $0.89 $1.42 $0.88
Basic earnings per share - before merger related $0.93 $1.42 $0.92
expenses(1)
Diluted earnings per share - before merger related $0.93 $1.42 $0.91
expenses(1)
Basic weighted average number of shares 7,841,505 896,881 9,354,005
outstanding(1)
Diluted weighted average number of shares 7,861,071 900,185 9,379,143
outstanding(1)
------------------------------------------------------
</TABLE>
(1) Adjusted to reflect the Stock Split.
The pro forma combined statement of income has not been adjusted to reflect any
of the improvements in operating efficiencies that FCNB anticipates may occur in
the future due to the Merger.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) Represents the estimated Merger costs that will be incurred by FCNB and
Capital. These costs are not reflected in the Pro Forma Combined
Statements of Income since these items do not have a continuing impact
on FCNB following the Merger. The following table summarizes the
financial impact of the additional accruals as reflected in the Pro
Forma Combined Balance Sheet (in thousands):
Merger-Related Costs:
Compensation (severance and related costs) $ 650
Transaction costs (including investment bankers,
attorneys and accountants) 600
Data processing contract termination 200
Miscellaneous expenses 300
---------
Total Merger-related costs 1,750
Income tax effect 460
---------
Net after tax adjustments $ 1,290
=========
The above estimated Merger-related costs that will be incurred by FCNB
and Capital include expenses that are estimated to be incurred from the
transaction. Compensation costs include estimated severance to Capital
employees and other related expenses as a result of merging
administrative staff.
(b) Represents the redemption of Capital's outstanding $6.00 per common
share par value, totalling $6.00 million, the issuance of FCNB's $1.00
per common share par value, totalling $1.27 million, based on the
assumed 1.6864 conversion ratio, and the net effect on capital surplus.
(c) Pro Forma Combined FCNB and Capital basic and diluted per Common Share
data have been determined based upon (i) the combined historical net
income of FCNB and Capital and (ii) the combined historic weighted
average common equivalent shares of FCNB and Capital. For purposes of
this determination, Capital's historical weighted average common shares
outstanding were increased to reflect the assumed 1.6864 conversion
ratio in the merger.
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<PAGE>
FCNB CORP
Financial and other information relating to FCNB is set forth in FCNB's
Annual Report to Shareholders for the year ended December 31, 1997, and its
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, incorporated
by reference herein. Additional financial and other information relating to
FCNB, including information relating to FCNB's directors and executive officers,
is included in FCNB's Annual Report on Form 10-K, and FCNB's Proxy Statement
relating to its Annual Meeting of Shareholders held on April 21, 1998, copies of
which may be obtained without cost from FCNB. See "Available Information."
HISTORY AND BUSINESS
FCNB was organized in 1986 to serve as the holding company for the Bank,
its principal operating subsidiary. The Bank, which was originally chartered in
1818, was converted from a national bank charter to a Maryland commercial bank
in 1993, and is engaged in a general commercial and consumer banking business,
serving individuals and businesses in Frederick, Anne Arundel, Baltimore,
Carroll, Howard, Montgomery and Prince George's counties in Maryland. The Bank
is the sixth largest commercial banking institution headquartered in Maryland.
At June 30, 1998, FCNB had assets of approximately $1.02 billion, total deposits
of approximately $681.57 million, and total shareholders' equity of
approximately $80.97 million. The principal executive office of FCNB is located
at 7200 FCNB Court, Frederick, Maryland 21703, and its telephone number is (301)
662-2191.
Over the past five years, FCNB has achieved significant growth in assets.
From 1993 to 1997, FCNB's assets grew at an 11.1% compound annual growth rate,
and increased by $104 million, or 11.3% in the first six months of 1998. FCNB
has achieved its growth both internally and through acquisition. In addition to
the pending Merger, FCNB has completed three whole bank acquisitions since 1995,
consummating the acquisition of Elkridge Bank (March 1995), Laurel Federal
Savings Bank (January 1996) and Odenton Federal Savings and Loan Association
(April 1996), as well as a number of branch transactions, including most
recently the acquisition of seven branches, holding approximately $44.8 million
in deposits as of June 26, 1998, from two subsidiaries of First Virginia Banks,
Inc. FCNB has also had a history of earnings growth. Net income (before
extraordinary charges and merger related expenses) grew at a compound annual
growth rate of 7.2% from 1993 to 1997. For the five year period from 1993 to
1997, FCNB's average annual return on average assets (before merger-related
expenses) was 1.15%. The annualized return on average equity and the annualized
return on average assets for the six months ended June 30, 1998 were 12.31% and
1.05%, respectively.
FCNB routinely explores opportunities for additional growth and expansion
of its core banking business and related activities, including the acquisition
of companies engaged in banking or other related activities, and internally
generated growth. There can be no assurance, however, that FCNB will be able to
grow, or if it does, that any such growth or expansion will result in an
increase in FCNB's earnings, dividends, book value or market value of its
securities.
DESCRIPTION OF FCNB CAPITAL STOCK
FCNB is authorized to issue an aggregate of twenty-one million (21,000,000)
shares of capital stock, of which twenty million (20,000,000) is common stock,
par value $1.00 per share, and one million (1,000,000) is undesignated preferred
stock. As of the FCNB Record Date, there were 7,905,445 shares of FCNB Common
Stock outstanding, held of record by approximately 2,500 shareholders, and
options to purchase 200,223 shares of FCNB Common Stock were issued and
outstanding. No shares of preferred stock were outstanding as of that date.
FCNB Common Stock. Each share of FCNB Common Stock is entitled to one
noncumulative vote on all matters to be submitted to a vote of shareholders. The
holders of FCNB Common Stock are not entitled to any preemptive or preferential
right to acquire any shares of any class of capital stock or other securities of
FCNB, except as
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<PAGE>
the FCNB Board may expressly provide in connection with any offering of capital
stock or other securities. Holders of FCNB Common Stock are entitled to receive
dividends as and when declared by the FCNB Board.
FCNB maintains a Dividend Reinvestment and Stock Purchase Plan (the "DRI
Plan") providing for the purchase of additional shares of FCNB Common Stock by
reinvestment of cash dividends paid on outstanding shares of FCNB Common Stock
and/or by optional direct cash payments by shareholders. Shares purchased under
the Plan with reinvested cash dividends and optional cash payments can be
acquired at 97% of current market prices. No commissions or other fees are
charged. Optional cash payments pursuant to the DRI Plan are limited to $2,500
for any shareholder in each calendar quarter. The DRI Plan allows FCNB, at its
election, to use shares purchased in the open market, or authorized but unissued
shares, to satisfy demand under the plan.
Upon liquidation, dissolution or winding up of FCNB, the holders of FCNB
Common Stock would be entitled to ratably receive all of the assets of FCNB
available for distribution after payment of all debts and liabilities of FCNB,
subject to the rights, if any, of the holders of any class of preferred stock
which may be issued with a priority in liquidation or dissolution over the
holders of FCNB Common Stock.
Preferred Stock. The FCNB Board may, from time to time, by action of a
majority of the Board of Directors, issue shares of the authorized, undesignated
preferred stock, in one or more classes or series. In connection with any such
issuance, the Board may by resolution determine the designation, voting rights,
preferences as to dividends, in liquidation or otherwise, participation,
redemption, sinking fund, conversion, dividend or other special rights or
powers, and the limitations, qualifications and restrictions of such shares of
preferred stock. As of the date hereof, no shares of preferred stock are
outstanding.
MARKET FOR FCNB COMMON STOCK AND DIVIDENDS
Market for Common Stock. FCNB Common Stock is listed for quotation on
Nasdaq under the symbol "FCNB." Eight brokerage firms, Ferris, Baker, Watts &
Co., Legg Mason Wood Walker, Inc., Ryan, Beck & Co., Wheat First Securities,
Inc. Sandler O'Neill & Partners, L.P., Janney Montgomery Scott, Inc., F.J.
Morrisey & Co., Inc., and Herzog, Heine, Geduld, Inc., currently offer to make a
market in FCNB Common Stock on a regular basis.
Dividends. Holders of FCNB Common Stock are entitled to receive dividends
as and when declared by the FCNB Board. Historically, FCNB has paid quarterly
cash dividends on or about January 31, April 30, July 31, and October 31 of each
year. Funds for the payment of dividends will, for the foreseeable future, be
obtained from dividends paid to FCNB by the Bank, which dividends are subject to
statutory limitations.
In addition, FCNB and its banking subsidiary are subject to capital ratio
requirements imposed by the Federal Reserve. The effect of the payment of
dividends on FCNB's or its subsidiary's capital ratios may be a factor in the
determination of the FCNB Board, or the ability of FCNB, to pay dividends. To
the extent that such ratios are inadequate for regulatory purposes or would be
if dividends were paid by its banking subsidiaries to FCNB, or by FCNB to its
shareholders, FCNB's banking subsidiaries or FCNB, as applicable, would be
precluded from paying dividends. Although the management of FCNB believes that
sufficient funds for the payment of dividends will be available, there can be no
assurance that funds for the payment of dividends will continue to be available
in sufficient amounts to pay dividends in accordance with FCNB's past practice,
or even if available, that the FCNB Board will elect to expend resources in the
payment of dividends, as opposed to retaining earnings to fund growth or
expansion, or for other corporate purposes.
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<PAGE>
Set forth below are the high and low prices for FCNB Common Stock for each
quarter since January 1, 1996, as well as the amount of cash dividends declared
in each quarter. [Adjust for Stock Split]
Quarter Ended High(1) Low(1) Dividends Declared(1)
------------- ------- ------ ---------------------
March 31, 1998 $24.38 $20.81 $0.128
June 30, 1998 $24.94 $23.44 $0.135
March 31, 1997 $15.34 $13.64 $0.102
June 30, 1997 $15.00 $13.64 $0.102
September 30, 1997 $23.87 $13.98 $0.109
December 31, 1997 $23.69 $20.80 $0.116
March 31, 1996 $15.00 $12.11 $0.082
June 30, 1996 $13.30 $11.76 $0.095
September 30, 1996 $13.64 $11.59 $0.095
December 31, 1996 $14.15 $13.13 $0.095
(1) Adjusted to reflect the Stock Split.
RECENT DEVELOPMENTS
On July 20, 1998 FCNB raised $40.25 million in capital (before expenses and
commissions) through the public issuance of 1,610,000 8.25% Trust Preferred
Securities by its subsidiary FCNB Capital Trust, a Delaware business trust
organized for the purpose of issuing the Preferred Securities. In connection
with the issuance of the Preferred Securities, FCNB issued $40.25 million of its
8.25% subordinated debentures, due July 31, 2028, to FCNB Capital Trust.
On September 1, 1998, FCNB and its wholly owned insurance agency
subsidiary, First Choice Insurance Agency, Inc. ("First Choice") entered into a
definitive agreement to acquire three closely held, affiliated insurance
agencies, Frederick Underwriters, Inc., Phillips Insurance Agency, Inc. and
Carroll County Insurance Agency, Inc. (collectively "the Underwriters
Companies"), through the merger of each of the Underwriters Companies with and
into First Choice, with First Choice surviving. Each of the Underwriters
Companies is a multilines insurance agency operating principally in the State of
Maryland, and trades under the name Frederick Underwriters. The Underwriters
Companies had aggregate revenues of approximately $5.6 million and $2.9 million
(excluding nonrecurring gains on the sale of securities) during 1997 and the
first six months of 1998, respectively.
FCNB will issue approximately 413,000 shares of FCNB Common Stock in
connection with the acquisition of the Underwriters Companies, comprising a
maximum of approximately 4.2% of the outstanding FCNB Common Stock following
consummation of that transaction and the Merger. The principal shareholder,
President and Chairman of each of the Underwriters Companies is J.R. Ramsburg,
Jr., a director of FCNB Corp and FCNB Bank. The proposed acquisition of the
Underwriters Companies is subject to satisfaction of a number of conditions,
including regulatory approval and the approval of the shareholders of FCNB. It
is anticipated that the shareholder meeting with respect to such approval will
be held early in the first quarter of 1999.
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<PAGE>
COMPARISON OF SHAREHOLDER RIGHTS AND CERTAIN PROVISIONS OF
THE ARTICLES OF INCORPORATION OF FCNB
Following effectiveness of the Merger of Capital with and into the Bank,
the former holders of Capital Common Stock will become holders of FCNB Common
Stock, and the rights of such holders will be determined by reference to the
Maryland General Corporation Law (the "MGCL"), the Restated Articles of
Incorporation ("Articles") and Bylaws of FCNB, rather than the National Bank
Act, the regulations of the Comptroller, the Articles of Association, as amended
("Articles"), and Bylaws of Capital.
Authorized Shares. The Articles of FCNB authorize the FCNB Board to issue,
without further authorization by shareholders, up to twenty million (20,000,000)
shares of FCNB Common Stock, and one million (1,000,000) shares of preferred
stock having such rights as the Board in its discretion may determine. See
"Description of FCNB Capital Stock." Capital's Articles authorize the issuance
of two million (2,000,000) shares of Capital Common Stock. Capital's Articles do
not authorize a class of preferred stock. The existence of a class of
authorized, undesignated preferred stock could have the effect of discouraging
or rendering more difficult an attempted takeover of FCNB, or, alternatively, of
facilitating a negotiated acquisition. The availability of additional shares of
capital stock for issuance could have the effect of diluting the ownership
interest of holders of FCNB Common Stock.
Voting Rights. The holders of FCNB Common Stock are entitled to one vote
per share on all matters submitted for a vote of shareholders, and are not
permitted to cumulate votes in the election of directors. The undesignated
preferred shares authorized by FCNB's Articles could be issued with such voting
rights as the FCNB Board of Directors. The holders of Capital Common Stock are
entitled to cumulate votes in the election of directors upon ten days notice,
and are entitled to one vote per share on each other matter submitted for a vote
of shareholders.
Directors. The Articles and the Bylaws of FCNB call for a Board of
Directors of between three and fifteen directors, with the exact number to be
determined by the resolution of the Board of Directors. Currently, as a result
there are fourteen directors which are divided into one class of four directors,
and two classes of five directors. At each annual meeting, one class is elected
for a three year term and until their successors shall have been duly elected
and qualified. The Articles and Bylaws of Capital call for a Board of Directors
of between five and twenty-five directors, with the exact number to be
determined by resolution of the Board of Directors the full board is elected for
a one year term or by the shareholders, provided that the Board may not increase
the size of the Board by more than two if the number of directors most recently
elected by shareholders is fifteen or less, or by more than four if greater than
15. Currently there are nine. In determining the rights of any class or series
of preferred stock which may in the future be issued, the Board of Directors of
FCNB may provide that any such class or series is entitled to elect one or more
directors separately from the holders of other classes of capital stock.
The Articles of FCNB provide that directors may be removed at any time, but
only for cause and upon the vote of the holders of eighty percent (80%) or more
of the total number of votes entitled to be cast generally in the election of
directors. The provision regarding the removal of directors may be amended only
upon the vote of holders of eighty percent (80%) of all votes entitled to be
cast in the election of directors. The Bylaws of Capital provide that neither
the Board of Directors nor the shareholders may remove a director without cause,
and further provide that shareholders may remove a director only with a vote of
two-thirds of the outstanding shares.
Special Meetings. Special meetings of the shareholders of FCNB may be
called by the Chairman of the Board, President or a majority of the Board of
Directors, or by the request of the holders of at least twenty five percent
(25%) of the votes entitled to be cast at the meeting. FCNB's Bylaws provide
that if any matter to be acted upon at the meeting is substantially the same as
a matter voted upon at any special meeting of shareholders held during the
preceding twelve months, the holders of at least fifty percent (50%) of the
votes entitled to be cast at the meeting must request the meeting with respect
to such matter. Additionally, shareholders of FCNB requesting a special meeting
must pay the reasonably estimated costs of preparing and mailing a notice of
such meeting prior to issuance of a notice for the meeting. Special meetings of
the shareholders of Capital may be called for any legitimate purpose by the
Board of
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<PAGE>
Directors or three or more shareholders owning in the aggregate at least twenty
five percent of the Capital Common Stock, provided that shareholders calling a
special meeting must, under Capital's Bylaws, provide at least 60 days notice to
Capital, and provide certain information regarding the persons calling the
meeting, and the shareholders to be solicited. The conduct of business at
special meetings of both FCNB and Capital is limited to the matters set forth in
the notice.
Amendment of Articles. Except where applicable law or the Articles of FCNB
provide otherwise, the Articles of FCNB may be amended by the affirmative vote
of two-thirds of the votes entitled to be cast thereon. The provision of the
FCNB Articles relating to removal of directors may be amended only upon the vote
of the holders of eighty percent (80%) of the votes entitled to be cast in the
election of directors, voting as a single class. Except to the extent a greater
vote is required by law, Capital's Articles may be amended by a vote of a
majority of the outstanding Capital Common Stock. The National Bank Act requires
the vote of two-thirds of the outstanding Capital stock to approve an amendment,
inter alia, to increase or decrease the authorized capital stock of Capital.
Consideration of Business Combinations. The Articles of FCNB provide that
where the Board of Directors evaluates any actual or proposed transaction which
would or may involve a change in control of FCNB, the Board of Directors shall,
in connection with the exercise of its business judgement in determining what is
in the best interests of FCNB and its shareholders and in making any
recommendation to its shareholders, give due consideration to all relevant
factors, including, but not limited to the economic effect, both immediate and
long term, upon FCNB's shareholders, if any, not to participate in the
transaction; the social and economic effect on the employees, depositors and
customers of, and others dealing with, FCNB and its subsidiaries and on the
communities in which FCNB and its subsidiaries operate or are located; whether
the proposal is acceptable based on the historical and current operating results
or financial condition of FCNB; whether a more favorable price could be obtained
for the FCNB Common Stock or other securities in the future; the reputation and
business practices of the offeror and its management and affiliates as they
would affect the employees of FCNB and its subsidiaries; the future value of the
stock or other securities of FCNB; and any antitrust or other legal and
regulatory issues that are raised by the proposal. If the Board of Directors
determines that any such transaction should be rejected, it may take any lawful
action to defeat such transaction. The Articles and Bylaws of Capital do not
contain any comparable provisions.
Advance Written Notice of Shareholder Proposals and Nominations. The
Articles of FCNB provide that any shareholder entitled to vote at a meeting of
shareholders who desires to nominate any person for election as director of FCNB
or who desires to bring up any new business at the meeting, but who does not
seek to have such nomination or proposal included in the proxy materials
prepared by FCNB, give at least 30 days, but not more than 60 days, written
notice to FCNB of such nomination or business. Where less than 31 days notice of
the meeting was given to shareholders by FCNB, notice must be given by the
shareholder within 10 days of the date on which the meeting was announced to
shareholders. If notice by the shareholder is not given in proper form and in a
timely manner, the matter will be laid over until the next meeting of
shareholders held more than 30 days following the meeting at which the
nomination or proposal, was made. The Articles and Bylaws of Capital require at
least 14 days but not more than 50 days notice of any shareholder nomination for
election as a director, provided that if less than 21 days notice of the meeting
at which the election of directors will be held is given, seven days notice is
required. The Articles and Bylaws of Capital do not contain any provisions
regarding shareholder business proposals to be brought up at a meeting of
shareholders.
Restrictions on Business Combinations with Interested Shareholders. Section
3-602 of the MGCL imposes conditions and restrictions on certain "business
combinations" (including, among other various transactions, a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance of equity securities) between a Maryland corporation and any person
who beneficially owns at least 10% of the corporation's voting stock (an
"interested shareholder"). Unless approved in advance by the board of directors,
or otherwise exempted by the statute, such a business combination is prohibited
for a period of five years after the most recent date on which the interested
shareholder became an interested shareholder. After such five-year period, a
business combination with an interested shareholder must be: (a) recommended by
the corporation's board of directors, and (b) approved by the affirmative vote
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of at least (i) 80% of the corporation's outstanding shares entitled to vote and
(ii) two-thirds of the outstanding shares entitled to vote which are not held by
the interested shareholder with whom the business combination is to be effected,
unless, among other things, the corporation's common shareholders receive a
"fair price" (as defined by the statute) for their shares and the consideration
is received in cash or in the same form as previously paid by the interested
shareholder for his or her shares. Federal law and regulations applicable to
Capital do not contain a comparable provision. The Articles and Bylaws of
Capital do not include any provisions imposing any special approval requirements
for a transaction with a major shareholder.
Control Share Acquisition Statute. Under the MGCL's control share
acquisition law, voting rights of shares of stock of a Maryland corporation
acquired by an acquiring person at ownership levels of 20%, 33-1/3% and 50% of
the outstanding shares are denied unless conferred by a special shareholder vote
of two-thirds of the outstanding shares held by persons other than the acquiring
person and officers and directors of the corporation or, among other exceptions,
such acquisition of shares is made pursuant to a merger agreement with the
corporation or the corporation's charter or bylaws permit the acquisition of
such shares prior to the acquiring person's acquisition thereof. Unless a
corporation's charter or bylaws provide otherwise, the statute permits such
corporation to redeem the acquired shares at "fair value" if the voting rights
are not approved or if the acquiring person does not deliver a "control share
acquisition statement" to the corporation on or before the tenth day after the
control share acquisition. The acquiring person may call a shareholder's meeting
to consider authorizing voting rights for control shares subject to certain
disclosure obligations and payment of certain costs. If voting rights are
approved for more than fifty percent of the outstanding stock, objecting
shareholders may have their shares appraised and repurchased by the corporation
for cash. Federal law and regulations applicable to Capital do not contain a
comparable provision. The Articles and Bylaws of Capital do not include any
provisions restricting the voting ability of major shareholders. Federal law
does, however, require prior regulatory approval of acquisitions of "control" of
a national bank such as Capital.
Rights Plan. Capital has adopted the Capital Shareholder Protection Rights
Plan, pursuant to which a right to purchase one-half of one share of Capital
Common Stock, at a price of three dollars per share, upon the occurrence of
certain events has been attached to each share of Capital Common Stock. Such
right would detach and become exercisable, in general, upon a declaration by the
Board that any person, other than certain excluded persons, becomes the
beneficial owner of more than ten percent of the Capital Common Stock. FCNB does
not have a comparable plan as of the date hereof. In connection with the
Agreement, the Capital Board amended the Capital Shareholder Protection Rights
Plan so that the transactions contemplated by the Agreement and the Option
Agreement would not cause the rights under the Capital Shareholder Protection
Rights Plan to be exercisable.
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CAPITAL BANK, NATIONAL ASSOCIATION
HISTORY AND BUSINESS
Capital was founded in the District of Columbia as Hemisphere National Bank
in 1794, and was renamed Capital Bank, National Association in 1981. Capital
primarily serves small to medium-sized businesses, professionals, not-for-profit
organizations and investors in the Washington, D.C. metropolitan area. Capital
offers a full range of commercial banking services to its business and
professional clients, as well as basic retail banking services to individuals
living or working within its service area.
In 1995, Capital relocated its main office and headquarters to Rockville,
Maryland, which allowed it to explore additional growth opportunities in
Montgomery County, Maryland, while continuing to operate its offices in
Washington, D.C. In January 1997, Capital opened its first branch in Northern
Virginia.
At June 30, 1998, Capital had approximately $167.17 million in total
assets, and $11.74 million in shareholders' equity. As of June 30, 1998, there
were 999,752 shares of Capital Common Stock outstanding.
Capital operates one office in Rockville, Maryland, one office in Tysons
Corner, Fairfax County, Virginia, and two offices in the District of Columbia.
Capital's principal offices are located at One Church Street, Rockville,
Maryland 20850, and its telephone number is (301) 279-8900.
Financial and other information relating to Capital is set forth in
Capital's Annual Report on Form 10-KSB for the year ended December 31, 1997, and
its Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998 each of
which is delivered with this Proxy Statement and incorporated by reference
herein. See "Available Information" and "Documents Delivered and Incorporated by
Reference."
MARKET FOR CAPITAL COMMON STOCK AND DIVIDENDS
There is no established trading market for shares of Capital Common Stock,
and there are no dealers who offer to make a market in Capital Common Stock on a
regular basis. Capital Common Stock is subject to infrequent trades, in
individually negotiated transactions. The last trade known to the Company was a
sale of Capital Common Stock on January 29, 1998, and involved 1090 shares, at
$14.00 per share. Capital is not necessarily aware of all trades in the Capital
Common Stock. Capital has not paid a cash dividend in the two most recent fiscal
years, and has a policy of retaining earnings to fund growth.
LEGAL MATTERS
The validity of the issuance of the shares of FCNB Common Stock offered
hereby will be passed upon for FCNB by Kennedy, Baris & Lundy, L.L.P., Bethesda,
Maryland. Certain federal income tax consequences of the transaction have been
passed upon by Kevin P. Kennedy, Esquire.
EXPERTS
The consolidated financial statements of Capital incorporated by reference
herein and delivered herewith have been audited by Hoffman Morrison &
Fitzgerald, P.C. independent certified public accountants, as indicated in their
report dated January 22, 1998 with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of FCNB incorporated by reference
herein have been audited by Keller Bruner & Company, L.L.C., independent
certified public accountants, as indicated in their reports dated January 23,
1998 with respect thereto, and are incorporated by reference herein in reliance
upon the authority of said firm as experts in accounting and auditing.
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EXHIBIT A
Agreement and Plan of Reorganization and Merger
<PAGE>
This Agreement and Plan of Reorganization and Merger (the "Agreement"),
made as of this 23rd day of June, 1998, by and among FCNB Corp ("FCNB"), a
corporation organized and existing under the laws of the State of Maryland and
having its principal office at 7200 FCNB Court, Frederick, Maryland, FCNB Bank
(the "Bank"), a Maryland chartered commercial bank having its principal office
at 7200 FCNB Court, Frederick, Maryland, and Capital Bank, National Association
("Capital"), a national banking association organized and existing under the
laws of the United States and having its principal office at One Church Street,
Rockville, Maryland.
WHEREAS, the respective Boards of Directors of FCNB, the Bank and Capital
each deem it advisable and in the best interest of their respective shareholders
that Capital be acquired by FCNB through the merger of Capital with and into the
Bank, the wholly owned subsidiary of FCNB, substantially on the terms, and
subject to the conditions, set forth in this Agreement; and
WHEREAS, the respective Boards of Directors of FCNB, the Bank and Capital
have each approved the merger of Capital with and into the Bank, substantially
on the terms, and subject to the conditions, hereinafter set forth (the
"Merger");
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereafter set forth, and intending to be legally bound hereby,
the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 Merger. Subject to the terms and conditions hereafter set forth,
Capital shall be merged with and into the Bank, in accordance with the
applicable provisions of the Maryland General Corporation Law (the "MGCL") and
the National Bank Act.
1.2 Name. The name of the surviving bank (the "Surviving Bank" when
reference is made to it after the Effective Time (hereinafter defined)) shall be
"FCNB Bank".
1.3 Certificate of Incorporation; Bylaws. The Articles of Incorporation and
Bylaws of the Bank in effect at the Effective Time shall be the Articles of
Incorporation and Bylaws of the Surviving Bank. The Articles of Incorporation
and Bylaws of FCNB Corp in effect at the Effective Time shall be the Articles of
Incorporation and Bylaws of FCNB Corp after the Effective Time.
1.4 Board of Directors; Officers. (a) The Board of Directors of the Bank at
the Effective Time shall serve as the Board of Directors of the Surviving Bank
until their successors are duly elected and qualified. The Board of Directors of
the FCNB at the Effective Time shall serve as the Board of Directors of FCNB
until their successors are duly elected and qualified.
(b) The officers of the Bank at the Effective Time shall serve as the officers
of the Surviving Bank until their successors are duly appointed by the Board of
Directors. The officers of FCNB at the Effective Time shall serve as the
officers of FCNB until their successors are duly appointed by the Board of
Directors.
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1.5 Effect of the Merger. At the Effective Time, the separate corporate
existence of Capital shall cease and the Bank as the Surviving Bank shall
succeed to and possess all of the properties, rights, powers, privileges,
franchises, patents, trademarks, licenses, registrations, and other assets of
every kind and description of Capital, and shall be subject to, and be
responsible for, all debts, liabilities, and obligations of Capital, all without
further act or deed, and in accordance with the applicable provisions of the
MGCL and the National Bank Act.
1.6 Closing; Effective Time. (a) The closing of the Merger (the "Closing")
shall occur at the principal offices of FCNB, at a time and on a date specified
in writing by the parties, which date shall be as soon as practicable, but not
more than fifteen (15) days, after the receipt of all requisite approvals and
authorizations of regulatory and governmental authorities, the expiration of all
applicable waiting periods and the satisfaction or waiver of all conditions
hereto. The date at which the Closing occurs is occasionally referred to herein
as the "Closing Date."
(b) The Merger shall become effective upon the later of (i) the filing of the
articles of merger in substantially the form attached hereto as Exhibit A (the
"Articles of Merger") with the Maryland State Department of Taxation and
Assessments (the "SDAT") or (ii) the time set forth in the Articles of Merger
filed with the SDAT (the "Effective Time"). Except as otherwise agreed in
writing, the Effective Time shall be within one business day of the Closing.
ARTICLE II
CONVERSION OF SHARES
2.1 Conversion of Shares and Options. (a) At the Effective Time, each of
the outstanding shares of common stock, par value $6.00 per share, of Capital
("Capital Common Stock") (excluding shares of Capital Common Stock held in
treasury or by any Capital Subsidiary, or as to which the holders have perfected
dissenters' right in accordance with the National Bank Act ("dissenting
shares")), shall automatically, and without further action, be converted into
the number of shares of the common stock, par value $1.00 per share, of FCNB
("FCNB Common Stock") determined by dividing (i) forty dollars ($40.00) by (ii)
the value of a share of FCNB Common Stock as determined in accordance with the
provisions of Section 2.2 hereof (the "Conversion Ratio"), provided, however,
that except as provided in Section 8.1(h) below, in no event shall the
Conversion Ratio exceed one and three thousand nine hundred thirty two ten
thousandths (1.3932) shares of FCNB Common Stock for each share of Capital
Common Stock (the "Maximum Conversion Ratio") or be less than one and one
thousand three hundred ninety nine ten thousandths (1.1399) shares of FCNB
Common Stock for each share of Capital Common Stock (the "Minimum Conversion
Ratio"). The Maximum Conversion Ratio and the Minimum Conversion Ratio shall be
proportionately adjusted for dividends on FCNB Common Stock payable to
shareholders of record of FCNB Common Stock as of a date after the date hereof
and prior to the Effective Date in shares of FCNB Common Stock, or any
combination or subdivision of the FCNB Common Stock.
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Following the Effective Time, certificates which formerly represented
shares of Capital Common Stock (except for certificates representing shares held
in treasury or by any Capital Subsidiary or dissenting shares) shall be deemed
for all purposes to represent shares of FCNB Common Stock, except that until
exchanged in accordance with the provisions of Section 2.3 hereof, the holders
of such shares shall not be entitled to receive dividends or other distributions
or payments in respect of FCNB Common Stock.
(b) (i) At the Effective Time, each incentive stock option issued and
outstanding under the Capital 1988 Incentive Stock Option Plan (each a "Capital
Incentive Option") outstanding as of the Effective Time, shall be converted into
and become options to purchase FCNB Common Stock, and FCNB shall assume each
Capital Incentive Option in accordance with the terms and conditions thereof and
the plan pursuant to which it was issued, provided, however, that from and after
the Effective Time, each such Capital Incentive Option shall be exercisable
solely for FCNB Common Stock; the number of shares of FCNB Common Stock which
may be acquired pursuant to such Capital Incentive Option shall be the number of
shares of Capital Common Stock subject to such Capital Incentive Option
multiplied by the Conversion Ratio, rounded down to the nearest whole share; and
the exercise price per share of FCNB Common Stock shall be equal to the exercise
price per share of Capital Common Stock divided by the Conversion Ratio, rounded
to the nearest cent. It is intended that the foregoing assumption and adjustment
shall be effected in a manner consistent with the requirements of Section 424 of
the Internal Revenue Code of 1986, as amended, as to each Capital Incentive
Option. Notwithstanding the foregoing, each Capital Incentive Option held by an
employee or officer of Capital who shall not be a continuing employee of the
Bank following the Effective Time, shall automatically, and without further
action, be converted into the number of shares of FCNB Common Stock determined
by (i) subtracting the exercise price per share of such Capital Incentive Option
from forty dollars ($40.00), (ii) dividing the result by the value of a share of
FCNB Common Stock determined in accordance with Section 2.2, provided that
except as set forth in Section 8.1(h), such divisor shall not be less than
$28.71, and shall not exceed $35.09.
(ii) At the Effective Time, each stock option issued to Capital's Directors
(each a "Capital Director Option," and together with the Capital Incentive
Options, the "Capital Options") outstanding as of the Effective Time, shall
automatically, and without further action, be converted into the number of
shares of FCNB Common Stock determined by (i) subtracting the exercise price per
share of such Capital Director Option from forty dollars ($40.00), (ii) dividing
the result by the value of a share of FCNB Common Stock determined in accordance
with Section 2.2, provided that except as set forth in Section 8.1(h), such
divisor shall not be less than $28.71, and shall not exceed $35.09.
(iii) As soon as reasonably practicable after the Effective Time, FCNB shall
deliver to holders of Capital Options which have been converted into options to
acquire FCNB Common Stock in accordance with subparagraph (i) of this paragraph
(b), a notice setting forth a statement of the modified terms thereof. As soon
as reasonably practicable after the Effective Time, FCNB shall file a
registration statement on Form S-8, or on such other form as may be appropriate,
with respect to the shares of FCNB Common Stock subject to such options, and
shall use its reasonable efforts
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to maintain the effectiveness of such registration statement or statements for
so long as such options remain outstanding.
(c) No certificate for fractional shares of FCNB Common Stock will be issued
in connection with the exchange contemplated by the Merger, and holders of
Capital Common Stock entitled to fractional shares shall be paid cash in lieu of
such fractional shares, without interest, on the basis of the value of a share
of FCNB Common Stock as calculated in accordance with the provisions of Section
2.2 hereof.
(d) Each share of the Bank's common stock outstanding immediately prior to the
Effective Time shall be unchanged, and shall continue to be issued and
outstanding shares of the Bank's common stock.
(e) All shares of Capital Common Stock held by Capital as treasury shares shall
be cancelled and shall not be converted as provided in Section 2.1(a).
2.2 Determination of Value of FCNB Common Stock. For purposes of this
Agreement, the value of a share of FCNB Common Stock shall be equal to the
average of the per share closing price for FCNB Common Stock for the twenty (20)
trading days immediately preceding the date which is five business days before
the Closing Date, as reported on the Nasdaq National Market ("Nasdaq"), the
foregoing twenty (20) day period referred to as the "Price Determination
Period." In the event that there shall be no trade on any trading day within the
Price Determination Period, or if Nasdaq shall fail to report a closing price on
any such day, the closing price for such day shall be the average of the closing
bid price and the closing asked price as reported by Nasdaq. In the event of the
payment of a dividend payable in shares of FCNB Common Stock, or the combination
or subdivision of the FCNB Common Stock, the calculation for determining the
value per share of FCNB Common Stock shall be proportionally adjusted to reflect
such event.
2.3 Exchange of Share Certificates. Certificates formerly representing
shares of Capital Common Stock shall be exchanged for FCNB Common Stock
certificates in accordance with the following procedures:
(a) Exchange Agent. At FCNB's election, FCNB or the transfer agent for FCNB
shall act as exchange agent ("Exchange Agent") to receive Capital Common Stock
certificates from the holders thereof and to exchange such stock certificates
for FCNB Common Stock certificates, and if appropriate, to pay cash for
fractional shares of FCNB Common Stock pursuant to Section 2.1 hereof. The
Exchange Agent shall, promptly after the Effective Time, mail to each former
shareholder of Capital a notice specifying the procedures to be followed in
surrendering such shareholder's Capital Common Stock certificates.
(b) Surrender of Certificates. As promptly as possible after receipt of the
Exchange Agent notice, each former shareholder of Capital shall surrender his or
her certificates to the Exchange Agent; provided, that if any former shareholder
of Capital shall be unable to surrender his Capital
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Common Stock certificates due to loss or mutilation thereof, he or she may make
a constructive surrender by following the procedures customarily followed by
FCNB in the replacement of lost or mutilated certificates, including, if
necessary, the posting of appropriate bond. Upon actual or constructive
surrender of Capital Common Stock certificates from a former Capital
shareholder, the Exchange Agent shall issue such shareholder, in exchange
therefore, one or more certificates representing the number of whole shares of
FCNB Common Stock into which such shareholder's shares of Capital Common Stock
have been converted, together with a check in the amount of any cash in lieu of
fractional shares of FCNB Common Stock.
(c) Dividend Withholding. Dividends or other distributions, if any, payable by
FCNB after the Effective Time to any former shareholder of Capital who has not
prior to the payment date surrendered his or her Capital Common Stock shall be
withheld. Any dividends or other distributions so withheld shall be paid,
without interest, to such former shareholder upon proper surrender of his
Capital Common Stock certificates.
(d) Failure to Surrender Certificates. All Capital Common Stock certificates
must be surrendered to the Exchange Agent within two (2) years of the Effective
Time. In the event that any former shareholder of Capital shall not have
properly surrendered his or her certificates within such period, the shares of
FCNB Common Stock that would otherwise have been issued to such shareholder may,
at the option of FCNB, be sold and the net proceeds of such sale, together with
any cash in respect of fractional shares and any previously accrued dividends,
shall be held in a non-interest bearing account for such shareholder's benefit.
From and after such sale, the sole right of such shareholder shall be the right
to collect such net proceeds, cash and accumulated dividends. Subject to all
applicable laws of escheat, such amount shall be paid to such former shareholder
of Capital, without interest, upon proper surrender of his or her Capital Common
Stock certificates in accordance with Section 2.3(b) hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FCNB
FCNB represents and warrants to Capital as follows:
3.1 Organization and Authority. FCNB is a corporation duly organized,
validly existing and in good standing under the laws of the State of Maryland,
is a registered bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHCA"), and has the corporate power and authority to own its
properties and assets and to carry on its business, and the business of its
subsidiaries, as now being conducted and to enter into and carry out its
obligations under this Agreement. FCNB is qualified to do business as a foreign
corporation in each jurisdiction where such qualification is necessary, except
where the failure to obtain such qualification would not have a material adverse
effect on the business, operations, assets, financial condition, prospects or
results of operations, of FCNB and its subsidiaries, taken as a whole. FCNB has
all necessary governmental authorizations to own or lease its properties and
assets, and carry on its business as
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now being conducted, with the exception of those authorizations which the
failure to obtain would not have a material adverse effect on the business,
operations, financial condition, or result of operations of FCNB and its
subsidiaries, taken as a whole.
3.2 Capital Structure of FCNB. As of May 31, 1998, the authorized capital
stock of FCNB consisted of 20,000,000 shares of common stock, par value $1.00
per share, of which at such date, 5,915,443 shares were issued and outstanding
and 1,000,000 shares of undesignated preferred stock, par value $1.00 per share,
of which no shares were issued or outstanding at such date. Additionally,
502,010 shares of Common Stock have been reserved for issuance pursuant to
FCNB's 1992 Stock Option Plan and the FCNB 1997 Director Stock Option Plan (the
"FCNB Option Plans"), under which options to purchase an aggregate of 167,067
shares of FCNB Common Stock are issued and outstanding as of the date hereof.
Additionally, 202,476 shares of FCNB Common Stock are reserved for issuance in
connection with the FCNB Dividend Reinvestment Plan ("DRI Plan"). Other than as
set forth in this Section 3.2, there are no other shares of capital stock or
other equity securities of FCNB outstanding and no other outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of any capital stock of FCNB, or contracts, commitments,
understandings, or arrangements by which FCNB was or may become bound to issue
additional shares of its capital stock or options, warrants or rights to
purchase or acquire any additional shares of its capital stock.
All of the outstanding shares of FCNB Common Stock, and, when issued in
accordance with the provisions of this Agreement, all of the shares of FCNB
Common Stock to be issued in exchange for shares of Capital Common Stock, are,
or will be, duly authorized and validly issued shares of FCNB Common Stock,
which shares are fully paid and nonassessable under the MGCL. No shares of FCNB
Common Stock have been, and none of the shares of FCNB Common Stock to be issued
in exchange for shares of Capital Common Stock will be, issued in violation of
the preemptive rights of any shareholder of FCNB. FCNB has reserved a sufficient
number of shares of FCNB Common Stock for the purpose of issuing shares of FCNB
Common Stock in accordance with the provisions of Article II hereof.
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3.3 FCNB Subsidiaries. FCNB directly owns all the shares of the outstanding
capital stock of the Bank. Except as set forth in the separate disclosure letter
of FCNB dated as of the date hereof, and delivered not later than the date
hereof (the "FCNB Disclosure Letter"), neither FCNB nor the Bank has any other
subsidiaries. No equity securities of the Bank are or may become required to be
issued by reason of any options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever, relative to, or concerning
securities or rights convertible into, or exchangeable for, shares of any class
of capital stock of the Bank, and there are no other contracts, commitments,
understandings or arrangements by which the Bank is bound to issue additional
shares of its capital stock or options, warrants or rights to purchase or
acquire any additional shares of its capital stock. All of the shares of capital
stock of the Bank so owned by FCNB are fully paid and non-assessable and are
owned by it free and clear of any claim, lien, encumbrance or agreement with
respect thereto. The Bank is a commercial bank duly organized, validly existing
and in good standing under the laws of the State of Maryland and has the
corporate power and authority and all necessary federal, state, local and
foreign authorizations to own or lease its properties and assets and to carry on
its business as it is now being conducted. The deposits of the Bank are insured
to the applicable legal limits by the Federal Deposit Insurance Corporation (the
"FDIC").
3.4 Authorization. The execution, delivery and performance of this
Agreement by FCNB and the Bank and the consummation of the transactions
contemplated hereby have been duly authorized by the Board of Directors of FCNB
and the Bank and, except for approval by the shareholders of FCNB, no other
corporate proceedings on the part of FCNB are necessary to authorize this
Agreement and the transactions contemplated hereby. Subject to shareholder
approval and the approvals of government agencies having regulatory authority
over FCNB and the Bank as may be required by statute or regulation, this
Agreement is the valid and binding obligation of FCNB and the Bank, enforceable
in accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization or moratorium or other similar laws affecting
creditors' rights generally and the rights of creditors of insured depository
institutions, and subject to general equitable principles which may limit the
enforcement of certain remedies.
Neither the execution, delivery and performance of this Agreement by FCNB
and the Bank, nor the consummation of the transactions contemplated hereby, nor
compliance by FCNB and the Bank with any of the provisions of this Agreement,
will (i) violate, conflict with, or result in a breach of any provisions of, or
constitute a default (or an event which, with notice of lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration, or the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of FCNB or the Bank under any
of the terms, conditions or provisions of, (x) the Articles of Incorporation or
Bylaws of FCNB or the Bank, or (y) any material note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which FCNB or the Bank is a party or by which FCNB or the Bank may be bound, or
to which FCNB, the Bank or any of their properties or assets may be subject, or
(ii) subject to compliance with the statutes and regulations referred to in the
next paragraph, violate any judgment, ruling, order, writ, injunction, decree,
statute, rule or
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regulation applicable to FCNB, the Bank or any of their properties or assets.
Other than in connection or in compliance with the applicable provisions of
the MGCL, the Maryland Financial Institutions Code (the "MFIC"), the Securities
Act of 1933, as amended, and the rules and regulations thereunder (the
"Securities Act"), the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder (the "Exchange Act"), the securities or blue
sky laws of the various states and consents, authorizations, approvals or
exemptions required under the BHCA or the National Bank Act or any applicable
federal or state banking statute, no notice to, filing with, authorization of,
exemption by, or consent or approval of, any public body or authority is
necessary for the consummation by FCNB and the Bank of the transactions
contemplated by this Agreement. FCNB has no reason to believe that any required
regulatory consent or approval will not be received or will be received with
conditions or restrictions which it would deem unduly burdensome, or which would
have an adverse impact on its capacity to consummate the transactions
contemplated hereby.
3.5 Intentionally Omitted.
3.6 Financial Statements. FCNB has furnished to Capital the following
financial statements: (i) the audited Consolidated Balance Sheets for the years
ended December 31, 1997 and 1996, and Consolidated Statements of Income,
Consolidated Statements of Stockholders' Equity and Consolidated Statements of
Cash Flows of FCNB and its subsidiaries as of and for the years ended December
31, 1997, 1996 and 1995; and (ii) unaudited Consolidated Balance Sheets,
Consolidated Statements of Income, Consolidated Statements of Stockholders'
Equity and Consolidated Statements of Cash Flows of FCNB and its subsidiaries as
of and for the three months ended March 31, 1998. Each of the aforementioned
financial statements, and like financial information provided to Capital
subsequent to the date hereof, have been and will be prepared in accordance with
generally accepted accounting principles applied on a consistent basis, and
present fairly and will present fairly the consolidated financial position,
results of operations, stockholders' equity and changes in financial position of
FCNB as of the dates and for the periods therein set forth. In the case of the
interim fiscal periods, all adjustments, consisting only of normal recurring
items, have been and will be made, subject to year end audit adjustments.
Without limitation of the foregoing, the reserves for possible credit losses
which it has established and which are included in the above-referenced FCNB
Financial Statements, were as of such dates, adequate to absorb all reasonably
anticipated losses in the loan and lease portfolios of FCNB, in view of the size
and character of such portfolios, current economic conditions, and other
pertinent factors; and, further, no facts have subsequently come to the
attention of management of FCNB which would cause it to restate in any material
way the levels of such reserves for possible credit losses. Such financial
statements do not, as of the date thereof, include any material asset, or omit
any material liability, absolute or contingent, or other fact, the inclusion or
omission of which renders such financial statements, in light of the
circumstances in which they were made, misleading in any material respect.
3.7 SEC Filings. FCNB has filed all reports, forms, statements and other
documents with
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the SEC that it was required to file since January 1, 1996 (the "SEC filings"),
all of which complied in all material respects with the applicable requirements
of the Securities Act and/or Exchange Act. As of their respective dates, and
except as revised, amended or modified by a subsequently filed document, each
such SEC filing did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
3.8 Absence of Material Adverse Changes. Since December 31, 1997, there has
not been any change in the financial condition, results of operations or
business of FCNB and its subsidiaries that has had, or may be reasonably
expected to have, a material adverse effect on the business, operations, assets,
financial condition, prospects or results of operations of FCNB and its
subsidiaries, taken as a whole, or on the ability of FCNB to consummate the
transactions contemplated hereby.
3.9 Books of Account; Corporate Records. The books of account of FCNB and
the Bank are maintained in compliance in all material respects with all
applicable legal and accounting requirements. The minute books of FCNB and the
Bank accurately disclose all material corporate actions of their respective
shareholders and Board of Directors and of all committees thereof.
3.10 Reports. As of March 31, 1998, FCNB and the Bank have filed, since
that date have filed, and subsequent to the date hereof will file, all reports,
registrations and statements, if any, together with any amendments required to
be made with respect thereto, that were and are required to be filed with (i)
the SEC, (ii) the Federal Reserve Board, (iii) the FDIC, (iv) the SDAT, and (v)
the Department of Financial Regulation (the "DFR") (all such reports and
statements are collectively referred to herein as the "FCNB Reports"). As of
their respective dates, the FCNB Reports complied and will comply in all
material respects with all the statutes, rules and regulations enforced or
promulgated by the regulatory authority with which they were filed and did not
and will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
3.11 Taxes. FCNB has duly filed, or will file, all federal, state, local
and foreign tax returns ("Returns") required by applicable law to be filed on or
before the Effective Time (all such Returns being accurate and complete in all
material respects), and have paid or have set up adequate reserves or accruals
for the payment of all taxes required to be paid in respect of the periods
covered by such Returns, and will pay, or where payment is not yet due, will set
up adequate reserves or accruals adequate in all material respects for the
payment of all taxes for any subsequent periods ending on or prior to the
Effective Time or any portion of a subsequent period which includes the
Effective Time and ends subsequent thereto. FCNB will not have any material
liability for any such taxes in excess of the amounts so paid or reserved or
accruals so established. FCNB is not delinquent in the payment of any material
tax, assessment or governmental
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charge and has not requested any extension of time within which to file any tax
returns in respect of any fiscal year which have not since been filed. No
material deficiencies for any tax, assessment or governmental charge have been
proposed, asserted or assessed (tentatively or definitively) against FCNB which
have not been settled and paid and, except as set forth in the FCNB Disclosure
Letter, as of the date of this Agreement, no requests for waivers of the time to
assess any tax, or waivers of the statutory period of limitation, are pending or
have been granted, and FCNB does not have in effect any currently effective
power of attorney or authorization to any person to represent it in connection
with any taxes.
3.12 Environmental Matters. Except as disclosed in the FCNB Disclosure
Letter, no contaminant, pollutant, toxic or hazardous waste or similar or like
substance has been generated, used, stored, processed, disposed of, discharged
at, or was or is otherwise present at any real estate now or previously owned or
acquired (including without limitation any real estate acquired by means of
foreclosure, transfer in lieu of foreclosure or by exercise of any other
creditor's right) or leased by FCNB, or any real estate which is pledged or
stands as collateral security for any loan or other extension of credit by FCNB,
except such as are not reasonably likely to have a material adverse effect on
the business, operations, assets, financial condition, prospects or results of
operation of FCNB and its subsidiaries, taken as a whole. Except as disclosed in
the FCNB Disclosure Letter, there is no legal, administrative, arbitrarial or
other proceeding, claim, action, cause of action or governmental proceeding or
investigation of any nature whatsoever, seeking to impose, or that could result
in the imposition, on FCNB of any liability arising under any local, state, or
federal environmental statute, regulation, rule or ordinance, pending or, to the
knowledge of FCNB, threatened against FCNB; and there is no reasonable basis for
any of the foregoing; and FCNB is not subject to any agreement, order, judgment,
decree or memorandum of any court, governmental authority, regulatory agency or
third party imposing any such liability.
3.13 Litigation and Other Proceedings. Except as set forth in the FCNB
Disclosure Letter, FCNB is not a party to any pending, or, to the knowledge of
FCNB, threatened claim, action, suit, investigation or proceeding or subject to
any order, judgment or decree, except for matters which, in the aggregate,
cannot reasonably be anticipated to have, a material adverse effect on the
business, operations, assets, financial condition, prospects or results of
operations of FCNB and its subsidiaries, taken as a whole. The FCNB Disclosure
Letter sets forth a complete and accurate list of all actions, suits,
investigations or proceedings to which FCNB is a party or which relate to any of
their respective assets.
3.14 Compliance with Laws. FCNB has all permits, licenses, certificates of
authority, orders and approvals of, and have made all filings, applications and
registrations with, federal, state, local or foreign governmental or regulatory
bodies that are required in order to permit them to carry on their business as
presently conducted and the absence of which would have a material adverse
effect on such business; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect, and, to the knowledge of
FCNB, no suspension or cancellation of any of them is threatened; and all such
filings, applications and registrations are current. The conduct of its business
by FCNB does not violate, in any material respect, any applicable domestic
(federal, state or local) or foreign law, statute, ordinance, license or
regulation now in effect. FCNB is not in default under any order, license,
regulation or demand of any federal, state, local or other
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governmental agency or with respect to any order, writ, injunction or decree of
any court. Except for statutory or regulatory restrictions of general
application, no federal, state, local or other governmental authority has placed
any restrictions on the business of FCNB.
3.15 Proxy Statement, Etc. None of the information supplied or to be
supplied by FCNB for inclusion, or included, in (i) the Proxy Statements to be
mailed to the shareholders of Capital and FCNB ("Proxy Statement" as described
in Section 5.3 below), in connection with the Shareholder Meetings and (ii) any
other documents to be filed with the SEC or any regulatory agency in connection
with the transactions contemplated hereby will, to the best knowledge of FCNB
and at such respective times as such information is supplied or such documents
are filed or mailed, be false or misleading with respect to any material fact,
or omit to state any material fact necessary in order to make the statements
therein not misleading. All documents which FCNB is responsible for filing with
the SEC and any regulatory agency in connection with the Merger will comply as
to form in all material respects with the provisions of applicable law.
3.16 Year 2000. FCNB is in compliance in all material respects with all
regulatory requirements regarding Year 2000 issues. FCNB has developed, approved
and is implementing in a timely manner, a Year 2000 compliance program which
will ensure that its computer systems and/or those of its data processing
providers are or will be Year 2000 compliant prior to December 1999. No material
costs in excess of those reflected on the financial statements and internal
budget projections will be incurred in connection with such programs.
3.17 Brokers and Finders. Except for a success fee of .03% of the aggregate
value of the consideration issued by FCNB to holders of Capital Common Stock to
Feldman Financial Advisors, Inc., and fees of $4,013 paid to Feldman Financial
Advisors, Inc., for services in connection with analysis of the Merger, neither
FCNB, the Bank nor any of their officers, directors or employees has employed
any broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted
directly or indirectly for FCNB or the Bank in connection with this Agreement or
the transactions contemplated hereby.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CAPITAL
Capital represents and warrants to FCNB and the Bank that:
4.1 Organization and Authority. Capital is a national banking organization,
duly organized, validly existing and in good standing under the laws of the
United States, and has the corporate power and authority to own its properties
and assets and to carry on its business and the business of its subsidiaries as
now being conducted and to enter into and carry out its obligations under this
Agreement. Capital is qualified to do business in each other state or other
jurisdiction in which the nature of its operations and business so requires
except where the failure to obtain such qualification would not have a material
adverse effect on the business, operations, assets, financial condition,
prospects or results of operations of Capital and its subsidiaries, taken as a
whole. Capital has all necessary governmental authorizations to own or lease its
properties and assets and to carry on its business, as now being conducted,
except where the failure to obtain such qualification would not have a material
adverse effect on the business, operations, assets, financial condition.
prospects or results of operations of Capital and its subsidiaries, taken as a
whole. The deposits of Capital are insured to the applicable legal limits by the
Bank Insurance Fund of the FDIC.
4.2 Capital Subsidiaries. Except for Capital Asset Recovery, Inc. ("Capital
Asset"), all of the outstanding shares of which Capital owns directly, free and
clear of all liens, charges, security interests and encumbrances of any kind
whatsoever, Capital does not have any subsidiaries, and does not own any capital
stock or other interests in any entity (including, without limitation,
corporations, partnerships, joint ventures, and inactive corporations). There
are no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of capital stock of Capital Asset,
or contracts, commitments, understandings, or arrangements by which Capital was
or may become bound to issue additional shares of Capital Asset's capital stock
or options, warrants or rights to purchase or acquire any additional shares of
Capital Asset's capital stock. Except where the context otherwise requires,
references in this Agreement to Capital shall be deemed to include Capital
Asset.
4.3 Capitalization of Capital. As of May 31, 1998, the authorized capital
stock of Capital consisted of 2,000,000 shares of Capital Common Stock, par
value $6.00 per share. As of June 12, 1998, 999,352 shares of Capital Common
Stock were issued and outstanding, and except for the issuance of shares upon
the exercise of Capital Options (hereinafter defined) outstanding as of the date
hereof, no shares of Capital Common Stock have been issued since that date.
Except as set forth in this Section 4.3 and except for options to acquire 70,740
shares of Capital Common Stock upon the exercise of the Capital Options, which
options are described (including, but not limited to, exercise price, expiration
date, identity of optionholders, and number of options held by each
optionholder) in the separate disclosure letter of Capital dated as of the date
hereof and delivered
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not later than the date hereof, (the "Capital Disclosure Letter"), and except
for the Capital Shareholder Protection Rights Plan and the Stock Option
Agreement contemplated hereby, there are no other shares of capital stock or
other equity securities of Capital outstanding and no other outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of capital stock of Capital, or contracts, commitments,
understandings, or arrangements by which Capital was or may become bound to
issue additional shares of its capital stock or options, warrants or rights to
purchase or acquire any additional shares of its capital stock.
All of the outstanding shares of Capital Common Stock, are duly authorized
and validly issued shares of Capital Common Stock, which shares are fully paid
and nonassessable. No shares of Capital Common Stock have been issued in
violation of the preemptive rights of any shareholder of Capital.
4.4 Authorization. The execution, delivery and performance of this
Agreement by Capital and the consummation of the transactions contemplated
hereby have been duly authorized by the Board of Directors of Capital and,
except for the approval by the shareholders of Capital, no other corporate
proceedings on the part of Capital are necessary to authorize this Agreement and
the transactions contemplated hereby. Subject to shareholder approval and the
approvals of government agencies having regulatory authority over Capital as may
be required by statute or regulation, this Agreement is the valid and binding
obligation of Capital enforceable against it in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization or
moratorium or other similar laws or equitable principles affecting creditors'
rights generally and the rights of creditors of insured depository institutions,
and subject to general equitable principles which may limit the enforcement of
certain remedies.
Except as set forth in the Capital Disclosure Letter, neither the
execution, delivery and performance of this Agreement by Capital, nor the
consummation of the transactions contemplated hereby, nor compliance by Capital
with any of the provisions hereof or thereof, will (i) violate, conflict with,
or result in a breach of any provisions of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration or the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
Capital under any of the terms, conditions or provisions of (x) its Articles of
Association or Bylaws or (y) any material note, bond, mortgage, indenture, deed
of trust, license, lease, agreement or other instrument or obligation to which
Capital may be bound, or to which Capital of its properties or assets may be
subject; or (ii) subject to compliance with the statutes and regulations
referred to in the next paragraph, violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to Capital or any of
their respective properties or assets.
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Other than in connection or in compliance with the applicable provisions of
the Securities Act, the Exchange Act, the National Bank Act, the securities or
blue sky laws of the various states and consents, authorizations, approvals or
exemptions required under the BHCA or any applicable federal or state banking
statute, no notice to, filing with, authorization of, exemption by, or consent
or approval of, any public body or authority is necessary for the consummation
by Capital of the transactions contemplated by this Agreement.
4.5 Capital Financial Statements. Capital has furnished to FCNB the
following financial statements: (i) the audited balance sheets of Capital as of
December 31, 1997 and 1996, and the related statements of financial condition,
operations, changes in stockholders' equity and cash flows for the three years
ended December 31, 1997, and (ii) unaudited balance sheet of Capital as of March
31, 1998, and the related unaudited statements of financial condition,
operations, changes in stockholders' equity and cash flows for the three month
period then ended, (collectively the "Capital Financial Statements"). Each of
the aforementioned financial statements and like financial information provided
to FCNB subsequent to the date hereof, have been and will be prepared in
accordance with generally accepted accounting principles applied on a consistent
basis, and present fairly and will present fairly the financial position of
Capital at the dates, and the results of operations, stockholders' equity, and
changes in the financial position of Capital for the periods stated therein. In
the case of interim fiscal periods, all adjustments, consisting only of normal
recurring items, have been and will be made, subject to year-end audit
adjustments. Without limitation of the foregoing, the reserves for possible
credit losses which it has established and which are included in the
above-referenced Capital Financial Statements, were as of such dates, adequate
to absorb all reasonably anticipated losses in the loan and lease portfolios of
Capital, in view of the size and character of such portfolios, current economic
conditions, and other pertinent factors; and, further, no facts have
subsequently come to the attention of management of Capital which would cause it
to restate in any material way the levels of such reserves for possible credit
losses. Such financial statements do not, as of the date thereof, include any
material asset, or omit any material liability, absolute or contingent, or other
fact, the inclusion or omission of which renders such financial statements, in
light of the circumstances in which they were made, misleading in any material
respect.
4.6 Books of Account; Corporate Records. The books of account of Capital
are maintained in compliance in all material respects with all applicable legal
and accounting requirements. The minute books of Capital accurately disclose all
material corporate actions of their respective shareholders and Board of
Directors and of all committees thereof.
4.7 Reports. As of May 31, 1998, Capital has filed, since that date has
filed, and subsequent to the date hereof will file, all reports, registrations
and statements, if any, together with any amendments required to be made with
respect thereto, that were and are required to be filed with (i) the Office of
the Comptroller of the Currency (the "OCC"), (ii) the Federal Reserve Board, and
(iii) the FDIC (all such reports and statements are collectively referred to
herein as the "Capital Reports"). As of their respective dates, the Capital
Reports complied and will comply in all material respects with all the statutes,
rules and regulations enforced or promulgated by the
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regulatory authority with which they were filed and did not and will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
4.8 Absence of Certain Changes. Since March 31, 1998, there has not been
any change, in the nature of the financial condition, results of operation or
business of Capital, that has had, or may reasonably be expected to have, a
material adverse effect on the business, operations, assets, financial
condition, prospects or results of operations of Capital taken as a whole, or on
the ability of Capital to consummate the transactions contemplated hereby.
4.9 Insurance. All policies of insurance, including policies of title
insurance, liability insurance and financial institutions bonds maintained by
Capital, including the identity of the carrier, type of coverage, policy limits,
expiration, and all open or unresolved claims, are set forth in the Capital
Disclosure Letter. All such policies are in full force and effect and no notices
of cancellation have been received in connection therewith. Such policies are in
accordance with customary and reasonable practice in the banking industry in
respect of amounts, types and risks insured, for the business in which Capital
are engaged, and are sufficient for compliance with all legal requirements and
all agreements to which Capital is a party. Capital is not in default with
respect to any such policy which defaults, taken as a whole, are material to
Capital.
4.10 Properties, Leases and Other Agreements. Except as may be reflected in
the Capital Financial Statements and except for any lien for current taxes not
yet delinquent, and except for imperfections of title, encumbrances and
easements, if any, as are not substantial in character, amount or extent and do
not materially detract from the value, or interfere with the present or proposed
use of, such properties or assets, Capital has good title, free and clear of any
liens, claims, charges, options or other encumbrances, to all of the personal
and real property reflected in the consolidated balance sheet of Capital as of
March 31, 1998 referred to above in Section 4.5, and all personal and real
property acquired since such date, except such personal and real property as has
been disposed of for fair value in the ordinary course of business. All leases
material to Capital, pursuant to which Capital, as lessee, leases real or
personal property, are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any material existing default
by Capital or any event which with notice or lapse of time or both would
constitute such a material default. The Capital Disclosure Letter sets forth a
complete list and brief description of all real estate owned or leased by
Capital (including real estate acquired by means of foreclosure, transfer in
lieu of foreclosure or by exercise of any creditor's right), and all personal
property having a value in excess of $25,000 owned or leased by Capital. Each
item of real estate described in the Capital Disclosure Letter and used in the
conduct of the business of Capital is in good repair and insurable at market
rates; no notice of violation of zoning laws, building or fire codes or other
statutes, ordinances or regulations relating to the use or operation of such
property has been received by or is known of by Capital; and there are no
condemnation or similar proceedings pending or threatened against any such
property or any portion thereof.
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4.11 Taxes. Capital has duly filed, or will file, all federal, state, local
and foreign tax returns ("Returns") required by applicable law to be filed on or
before the Effective Time (all such Returns being accurate and complete in all
material respects), and have paid or have set up adequate reserves or accruals
for the payment of all taxes required to be paid in respect of the periods
covered by such Returns, and will pay, or where payment is not yet due, will set
up adequate reserves or accruals adequate in all material respects for the
payment of all taxes for any subsequent periods ending on or prior to the
Effective Time or any portion of a subsequent period which includes the
Effective Time and ends subsequent thereto. Capital will not have any material
liability for any such taxes in excess of the amounts so paid or reserved or
accruals so established. Capital is not delinquent in the payment of any
material tax, assessment or governmental charge and has not requested any
extension of time within which to file any tax returns in respect of any fiscal
year which have not since been filed. No material deficiencies for any tax,
assessment or governmental charge have been proposed, asserted or assessed
(tentatively or definitively) against Capital which have not been settled and
paid and, as of the date of this Agreement, no requests for waivers of the time
to assess any tax, or waivers of the statutory period of limitation, are pending
or have been granted, and Capital does not have in effect any currently
effective power of attorney or authorization to any person to represent it in
connection with any taxes.
4.12 Intentionally Omitted.
4.13 Intangible Property. Capital owns or possesses the right, free of the
claims of any third party, to use all material trademarks, service marks, trade
names, copyrights, patents, and licenses currently used by them in the conduct
of their respective businesses. No material product or service offered and no
material trademark, service mark or similar right used by them infringes any
rights of any other person, and, as of the date hereof, Capital has received no
written or oral notice of any claim of such infringement.
4.14 Employee Relations. As of the date hereof, Capital is, in all material
respects, in compliance with all federal and state laws, regulations, and orders
respecting employment and employment practices (including Title 7 of the Civil
Rights Act of 1964), terms and conditions of employment, and wages and hours,
and none of them is engaged in any unfair labor practice. As of the date hereof,
no dispute exists between Capital and any of its employee groups regarding
employee organization, wages, hours, or conditions of employment which would
materially interfere with the business or operations of Capital. As of the date
hereof, there are no labor or collective bargaining agreements binding upon
Capital or to which Capital is a party, and, except as set forth in the Capital
Disclosure Letter, there are no employment or consulting agreements binding upon
Capital, or to which Capital is a party. As of the date hereof, Capital is not
aware of any attempts to organize a collective bargaining unit to represent any
of its employee groups. All contributions due on or prior to the date hereof to
any pension, profit-sharing, or similar plan of Capital have been paid or
provided for in accordance with the Employee Retirement Income Security Act of
1974, as amended, and all other applicable federal and state statutes and
regulations. The Capital Disclosure Letter sets forth each employment contract,
deferred compensation, non-competition, bonus, stock option, profit sharing,
pension, retirement, incentive
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and insurance arrangement or plan, and any other remunerative or fringe benefit
arrangement applicable to Capital, including the amounts currently payable
pursuant to any employment agreement or other remunerative arrangement.
4.15 ERISA. The Capital Disclosure Letter sets forth a complete list of
Capital's employee pension benefit plans within the meaning of Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
profit sharing plans, stock purchase plans, deferred compensation and
supplemental income plans, group insurance plans and all other employee welfare
benefits plans within the meaning of Section 3(1) of ERISA, maintained for the
benefit of the employees or former employees, including any beneficiaries
thereof, and directors or former directors of Capital. Capital has delivered to
FCNB a true and correct copy of each such employee benefit plan. Other than as
set forth in this Section 4.15 and in the Capital Disclosure Letter, Capital
does not maintain any plans of the type described in this Section.
All "employee benefit plans" (as defined in Section 3(3) of ERISA) comply
in all material respects with all applicable provisions of ERISA, the Code, and
all other federal, state, or local laws. The assets of Capital are not subject
to any liens under ERISA or the Code with respect to any employee benefit plan
of Capital or an Affiliate (as defined below), and no event has occurred, or
condition exists, which could subject Capital or its assets to a future
liability, obligation, or lien arising out of any employee benefit plan of
Capital or an Affiliate.
All employee benefit plans currently or previously maintained, sponsored,
or contributed to by Capital have been administered, maintained, and operated in
accordance with their terms. All contributions, payments, fees or expenses
relating to each such employee benefit plan that were deducted by Capital for
income tax purposes were properly deductible in the year claimed. There are no
actions, claims (other than routine benefit claims made in the ordinary course),
proceedings or inquiries, pending or threatened, with respect to any such
employee benefit plan, and Capital has no knowledge of any fact which could give
rise to any such action, claim, proceeding or inquiry. Neither Capital nor
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any other person or entity who or which is a party in interest (as defined in
Section 3(14) of ERISA) or disqualified person (as defined in Section 4975(e)(2)
of the Code) has acted or failed to act with respect to any such employee
benefit plan in any manner which constitutes: (a) a breach of fiduciary
responsibility under ERISA; (2) a prohibited transaction under Section 406 of
ERISA or Section 4975 of the Code; or (3) any other violation of ERISA or the
Code, except as set forth in the Capital Disclosure Letter. Except as set forth
in the Capital Disclosure Letter, Capital is not obligated to indemnify,
reimburse, or contribute to the liabilities or expenses of any person or entity
who may have committed or been involved in any such fiduciary breach, prohibited
transaction, or ERISA or Code violation. Each such employee benefit plan which
is intended to meet the requirements for tax-favored treatment under Subtitle A,
Chapter 1 of the Code meets such requirements. Each such employee benefit plan
that was intended to constitute a qualified plan under Section 401(a) of the
Code has, at all times, been qualified, in form and operation, under Section
401(a) of the Code, and any related trust is and has, at all times, been exempt
from income tax. Neither Capital nor any Affiliate (as defined below) has ever
maintained or contributed to a multiemployer plan (as defined in Section 3(37)
of ERISA). Neither Capital nor any Affiliate has any current liability for
contributions to a defined benefit plan (as defined in Section 3(35) of ERISA).
All returns, reports, statements, notices, declarations or documents relating to
an employee benefit plan that are required by law to be filed with or furnished
to any federal, state, or local governmental agency have been timely filed. Any
employee benefit plan (including any employee benefit plan of an Affiliate) that
is a group health plan (as defined in Section 5000(b)(1) of the Code) has
complied in each and every case with the requirements of Sections 601 through
607 of ERISA and Section 4980B of the Code and all other applicable federal,
state, and local laws relating to continuation coverage (collectively "COBRA"),
and no such plan provides benefits to former employees or their beneficiaries
(except to the extent required under COBRA). Each employee benefit plan can be
amended, modified, or terminated without participant consent and without
additional liability accruing to Capital after the date of Plan termination. For
this purpose, liabilities accrued on or before the date of Plan termination
shall be limited to the following: (1) in the case of an employee benefit
pension plan (within the meaning of Section 3(2) of ERISA), the participant's
"accrued benefit," as defined in Section 3(23) of ERISA; and (2) in the case of
an employee welfare benefit plan (within the meaning of Section 3(1) of ERISA),
claims for expenses, costs, or services (including, but not limited to, medical
and other health care services) actually performed or incurred before the date
of the Plan termination. Any prior amendment, modification, or termination of an
employee benefit plan has been made in accordance with the terms of the Plan and
applicable law.
For purposes of this Section 4.15, the term Affiliate means an entity
included in the group of entities consisting of Capital and all other entities
that are treated as part of the same controlled group under Section 414(b), (c),
(m) or (o) of the Code.
4.16 Contracts. Except as disclosed in the Capital Disclosure Letter,
Capital is not a party to, and no property or assets of Capital is subject to
any contract, agreement, lease, sublease, license, arrangement, understanding or
instrument calling for payments in excess of $25,000 in any year ("Material
Contract"). Except as disclosed in the Capital Disclosure Letter each such
Material Contract is valid and in full force and effect, and all parties thereto
have in all material respects performed all obligations thereunder required to
be performed to date, and are not in material default. Except as disclosed in
the Capital Disclosure Letter each Material Contract is assumable and assignable
without consent of the other party thereto and do not contain any provision,
increasing or accelerating payments otherwise due, or change or modify the
provisions or terms of such Material Contract as a result of this Agreement or
the transactions contemplated hereby.
4.17 Related Party Transactions. Except as set forth in the Capital
Disclosure Letter, Capital has no contract, extension of credit, business
arrangement, depository relationship, or other relationship with (i) any present
director or officer of Capital; (ii) any shareholder of Capital owning 5% or
more of the outstanding Capital Common Stock; or (iii) except with respect to
depository relationships, any affiliate or associate of the foregoing. Each
extension of credit disclosed in the Capital Disclosure Letter has been made in
the ordinary course of business, and on the same terms, including interest rate
and collateral, as those prevailing at the time for comparable arms'-length
transactions, and do not involve more than the normal risk of collectibility or
present
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other unfavorable features.
4.18 Loans. Except as set forth in the Capital Disclosure Letter, each of
the loans of Capital represents the legal, valid and binding obligation of the
borrowers named therein, enforceable in accordance with its terms (including the
validity, perfection and enforceability of any lien, security interest or other
encumbrance relating to such loan), except as such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting the enforcement of creditors' rights generally, and
subject to general principles of equity which may limit the enforcement of
certain remedies. Except as set forth in the Capital Disclosure Letter no
default (including any event or circumstance which with the passage of time or
the giving of notice or both would constitute a default) in respect of any
material monetary provision of any such loan exists, and except as set forth in
the Capital Disclosure Letter, Capital has no knowledge of any borrower's
inability to repay any of such loans when due, whether or not such borrower is
currently in default.
4.19 Environmental Matters. Except as disclosed in the Capital Disclosure
Letter, no contaminant, pollutant, toxic or hazardous waste or similar or like
substance has been generated, used, stored, processed, disposed of, discharged
at, or was or is otherwise present at any real estate now or previously owned or
acquired (including without limitation any real estate acquired by means of
foreclosure, transfer in lieu of foreclosure or by exercise of any other
creditor's right) or leased by Capital, or any real estate which is pledged or
stands as collateral security for any loan or other extension of credit by
Capital, except such that are not reasonably likely to have a material adverse
effect on the business, operations, assets, financial condition, prospects or
results of operations of Capital taken as a whole. Except as disclosed in the
Capital Disclosure Letter, there is no legal, administrative, arbitrarial or
other proceeding, claim, action, cause of action or governmental proceeding or
investigation of any nature whatsoever, seeking to impose, or that could result
in the imposition, on Capital of any liability arising under any local, state,
or federal environmental statute, regulation, rule or ordinance, pending or, to
the knowledge of Capital, threatened against Capital; and there is no reasonable
basis for any of the foregoing; and Capital is not subject to any agreement,
order, judgment, decree or memorandum of any court, governmental authority,
regulatory agency or third party imposing any such liability. Notwithstanding
anything to the contrary contained herein, FCNB shall be entitled to conduct
investigations into environmental matters relating to Capital. Capital agrees
that it shall permit to be performed, at FCNB's expense, such environmental
testing and investigations as FCNB shall request.
4.20 Litigation and Other Proceedings. Except as set forth in the Capital
Disclosure Letter, Capital is not a party to any pending, or, to the knowledge
of Capital, threatened claim, action, suit, investigation or proceeding or
subject to any order, judgment or decree, except for matters which, in the
aggregate, cannot reasonably be anticipated to have, a material adverse effect
on the business, operations, assets, financial condition, prospects or results
of operations of Capital taken as a whole. The Capital Disclosure Letter sets
forth a complete and accurate list of all actions, suits, investigations or
proceedings to which Capital is a party or which relate to any of its assets.
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4.21 Year 2000. Capital is in compliance in all material respects with all
regulatory requirements regarding Year 2000 issues. Capital has developed,
approved and is implementing in a timely manner, a Year 2000 compliance program
which will ensure that its computer systems and/or those of its data processing
providers are or will be Year 2000 compliant prior to December 1999. No material
costs in excess of those reflected on the financial statements and budget
projections provided to FCNB will be incurred in connection with such programs.
4.22 Compliance with Laws. Capital has all permits, licenses, certificates
of authority, orders and approvals of, and have made all filings, applications
and registrations with, federal, state, local or foreign governmental or
regulatory bodies that are required in order to permit them to carry on its
business as presently conducted and the absence of which would have a material
adverse effect on such business; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect, and, to the
knowledge of Capital, no suspension or cancellation of any of them is
threatened; and all such filings, applications and registrations are current.
The conduct of its business by Capital does not violate, in any material
respect, any applicable domestic (federal, state or local) or foreign law,
statute, ordinance, license or regulation now in effect. Capital is not in
default under any order, license, regulation or demand of any federal, state,
local or other governmental agency or with respect to any order, writ,
injunction or decree of any court. Except for statutory or regulatory
restrictions of general application, no federal, state, local or other
governmental authority has placed any restrictions on the business of Capital.
4.23 Proxy Statement, Etc. None of the information supplied or to be
supplied by Capital for inclusion, or included, in (i) the Proxy Statement or
(ii) any other documents to be filed with the SEC or any regulatory agency in
connection with the transactions contemplated hereby will, to the best knowledge
of Capital, and at the respective times such information is supplied or such
documents are filed or mailed, be false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein not misleading. All documents which Capital is responsible
for filing with the OCC and any regulatory agency in connection with the Merger,
and all information provided by Capital to FCNB for inclusion in any such
filings by FCNB, will comply as to form in all material respects with the
provisions of applicable law.
4.24 Brokers and Finders. Except for a fee equal to the sum of .65% percent
of the aggregate consideration up to thirty seven million five hundred thousand
dollars ($37,500,000) received by shareholders of Capital as a result of the
Merger; (ii) plus 5% of the aggregate consideration received by the shareholders
of Capital in excess of thirty seven million five hundred thousand dollars
($37,500,000) payable to Friedman, Billings, Ramsey & Company, Inc. upon
effectiveness of Merger, neither Capital nor any of its officers, directors, or
employees, or to the best knowledge of Capital any shareholder of Capital, has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or finder's fees, and no broker or
finder has acted, directly or indirectly, for Capital, in connection with this
Agreement or the transactions contemplated hereby.
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ARTICLE V
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME
5.1 Forbearance by Capital. From the date hereof until the Effective Time,
Capital covenants and agrees that it will not do, or agree or commit to do,
without the prior written consent of FCNB, any of the following:
(a) except in the ordinary course of business consistent with past practice,
enter into or assume any Material Contract, make any material commitment, incur
any material liabilities or material obligations, whether directly or by way of
guaranty, including any obligation for borrowed money whether or not evidenced
by a note, bond, debenture or similar instrument, acquire or dispose of any
material property or asset, or engage in any transaction not in the ordinary
course of business consistent with past practice or subject any of Capital's
assets or properties to any lien, claim, charge or encumbrances whatsoever;
(b) grant any general increase in compensation to its employees or officers or
directors, pay any bonus which is not required under the terms of any employment
agreement binding upon Capital on the date hereof, or effect any increase in
retirement benefits to any class of employees or its officers (unless any such
change shall be required by applicable law), except that Capital may pay in
accordance with past practice, at the end of Capital's 1998 fiscal year, or in
the event that the Closing occurs prior to the end of Capital's 1998 fiscal
year, immediately prior to Closing, aggregate discretionary bonuses not in
excess of the amount which Capital has, as of the date of payment of such
bonuses, accrued for the payment of such bonuses in accordance with past
practice, and grant such increases in compensation as are in accordance with
past practice, including in terms of amount, percentage, timing and eligibility,
as are disclosed in the Capital Disclosure Letter;
(c) declare, set aside or pay any dividend or other distribution on Capital
Common Stock;
(d) redeem, purchase or otherwise acquire any shares of its capital stock or
any securities or obligations convertible into or exchangeable for any shares of
its capital stock; merge into any other corporation or bank or permit any other
corporation or bank to merge into it, or consolidate with any other corporation
or bank; liquidate, sell or dispose of any assets or acquire any assets,
otherwise than in the ordinary course of its business consistent with past
practice; or agree to do any of the foregoing;
(e) open, or file an application with any federal or other regulatory agency
with respect to the opening of, any additional office, branch or banking
facility, or the acquisition or establishment of any additional banking or
nonbanking facility;
(f) issue any share of its capital stock or permit any share of its capital
stock held in its treasury to become outstanding, except for the issuance of
shares of Capital Common Stock pursuant to the
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exercise of Capital Options outstanding as of the date hereof, and pursuant to
the Stock Option Agreement contemplated hereby; issue, grant or extend the term
of any option, warrant, or stock appreciation right;
(g) amend the Articles of Association or Bylaws of Capital;
(h) effect any capital reclassification, stock dividend, stock split,
consolidation of shares or similar change in capitalization;
(i) take, cause or permit the occurrence of any change or event which would
render any of its representations and warranties contained herein untrue in any
material respect at and as of the Effective Time;
(j) enter into any related party transaction of the type contemplated by
Section 4.16 hereof, except for transactions relating to deposit relationships
or the extension of credit in the ordinary course of business, on substantially
the same terms, including interest rate and collateral, as those prevailing for
comparable transactions with unaffiliated parties, and which do not present more
than the normal risk of collectibility or other unfavorable features, and in
respect of which disclosure has been made to FCNB prior to disbursement;
(k) except as set forth in Section 6.17, solicit, encourage, or authorize any
person, including but not limited to directors, officers, shareholders, or
employees, to solicit from, or communicate with, any third party, inquiries or
proposals relating to the disposition of Capital's business or assets, or the
acquisition of Capital's voting securities, or the merger of Capital, with any
person other than FCNB or any subsidiary of FCNB, or provide any such person
with information or assistance or negotiate or conduct any discussions with any
such person in furtherance of such inquiries or to obtain a proposal, or
continue any such activities in progress on the date hereof, and Capital shall
promptly notify FCNB of all of the relevant details, including the identity of
such third party and the nature of any such third party proposal, relating to
all inquiries and proposals which it may receive relating to any of such
matters; or
(l) take or cause the occurrence of any event or action which would cause the
rights attached to the Capital Common Stock pursuant to the Capital Shareholder
Rights Protection Plan to detach or become exercisable;
(m) knowingly take any action which would (i) adversely affect the ability to
obtain the necessary approvals of governmental authorities required for the
transactions contemplated hereby; (ii) adversely affect the status of the
transactions contemplated hereby as a reorganization for purposes of Section 368
of the Code; (iii) adversely affect the eligibility of the transactions
contemplated hereby for treatment as a pooling of interests for financial
reporting purposes; or (iv) adversely affect the ability to perform the
covenants and agreements under the Agreement.
5.2 Conduct of Business. From the date hereof until the Effective Time,
Capital covenants
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and agrees that, except as otherwise consented to by FCNB in writing it shall:
(a) carry on its business, and maintain its books of account and other
corporate records, in the ordinary course consistent with past practice and
legal and regulatory requirements;
(b) to the extent consistent with prudent business judgment, use all reasonable
efforts to preserve its present business organization, to retain the services of
its officers and employees, and maintain customer and other business
relationships;
(c) maintain all of the structures, equipment, and other real and personal
property of Capital in good repair, order and condition, ordinary wear and tear
and unavoidable casualty excepted;
(d) use all reasonable efforts to preserve or collect all material claims or
causes of action of Capital;
(e) keep in full force and effect all material insurance coverage maintained by
Capital;
(f) perform in all material respects all obligations under all material
agreements, contracts, commitments and other instruments which Capital is a
party or by which they may be bound or which relate to or affect any of their
respective assets or properties;
(g) comply in all material respects with all statutes, laws, regulations,
rules, ordinances, orders, decrees, consent agreements, examination reports and
other federal, state and local governmental or regulatory directives applicable
to Capital and the conduct of its; and
(h) at all times maintain the allowance for loan losses at a level which is
adequate to absorb reasonably anticipated losses in the loan and lease
portfolio, in accordance with generally accepted accounting principles and
regulatory requirements.
5.3 Approval of Capital Shareholders. Subject to the effectiveness of the
Registration Statement (defined in Section 6.2 below), Capital shall cause a
meeting of its shareholders (the "Capital Shareholder Meeting" together with the
FCNB Shareholder Meeting, the "Shareholder Meetings") to be held as soon as
reasonably possible, but no later than sixty (60) days after the effectiveness
of the Registration Statement, for the purpose of considering the approval of
the Merger and adoption of this Agreement. Capital shall cause to be distributed
to each shareholder of record of Capital (according to the transfer records of
Capital as of the record date for the Capital Shareholder Meeting), such
material required by applicable statutes and regulations including but not
limited to a copy of the joint Prospectus/Proxy Statement (the "Proxy
Statement") to be prepared by FCNB in connection with the Merger and to be
included in the Registration Statement. The Proxy Statement shall be mailed by
Capital on the date (the "Mailing Date") at least twenty business (20) days
prior to the date of the Capital Shareholder Meeting. The Board of Directors of
Capital shall recommend to its shareholders that they vote the shares held by
them to approve the Merger and to adopt this Agreement and Capital shall use its
best efforts in good faith to obtain its
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shareholders' approval of the Merger in accordance with Maryland law, except to
the extent that in the good faith determination of the Board of Directors of
Capital, the fiduciary duty of the directors under Maryland law requires that
the Board of Directors not recommend the Merger to shareholders of Capital, to
withdraw, modify or change in a manner detrimental to approval of the Merger by
shareholders of Capital, its recommendation, which such determination shall be
based on the written advice of Alston & Bird, LLP, counsel to Capital, to the
effect that the fiduciary duty of the directors so requires.
5.4 Conduct of Business by FCNB. FCNB covenants that it shall, from the
date hereof until the Effective Time, use its best efforts to (i) preserve its
business organization intact in all material respects; (ii) maintain good
relationships with its employees; and (iii) preserve for itself the goodwill of
its and its subsidiaries' customer and other business relationships. FCNB
covenants that from the date hereof until the Effective Time, it shall not,
without the prior written consent of Capital, knowingly take any action which
would (i) adversely affect the ability to obtain the necessary approvals of
governmental authorities required for the transactions contemplated hereby; (ii)
adversely affect the status of the transactions contemplated hereby as a
reorganization for purposes of Section 368 of the Code; (iii) adversely affect
the eligibility of the transactions contemplated hereby for treatment as a
pooling of interests for financial reporting purposes; or (iv) adversely affect
the ability to perform the covenants and agreements under the Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Access and Information. (a) Capital shall afford to FCNB, and to FCNB's
accountants, counsel and other representatives, reasonable access during normal
business hours, during the period prior to the Effective Time, to all of its
properties, books, contracts, commitments and records and, during such a period,
shall furnish promptly to FCNB (a) a copy of each report, schedule and other
document filed or received by it during such period with or from (i) the OCC;
(ii) the Federal Reserve Board; (iii) the FDIC; and (b) all other information
concerning its business, properties and personnel as FCNB may reasonably
request. FCNB shall cause all information obtained by it or its representatives
pursuant to this Agreement or in connection with the negotiation thereof to be
treated as confidential and shall not use, nor knowingly permit others to use,
any such information for any purpose other than in connection with the
transactions contemplated hereby, unless such information becomes generally
available to the public or is required to be disclosed pursuant to the order of
a court of competent jurisdiction or otherwise in accordance with applicable
law, and in the event of the termination of this Agreement shall promptly return
all documents (including copies thereof) obtained hereunder from Capital, and
shall destroy all copies of any analyses, compilations, notes, studies or other
documents prepared from any such material by FCNB or for FCNB's use.
(b) FCNB shall afford to Capital, and to Capital's accountants, counsel and
other representatives, reasonable access during normal business hours, during
the period prior to the
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Effective Time, to all of its properties, books, contracts, commitments and
records and, during such a period, shall furnish promptly to Capital (a) a copy
of each report, schedule and other document filed or received by it during such
period with or from (i) the SEC; (ii) the Federal Reserve Board; (iii) the FDIC;
(iv) the DFR; and (b) such other information concerning its business, properties
and personnel as Capital may reasonably request. Capital shall cause all
information obtained by it or its representatives pursuant to this Agreement or
in connection with the negotiation thereof to be treated as confidential and
shall not use, nor knowingly permit others to use, any such information for any
purpose other than in connection with the transactions contemplated hereby,
unless such information becomes generally available to the public or is required
to be disclosed pursuant to the order of a court of competent jurisdiction or
otherwise in accordance with applicable law, and in the event of the termination
of this Agreement shall promptly return all documents (including copies thereof)
obtained hereunder from FCNB, and shall destroy all copies of any analyses,
compilations, notes, studies or other documents prepared from any such material
by Capital or for Capital's use.
6.2 Registration Statement; Other Information; Applications; Cooperation.
(a) As promptly as practicable after the date hereof and the furnishing by
Capital of all information regarding Capital required to be reflected therein,
FCNB shall file (i) a registration statement (the "Registration Statement") with
the SEC on Form S-4 under the Securities Act, containing the Proxy Statement to
be used in connection with the Shareholder Meetings regarding the Merger, which
shall also be filed with the OCC as the proxy statement to be used in connection
with the Capital Shareholder Meeting, as required by the rules of the OCC, (ii)
the applications for OCC, Federal Reserve and DFR approval, and (iii) any other
applications for regulatory or other approvals deemed necessary or appropriate
by FCNB. FCNB will use reasonable efforts to cause said Registration Statement
to be declared effective as soon as practicable thereafter. FCNB agrees, that at
the time the Registration Statement becomes effective and at the Mailing Date of
the Proxy Statement, the Registration Statement will comply as to form in all
material respects with the applicable provisions of the Securities Act. The
parties hereto agree that the Registration Statement, at the time it becomes
effective, and the Proxy Statement, in either case as amended or supplemented by
any amendment or supplement filed with the SEC, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that information as of a later date
included therein shall be deemed to modify information of an earlier date, and
with respect to either party, the foregoing statement shall not apply to
statements in or omissions from the Registration Statement or Proxy Statement
made in reliance upon and in conformity with information furnished by the other
party for use in the Registration Statement or Proxy Statement. After becoming
aware of any statement or omission which renders the statement set forth in the
preceding sentence not true or correct, FCNB will promptly amend, supplement or
revise such material in order to make the statement in the preceding sentence
true and correct at all times up to and including the Effective Time. Capital
shall have the right to review the Registration Statement and each of the above
applications, together with any and all amendments thereto, and to comment on
their form and content, prior to their being filed by FCNB. Capital agrees that
it shall, and shall cause its employees, agents, representatives, and advisors
to, cooperate with FCNB in the preparation and filing of the Registration
Statement and the aforementioned regulatory applications,
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including, but not in limitation, by providing on a prompt basis information
requested by FCNB for inclusion in such documents, and by providing comments on
drafts of such documents on a timely basis.
(b) FCNB agrees to use its best efforts to prepare and file all material
applications, notices or other filings with respect to the Merger required to be
made with the Federal Reserve Board, the OCC or the DFR, not later than forty
five (45) days from the date hereof, subject to the timely furnishing by Capital
of all information regarding Capital required to be included therein or
necessary for the preparation of such applications.
6.3 Approval of FCNB Shareholders. Subject to the effectiveness of the
Registration Statement, FCNB shall cause a meeting of its shareholders (the
"FCNB Shareholder Meeting") to be held as soon as reasonably possible, but no
later than sixty (60) days after the effectiveness of the Registration
Statement, for the purpose of considering the approval of the Merger and
adoption of this Agreement. FCNB shall cause to be distributed to each
shareholder of record of FCNB (according to the transfer records of FCNB as of
the record date for the FCNB Shareholder Meeting), such material required by
applicable statutes and regulations including but not limited to a copy of the
Proxy Statement. The Mailing Date for the Proxy Statement shall be at least
twenty (20) business days prior to the date of the FCNB Shareholder Meeting. The
Board of Directors of FCNB shall recommend to its shareholders that they vote
the shares held by them to approve the Merger and to adopt this Agreement and
FCNB shall use its best efforts to obtain its shareholders' approval of the
Merger in accordance with Maryland law, except to the extent that in the good
faith determination of the Board of Directors of FCNB, the fiduciary duty of the
directors under Maryland law requires that the Board of Directors not recommend
the Merger to shareholders of FCNB, to withdraw, modify or change in a manner
detrimental to approval of the Merger by shareholders of FCNB, its
recommendation, which such determination shall be based on the written advice of
Kennedy, Baris & Lundy, L.L.P., counsel to FCNB, to the effect that the
fiduciary duty of the directors so requires.
6.4 Notice of Actual or Threatened Breach. Each party will promptly give
written notice to the other party upon becoming aware of any impending or
threatened occurrence of any event or the failure of any event to occur which
would cause or constitute a breach of any of the representations, warranties or
covenants made by such party in this Agreement, any other changes or
inaccuracies in any data previously given or made available to the other party,
or which would threaten consummation of the transaction contemplated hereby.
6.5 Current Information. During the period from the date of this Agreement
to the Effective Time: (a) Capital will cause one or more of its representatives
to confer on a regular and frequent basis with representatives of FCNB and to
report the general status of its ongoing operations. Capital will promptly
notify FCNB of any material change in the normal course of its business or in
the operation of its properties and, to the extent permitted by applicable law,
of any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of material litigation involving Capital, and
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will keep FCNB fully informed with respect to such events. Capital shall provide
copies of all reports filed by it pursuant to Section 13 of the Exchange Act to
FCNB upon the filing of such reports.
(b) FCNB will cause one or more of its representatives to confer on a regular
and frequent basis with representatives of Capital and to report the general
status of its ongoing operations. FCNB will promptly notify Capital of any
material change in the normal course of its business or in the operation of its
properties and, to the extent permitted by applicable law, of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the institution or the threat of material
litigation involving FCNB and will keep Capital informed with respect to such
events. FCNB shall provide copies of all reports filed by it pursuant to Section
13 of the Exchange Act to Capital upon the filing of such reports.
6.6 Filing with Department. FCNB and Capital shall execute and deliver and
use their best efforts to file appropriate Articles of Merger with the SDAT at
the earliest practicable date after satisfaction or waiver of the conditions set
forth in Article VII hereof.
6.7 Expenses. Each party hereto shall pay its own expenses incident to
preparing for, entering into and carrying out this Agreement and to the
consummation of the Merger and the transactions contemplated hereby.
6.8 Miscellaneous Agreements and Consents. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including, without limitation, using reasonable
efforts to lift or rescind any injunction or restraining order or other order
adversely affecting the ability of the parties to consummate the transactions
contemplated hereby. FCNB and Capital, as the case may be, will use its best
efforts to obtain consents of all third parties and governmental bodies
necessary or desirable for the consummation of the transactions contemplated by
this Agreement.
6.9 Press Releases. FCNB and Capital will consult with each other as to the
form, substance and timing of any press release or other public disclosure of
matters related to this Agreement or any of the transactions contemplated
hereby. Notwithstanding the foregoing, FCNB and Capital agree that FCNB and
Capital shall, immediately following the execution hereof, issue a joint press
release announcing the execution of the Agreement and the proposed Merger, and
further agree that FCNB and Capital shall each be entitled to issue separate
press releases announcing the execution of the Agreement and the proposed
Merger, a copy of which release will be provided to the other party prior to
issuance.
6.10 Current Public Information. FCNB agrees that it shall, for a period of
two (2) years following the Effective Time, use its best efforts to meet the
current public information requirements as set forth in paragraph (c) of Rule
144 promulgated under the Securities Act, and
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will provide those persons providing affiliate letters pursuant to Section
7.2(n) with such other information as they may reasonably require and to
otherwise cooperate with such persons to facilitate any sales of FCNB Common
Stock issued to such persons pursuant to this Agreement in compliance with the
provisions of Rule 144 and/or Rule 145 promulgated under the Securities Act.
6.11 No Purchases or Sales of FCNB Common Stock During Price Determination
Period. Except for purchases of shares of FCNB Common Stock by FCNB in
connection with the DRI Plan and FCNB's 401(k) Plan, and in connection with the
issuance or exercise of options pursuant to the FCNB Option Plans, neither FCNB,
Capital, any subsidiary of FCNB, nor any executive officer or director of either
FCNB, Capital, any FCNB subsidiary, nor any shareholder who shall be deemed an
"affiliate" of FCNB or Capital (as that term is used for purposes of Rule 144
and Rule 145 promulgated under the Securities Act) shall purchase or sell on
Nasdaq, or submit a bid to purchase or an offer to sell on Nasdaq, directly or
indirectly, any shares of FCNB Common Stock or any options, warrants, rights or
other securities convertible into or exchangeable for shares of FCNB Common
Stock during the Price Determination Period.
6.12 Capital Employees. Following the Effective Time, FCNB shall provide to
all officers and employees of Capital who, at the Effective Time, become
employees of FCNB ("Continuing Employees") employee benefits under terms and
conditions, which when taken as a whole, are substantially similar to those
currently provided by FCNB to its similarly situated officers and employees. For
purposes of participation, vesting and accrual of benefits under FCNB's employee
benefit plans: (i) service under any qualified defined benefit plans of Capital
shall be treated as service under FCNB's qualified defined benefit plans; (ii)
service under any qualified defined contribution plans of Capital shall be
treated as service under FCNB's qualified defined contribution plans; and (iii)
service under any other employee benefit plans of Capital shall be treated as
service under any similar benefit plan maintained by FCNB. FCNB shall cause the
FCNB welfare benefit plans to waive any waiting period and restrictions or
limitations for preexisting conditions and insurability. FCNB shall honor all
employment, severance, consulting and other compensation contracts between
Capital and any current or former director, officer, employee thereof disclosed
in the Capital Disclosure Letter.
6.13 Stock Option Agreement. Capital agrees that, simultaneously with the
execution of this Agreement, it shall grant FCNB an option, substantially in the
form attached hereto and made a part hereof, to acquire such number of shares of
Capital Common Stock as shall equal 19.9% of the outstanding Capital Common
Stock following exercise thereof.
6.14 Rights Plan. Capital acknowledges and agrees that the execution and
performance of this Agreement and consummation of the Merger, subject to and in
accordance with the terms and conditions contained herein, the issuance,
delivery and performance of the stock option agreement contemplated by Section
6.13 hereof and the exercise of such stock option agreement in accordance with
its terms, is a transaction effected with the approval of the Board of Directors
of the Company, and as a result, neither FCNB, the Bank nor their respective
Affiliates and Associates (as defined in the Capital Shareholder Protection
Rights Plan) constitutes an "Acquiring Person" as
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defined in Capital's Shareholder Rights Protection Plan.
6.15 Advisory Board. FCNB agrees that it shall create a Regional Advisory
Board in respect of the District of Columbia, Northern Virginia and the southern
Montgomery County area. All of the members of the Board of Directors of Capital
in office as of the Effective Time shall be invited to serve on the Regional
Advisory Board. The members of the Regional Advisory Board shall serve at the
pleasure of the Board of Directors of FCNB Bank.
6.16 Indemnification. (a) FCNB acknowledges and agrees that all rights to
indemnification and all limitations on liability existing in favor of the
officers, directors and employees of Capital and its subsidiary (the "Covered
Persons") as provided in their respective Articles of Association or
Incorporation, Bylaws and other governing documents, as in effect as of the date
hereof with respect to matters arising prior to the Effective Time, shall
continue in full force and effect, and to the extent not honored by the Bank as
successor to Capital, shall be honored by FCNB to the extent set forth in such
governing documents, as if it were the indemnifying party thereunder, without
any amendment thereof, provided, however, that all rights to indemnification in
respect of any claim asserted or made within such period shall continue until
the final disposition of such claim. Not in limitation of the foregoing, in any
case where approval by FCNB is required to effectuate any indemnification, the
Covered Person seeking indemnification shall be entitled to require, by written
notice delivered to FCNB, such determination regarding approval to be made by
independent counsel mutually agreed upon by FCNB and such Covered Person.
(b) If FCNB or any successor or assign thereof shall merge into or consolidate
with any other person, and shall not be the party surviving such merger or
consolidation, or shall transfer all or substantially all of its assets to any
person, then in each such case FCNB (or such successor or assign) shall make
appropriate provision for the assumption by the acquiring or surviving party of
the obligations set forth in this Section 6.16.
(c) The provisions of this Section 6.16 are intended to be for the benefit of,
and shall be enforceable by, each Covered Person and their respective heirs and
personal representatives.
6.17 Unsolicited Acquisition Proposals. (a) Notwithstanding anything
contained in Section 5.1(k) to the contrary, in the event that Capital shall
receive prior to the Effective Time an Unsolicited Acquisition Proposal (as
hereinafter defined) which, in the good faith determination of the Board of
Directors of Capital, the fiduciary duty of the directors under Maryland law
requires that the Board of Directors consider, negotiate, communicate, or
provide information with respect to (collectively "communications"), which such
determination shall be based on the written advice of Alston & Bird, L.L.P.,
counsel to Capital, to the effect that the fiduciary duty of the directors
requires such communications because such Unsolicited Acquisition Proposal is
more favorable (in the written opinion of Capital's financial advisor) to
shareholders of Capital than the Merger, then Capital shall be entitled to
engage in such communications.
(b) For purposes of this Section 6.17 an "Unsolicited Acquisition Proposal"
shall mean any
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proposal, other than the Merger, received by Capital without violation of the
provisions of Section 5.1(k) hereof (without reference to the exception thereto)
regarding (i) any merger, consolidation, share purchase or exchange, or purchase
and assumption or similar transaction involving Capital; or (ii) any sale,
lease, transfer, pledge, encumbrance or other disposition, directly or
indirectly, of all of the assets of Capital. Any proposal relating to any such
transaction made by any party at the direction, suggestion, solicitation,
encouragement, or otherwise as a result of contact between such party and any
investment banker or financial advisor retained by Capital shall be deemed to be
a proposal solicited by Capital for purposes of this Section 6.17 and shall not
constitute an Unsolicited Acquisition Proposal. Capital shall immediately advise
FCNB of, and communicate to FCNB the terms of, any such inquiry or proposal
addressed to Capital or of which Capital or its officers, directors, employees,
agents, or representatives (including, without limitation, any investment banker
or financial advisor) has knowledge. Capital's Board of Directors shall use its
best efforts to cause its officers, directors, employees, agents and
representatives to comply with the requirements of this Section and Section
5.1(k).
6.18 Disclosure Letters. Capital and FCNB agree that they shall each update
their respective Disclosure Letter at and as of the Closing Date, for
comparative purposes.
ARTICLE VII
CONDITIONS
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment or waiver at or prior to the Effective Time of the following
conditions:
(a) Shareholder Approvals. The Merger shall have been approved by the requisite
majorities of the shareholders of each of FCNB and Capital.
(b) Tax Opinion. There shall have been delivered to FCNB and Capital, an
opinion of Kevin Kennedy, Esquire, special tax counsel to FCNB, in form and
substance satisfactory to FCNB and Capital to the effect that:
(i) the transactions contemplated by this Agreement will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended;
(ii) no gain or loss will be recognized by FCNB or Capital as a result of
the transactions contemplated hereby;
(iii) the tax basis of the assets of Capital in the hands of FCNB will be
the same as the tax basis of such assets in the hands of Capital
immediately prior to the Effective Time;
(iv) the holding period of the assets of Capital transferred to FCNB will
include the
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period during which such assets were held by Capital prior to the Effective
Time;
(v) no gain or loss will be recognized by the shareholders of Capital
upon the receipt of FCNB Common Stock in exchange for their shares of
Capital Common Stock (except in respect of cash received in lieu of the
issuance of fractional shares of FCNB Common Stock and any shareholder of
Capital who receives payment of cash as a dissenting shareholder);
(vi) the tax basis of the FCNB Common Stock received by shareholders of
Capital pursuant to the Agreement will be the same as the tax basis of the
Capital Common Stock surrendered in exchange therefore; and
(vii) the holding period of the FCNB Common Stock received by the
shareholders of Capital will include the holding period of the shares of
Capital Common Stock surrendered in exchange therefore, provided that such
shares of Capital Common Stock are held as a capital asset as of the
Effective Date.
7.2 Conditions to Obligation of FCNB and the Bank to Effect the Merger. The
obligation of FCNB and the Bank to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Time of the following
additional conditions:
(a) Representations and Warranties; Corporate Proceedings. Each material
representation and warranty of Capital set forth in Article IV hereof shall be
true and correct in all material respects as of the date of this Agreement and
as of the Effective Time (other than those limited to a specified date, which
shall speak only as to such date), and FCNB and the Bank shall have received a
certificate of the President of Capital to that effect. Each other
representation and warranty shall be true and correct except for such
inaccuracies or changes which, individually or in the aggregate, do not result
in a material adverse effect on the business, operations, assets, financial
condition, prospects or results of operations of Capital, taken as a whole, and
FCNB and the Bank shall have received a certificate of the President of Capital
to that effect. All action required to have been taken by, or on the part of,
Capital to authorize the execution, delivery and performance of this Agreement
and the Merger, respectively, shall have been duly and validly taken, and FCNB
and the Bank shall have received certified copies of the resolutions evidencing
such authorizations. Not in limitation of the foregoing, no representation or
warranty of Capital shall be deemed to be inaccurate solely as a result of the
impact of the factors set forth in 9.3(i)-(iv) hereof.
(b) Performance of Obligations. Capital shall have in all material respects
performed all obligations required to be performed by it under this Agreement
prior to the Effective Time, and FCNB and the Bank shall have received a
certificate of the President of Capital to that effect.
(c) Permits, Authorizations, Etc. Capital shall have obtained any and all
material permits, authorizations, consents, waivers, clearances or approvals
required for the lawful consummation of the Merger.
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(d) No Material Adverse Change. There shall not have been any material adverse
change in the business, operation, assets, financial condition, prospects or
results of operations of Capital, taken as a whole.
(e) Regulatory Approvals. FCNB and the Bank shall have received unconditional
approval of the Merger contemplated by this Agreement from the Federal Reserve
Board, the DFR and any other federal or state regulatory agencies whose approval
is required for consummation of such transaction (except for such conditions as
are ordinarily imposed in connection with transactions of the type contemplated
hereby and which do not, in the reasonable judgment of FCNB and the Bank, make
it inadvisable to consummate the transactions contemplated by this Agreement),
and all notice and waiting periods after the granting of any such approval shall
have expired.
(f) Intentionally Omitted.
(g) No Injunction. No injunction, restraining order, stop order or other order
or action of any federal or state court or agency in the United States which
prohibits, restricts or makes illegal the consummation of the transactions
contemplated hereby, shall be in effect, and no action, suit or other proceeding
seeking such shall have been instituted or threatened, and no statute, rule or
regulation shall have been enacted, issued or promulgated, by any state or
federal government or government agency, which prohibits, restricts or makes
illegal the consummation of the transactions contemplated hereby.
(h) Litigation. Except as set forth in the Capital Disclosure Letter, at the
Effective Time, there shall not be pending or threatened against Capital or the
officers or directors thereof in their capacity as such, any suit, action or
proceeding (including antitrust actions) which, if successful, would, in the
reasonable judgment of FCNB and the Bank, have a material adverse effect on the
financial condition, operations, business or prospects of Capital taken as a
whole.
(i) Support Agreement. Each of the directors of Capital shall have,
simultaneously with the execution of the Merger Agreement, entered into a
Support Agreement in substantially the form attached hereto.
(j) Brokers and Finders Fees. Capital shall have paid in full, at or prior to
Closing, all amounts owing in respect of the payments contemplated in Section
4.24 hereof.
(k) Accountants' Letter. FCNB shall have received from Hoffman, Morrison &
Fitzgerald, independent public accountants to Capital, a letter dated the
Closing Date, with respect to certain financial information regarding Capital,
which shall be substantially in the following form:
(i) they are independent public accountants with respect to
Capital;
(ii) in their opinion the audited financial statements of Capital
examined by them and included in the Proxy Statement furnished to
shareholders of Capital, or
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subsequently provided to FCNB and/or the shareholders of Capital,
comply as to form in all material respects with the requirements
applicable thereto;
(iii) at the request of Capital they have carried out procedures
to a specified date not more than five business days prior to the
Effective Time as follows: (1) read the unaudited financial statements
of Capital for the period from the date of the most recent audited
financial statements of Capital through the last day of the most
recent calendar month ended prior to such specified date (not more
than five days prior to the Effective Time; (2) read the minutes of
the meetings of the shareholders and of the Board of Directors (and
all committees thereof) of Capital from the date of the most recently
audited financial statements to a date not more than five days prior
to the Effective Time, and (3) consulted with certain officers and
employees of Capital responsible for financial and accounting matters
as to whether there has been any change in capital stock or long-term
debt, or any decrease in consolidated net assets or in the total or
per-share amounts of net income of Capital, and, based on such
procedures and except as disclosed in such letter, nothing has come to
their attention which would cause them to believe that:
(A) the financial statements referred to in (1) above
do not fairly present the financial position of Capital and
the results of its operations and changes in its financial
position at the dates and for the periods referred to
therein and are not presented in conformity with generally
accepted accounting principles applied on a basis consistent
in all material respects with that of the audited statements
of Capital at December 31, 1997 except as expressly required
by this Agreement or noted in such letter;
(B) as of said date not more than five business days
prior to the Effective Time, there was any (x) change in the
capital stock or long-term debt of Capital or (y) decreases
in net assets of Capital, in each case as compared with the
amounts shown in the balance sheet of Capital at the date of
the most recent audited financial statements, or for the
period from the date of the most recent financial statements
to said date not more than five business days prior to the
Effective Time, there were any decreases, as compared with
the corresponding portion of the preceding fiscal year, in
the total or per share amounts of income before
extraordinary items or net income, other than, in each case,
as set forth in such letter;
(C) the financial statements of Capital for the quarter
immediately preceding the Effective Time are not prepared in
accordance with generally accepted accounting principles,
and, based on a review of the interim financial statements
of Capital and upon due inquiry made of the management of
Capital, that material modifications should be made to such
financial statements for them to be in conformity with
generally accepted accounting principles as of said date not
more than five business days prior
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<PAGE>
to the Effective Time, except as noted in such letter;
(D) the reserve for possible credit losses established
by Capital is not adequate to absorb reasonably anticipated
losses in the loan and leasing portfolio of Capital in view
of the size and character of such portfolios, then current
economic conditions and other pertinent factors; and
(E) there are any contingent liabilities which could
have a materially adverse effect on the assets, business or
prospects of Capital other than as disclosed in the most
recent audited financial statements for Capital or other
than, in each case, as disclosed in said letter.
(m) Affiliate Letters. Capital shall deliver or cause to be delivered to FCNB a
letter from each officer or director of Capital who may be deemed to be an
"affiliate" (as defined for purposes of Rules 145 and 405 promulgated under the
1933 Act) of Capital, and shall use its best efforts to deliver or cause to be
delivered from each shareholder who may be deem to be an "affiliate," in form
and substance reasonably satisfactory to FCNB, under the terms of which each
such officer, director, and shareholder acknowledges and agrees to abide by and
comply with all limitations imposed by the 1933 Act and all rules, regulations
and releases promulgated thereunder with respect to the sale or other
disposition of the shares of FCNB Common Stock received by such person in
connection with this Agreement, including those accounting rules, regulations,
releases and guidelines which govern the eligibility of the transactions
governed hereby for treatment as a pooling of interests, including those which
impose limitations or restrictions on the sale, disposition or other
transactions with respect to shares of Capital Common Stock prior to the
Effective Time.
(n) Accounting Treatment. FCNB shall have received an opinion of Keller Bruner
& Company, L.L.C., or otherwise determined to its satisfaction, that the
transactions contemplated hereby can be accounted for as a pooling of interests
for financial reporting purposes.
(o) Third Party Consents. Capital shall have obtained all material third party
consents under any agreement, contract, lease, note, license, permit or other
document by which Capital or any Capital Subsidiary is bound or to which any of
their respective properties is subject required for the consummation of the
transactions contemplated hereby, except such consents which, individually or in
the aggregate do not result in a material adverse effect on the business,
operations, assets, financial condition, assets, prospects or results of
operations of Capital, taken as a whole. For purposes of this Section, the
failure to obtain any required consents from the landlords with respect to the
branch offices of Capital shall be deemed to constitute a material adverse
effect.
(p) Rights Plan. The Capital Shareholder Rights Protection Plan shall have been
amended so as to exclude FCNB, the Bank and their respective Affiliates and
Associates (as defined in such plan) from the definition of "Acquiring Person"
as a result of the execution, delivery or performance of this Merger Agreement
or the execution, delivery or exercise of the stock option
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agreement contemplated by Section 6.13 hereof, and terminating the plan at or
prior to the Effective Time. Additionally, the Rights attaching to each shares
of Capital Common Stock under the Capital Shareholder Rights Protection Plan
shall not have detached or become exercisable.
(q) Intentionally Omitted.
(r) Non-Competition Agreements. Each of the members of the Board of Directors
of Capital shall have entered into an agreement with FCNB and the Bank regarding
limitations on the ability of such persons to compete with FCNB and the Bank,
and to solicit customers of Capital, for the period commencing at the Effective
Time and ending on June 30, 2000.
7.3 Conditions to Obligation of Capital to Effect the Merger. The
obligation of Capital to effect the Merger shall be subject to the fulfillment
or waiver at or prior to the Effective Time of the following additional
conditions:
(a) Representations and Warranties; Corporate Proceedings. Each material
representation and warranty of FCNB and the Bank set forth in Article III hereof
shall be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time as though made at and as of the Effective
Time (other than those limited to a specified date, which shall speak only as to
such date), and Capital shall have received a certificate of the President of
FCNB and the Bank to that effect. Each other representation and warranty shall
be true and correct except for such inaccuracies or changes which, individually
or in the aggregate, do not result in a material adverse effect on the business,
operations, assets, financial condition, prospects or results of operations of
FCNB and the Bank, taken as a whole, and Capital shall have received a
certificate of the President of FCNB and the Bank to that effect. All corporate
action required to have been taken by, or on the part of, FCNB and the Bank to
authorize the execution, delivery and performance of this Agreement and the
Merger, respectively, shall have been duly and validly taken, and Capital shall
have received certified copies of the resolutions evidencing such
authorizations. Not in limitation of the foregoing, no representation or
warranty of FCNB and the Bank shall be deemed to be inaccurate solely as a
result of the impact of the factors set forth in 9.3(i)-(iv) hereof.
(b) Performance of Obligations. FCNB and the Bank shall have in all material
respects performed all obligations required to be performed by them under this
Agreement prior to the Effective Time, and Capital shall have received a
certificate of the President of FCNB and the Bank to that effect.
(c) Registration Statement. The Registration Statement of FCNB under the
Securities Act relating to the FCNB Common Stock shall have been declared
effective, and no stop order with respect to the Registration Statement shall
have been issued. In addition, all state securities and blue sky permits and
approvals required to carry out the transactions contemplated hereby shall have
been obtained.
(d) Fairness Opinion. Capital shall have received from Friedman, Billings,
Ramsey &
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<PAGE>
Company, Inc., an opinion dated as of a date prior to effectiveness of the
Registration Statement to shareholders of Capital, to the effect that the Merger
is fair to the shareholders of Capital from a financial point of view.
(e) Accountants' Letter. Capital shall have received from Keller Bruner &
Company, L.L.C., independent public accountants to FCNB, a letter dated the
Closing Date, with respect to certain financial information regarding FCNB,
which shall be substantially in the following form:
(i) they are independent public accountants with respect to FCNB;
(ii) in their opinion the audited financial statements of FCNB
examined by them and included in the Proxy Statement furnished to
shareholders of FCNB or subsequently provided to Capital and/or the
shareholders of FCNB, comply as to form in all material respects with
the requirements applicable thereto;
(iii) at the request of FCNB they have carried out procedures to
a specified date not more than five business days prior to the
Effective Time as follows: (1) read the unaudited financial statements
of FCNB for the period from the date of the most recent audited
financial statements of FCNB through the last day of the most recent
calendar month ended prior to such specified date (not more than five
days prior to the Effective Time; (2) read the minutes of the meetings
of the shareholders and of the Board of Directors (and all committees
thereof) of FCNB from the date of the most recently audited financial
statements to a date not more than five days prior to the Effective
Time, and (3) consulted with certain officers and employees of FCNB
responsible for financial and accounting matters as to whether there
has been any change in capital stock or long-term debt, or any
decrease in consolidated net assets or in the total or per-share
amounts of net income of FCNB, and, based on such procedures and
except as disclosed in such letter, nothing has come to their
attention which would cause them to believe that:
(A) the financial statements referred to in (1) above
do not fairly present the financial position of FCNB and the
results of its operations and changes in its financial
position at the dates and for the periods referred to
therein and are not presented in conformity with generally
accepted accounting principles applied on a basis consistent
in all material respects with that of the audited
consolidated statements of FCNB at December 31, 1997, except
as expressly required by this Agreement or noted in such
letter;
(B) as of said date not more than five business days
prior to the Effective Time, there was any (x) change in the
capital stock or long-term debt of FCNB or (y) decreases in
consolidated net assets of FCNB, in each case as compared
with the amounts shown in the balance sheet of FCNB at the
date of the most recent audited financial statements, or for
the period from the date of the most recent financial
statements to said date not more
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<PAGE>
than five business days prior to the Effective Time, there
were any decreases, as compared with the corresponding
portion of the preceding fiscal year, in the total or per
share amounts of income before extraordinary items or net
income, other than, in each case, as set forth in such
letter;
(C) the consolidated financial statements of FCNB for
the quarter immediately preceding the Effective Time are not
prepared in accordance with generally accepted accounting
principles, and, based on a review of the interim financial
statements of FCNB and upon due inquiry made of the
management of FCNB, that material modifications should be
made to such financial statements for them to be in
conformity with generally accepted accounting principles as
of said date not more than five business days prior to the
Effective Time, except as noted in such letter;
(D) the reserve for possible credit losses established
by FCNB is not adequate to absorb reasonably anticipated
losses in the loan and leasing portfolio of FCNB in view of
the size and character of such portfolios, then current
economic conditions and other pertinent factors; and
(E) there are any contingent liabilities which could
have a materially adverse effect on the assets, business or
prospects of FCNB or any FCNB subsidiary other than as
disclosed in the most recent audited financial statements
for FCNB or other than, in each case, as disclosed in said
letter.
(f) Nasdaq Listing. The shares of FCNB Common Stock to be issued to holders of
Capital Common Stock in connection with the Merger shall have been approved for
quotation, upon notice of issuance, on Nasdaq.
(g) No Material Adverse Change. There shall not have been any material adverse
change in the business, operations, assets, financial condition, prospects or
results of operations of FCNB or the Bank, taken as a whole.
(h) No Injunction. No injunction, restraining order, stop order or other order
or action of any federal or state court or agency in the United States which
prohibits, restricts or makes illegal the consummation of the transactions
contemplated hereby, shall be in effect, and no action, suit or other proceeding
seeking such shall have been instituted or threatened, and no statute, rule or
regulation shall have been enacted, issued or promulgated, by any state or
federal government or government agency, which prohibits, restricts or makes
illegal the consummation of the transactions contemplated hereby.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
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<PAGE>
8.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time:
(a) by mutual consent of Capital and FCNB; or
(b) by either FCNB or Capital at anytime after April 30, 1999, if the Merger
shall not theretofore have been consummated, unless the date reflected in this
Section 8.1(b) shall be extended in writing by the parties hereto, provided,
however, in the event that Capital engages in communications relating to and
Unsolicited Acquisition Proposal pursuant to Section 6.17(a) above, Capital
shall not be entitled to terminate this Agreement pursuant to provisions of
Section 8.1(b);
(c) by either FCNB or Capital in the event of the material breach by the other
party of any material representation, warranty or agreement contained herein if
such breach has not been, or cannot be, cured within of thirty (30) days of
delivery of written notice of breach;
(d) by either of Capital or FCNB if any governmental or regulatory approval
required for consummation of the Merger and the transactions contemplated hereby
shall have been denied by final, non-appealable order, or any such denial shall
not have been appealed within the time available for such appeal;
(e) by either FCNB or Capital in the event that any of the conditions precedent
to the obligation of such party to consummate the Merger cannot be satisfied or
fulfilled by the date specified in 8.1(b) of this Agreement, provided that the
terminating party shall not be in breach of a material representation, warranty
or covenant of this Agreement at the time of termination pursuant to this
Section 8.1(e);
(f) by FCNB at any time prior to 45 days from the date hereof, in the event
that the results of its investigations into environmental matters shall not have
been satisfactory to FCNB;
(g) by FCNB or Capital, in the event that the Merger and the Agreement are not
approved by the requisite majority of the shareholders of Capital and/or FCNB at
the Shareholder Meetings;
(h) by Capital if, at the Closing Date, the value of a share of FCNB Common
Stock as determined in accordance with Section 2.2 hereof is less than $23.93;
provided, however, that Capital shall not be entitled to terminate this
Agreement pursuant to this Section 8.1(h) if FCNB shall, not later than five
business days after receipt of notice from Capital that it is exercising its
right pursuant to this Section 8.1(h), advise Capital of its election to
increase the Conversion Ratio to the level equal to the number of shares
determined by dividing forty dollars ($40.00) by $23.93, without reference to
the Maximum Conversion Ratio. In the event FCNB shall make the election
hereunder, the foregoing quotient shall be the Conversion Ratio for all purposes
of this Agreement. The election to increase the Conversion Ratio under this
Section 8.1(h) shall be within the sole
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discretion of FCNB, and FCNB shall have no obligation to so elect.
8.2 Effect of Termination. In the event of termination of this Agreement by
either Capital or FCNB as provided in Section 8.1 above, this Agreement shall
forthwith become void and there shall be no liability on the part of either
Capital or FCNB or their respective officers or directors, except that (i) the
provisions of this Section 8.2, the provisions regarding the confidentiality and
return or destruction of documents of Section 6.1, and the provisions of Section
6.7 shall survive any such termination and abandonment, and (ii) a termination
pursuant to Section 8.1(c) shall not relieve the breaching party from liability
for any of wilful breach of a material provision of this Agreement giving rise
to such termination.
8.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken by or on behalf of their respective Boards of Directors, at any
time before or after approval of the Merger by the shareholders of both Capital
and FCNB; provided, however, that after such approvals no such amendment shall
reduce the value of or change the form of the consideration to be delivered to
each of Capital's shareholders as contemplated by the Agreement, unless such
amendment is subject to the obtaining of the approval of the amendment by the
shareholders of Capital and such approval is obtained. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
8.4 Waiver. Any term, condition or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders are,
entitled to the benefits thereof.
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ARTICLE IX
GENERAL PROVISIONS
9.1 Non-survival of Representations, Warranties and Agreements. No
investigation by the parties hereto made heretofore or hereafter shall affect
the representations and warranties of the parties which are contained herein and
each such representation and warranty shall survive such investigation. All
representations, warranties and agreements in this Agreement of Capital and FCNB
or in any instrument delivered by Capital and FCNB pursuant to this Agreement
shall expire at the Effective Time or upon termination of this Agreement in
accordance with its terms, except this Section 9.1, and the provisions of
Articles I and II, Section 6.12, 6.15 and 6.16 (to the extent they relate to, or
are to be performed after, the Effective Time).
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly received (i) on the date given if
delivered personally or by telecopier, cable, telegram or telex or (ii) on the
date received if sent by overnight delivery service or if mailed by registered
or certified mail (return receipt requested), to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to FCNB:
A. Patrick Linton, President
FCNB Corp
7200 FCNB Court
Frederick, Maryland 21703
Copy to:
David H. Baris, Esq.
Kennedy, Baris & Lundy, L.L.P.
Suite 300
4719 Hampden Lane
Bethesda, Maryland 20814
(b) if to Capital:
Stephen N. Ashman, President
Capital Bank, N.A.
One Church Street
Rockville, Maryland 20850
Copy to:
Alston & Bird LLP
601 Pennsylvania Avenue, NW
North Building, 11th Floor
Washington, DC 20004
Attention: Frank M. Conner, III
9.3 Material Adverse Change. Notwithstanding anything to the contrary
contained herein, the term "material adverse change" or "material adverse
effect" or words of similar import, shall not
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<PAGE>
include the impact of: (i) changes, after the date hereof, in laws of general
applicability or interpretations thereof by courts or governmental authorities;
(ii) changes, after the date hereof, in generally accepted accounting principles
or regulatory principles generally applicable to banks; (iii) actions or
omissions by a party hereto (or any of its subsidiaries), after the date hereof,
taken or failed to be taken with the prior informed written consent of the other
party, or at the express written request of the other party, in contemplation of
the transaction contemplated hereby; or (iv) the Merger and compliance with the
provisions of this Agreement on the operating performance of the parties.
9.4 Severability. Any invalidity, illegality or unenforceability of any
provision of this Agreement in any jurisdiction shall not invalidate or render
illegal or unenforceable the remaining provisions hereof in such jurisdiction
and shall not invalidate or render illegal or unenforceable such provision in
any other jurisdiction.
9.5 Headings. The headings of the Articles and Sections of this Agreement
are for convenience of reference only and shall not be deemed to be a part of
this Agreement.
9.6 Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the successful party shall be entitled to recover reasonable
attorneys' fees in addition to any other remedy.
9.7 Miscellaneous. This Agreement (including exhibits, documents and
instruments referred to herein)
(a) together with all disclosure letters, schedules, exhibits, documents and
instruments attached hereto or required to be delivered herewith, or at or prior
to closing, constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof;
(b) is not intended to confer upon any person not a party hereto any rights or
remedies hereunder, except as specifically provided in Section 6.16 hereof;
(c) shall not be assigned by operation of law or otherwise;
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(d) shall be governed in all respects by the laws of the State of Maryland
without regard to the choice of laws provisions thereof; and
(e) may be executed in two or more counterparts which together shall constitute
a single agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized and their
respective corporate seals to be affixed hereto, all as of the date first
written above.
ATTEST: [SEAL] FCNB CORP
By:
- ------------------------------ ------------------------------
Name: Helen G. Hahn A. Patrick Linton, President
Title: Secretary
ATTEST: [SEAL] FCNB BANK
By:
- ------------------------------ ------------------------------
Name: Helen G. Hahn A. Patrick Linton, President
Title: Secretary
ATTEST: [SEAL] CAPITAL BANK, NATIONAL ASSOCIATION
By:
- ------------------------------ ------------------------------
Name: Marilyn M. Ayres Stephen N. Ashman, President
Title: Secretary
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EXHIBIT B
Fairness Opinion of Friedman, Billings, Ramsey & Company, Inc.
<PAGE>
_____________, 1998
Board of Directors
Capital Bank, N.A.
One Church Street
Rockville, MD 20850
Board of Directors:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR") provide
you with its opinion as to the fairness, from a financial point of view, to the
holders of common stock ("Shareholders") of Capital Bank, N.A. ("Capital" or the
"Company") of the Exchange Ratio (as hereinafter defined) provided for by the
Agreement and Plan of Reorganization and Merger between Capital, FCNB Corp
("FCNB") and FCNB Bank (the "Bank" and together with FCNB, collectively
hereinafter referred to as "FCNB"), dated June 23, 1998 (the "Merger
Agreement"), pursuant to which Capital will be merged with and into the Bank
(the "Merger"). The Merger Agreement provides, among other things, that each
issued and outstanding share of common stock of Capital (other than those shares
subject to dissenters' rights) shall be converted into the right to receive
$40.00 per share of FCNB common stock (the "Exchange Ratio"), subject to certain
terms and conditions including pricing "collars" on the number of shares of FCNB
common stock to be received by the Shareholders. Additionally, certain options
to purchase shares of Capital common stock shall be converted into options to
purchase FCNB common stock, subject to certain terms and conditions.. The Merger
Agreement will be considered at a special meeting of the Shareholders of
Capital. The terms of the Merger are more fully set forth in the Merger
Agreement.
In delivering this opinion, FBR has completed the following tasks:
1. reviewed FCNB Annual Report to Shareholders for the fiscal years ended
December 31, 1996 and 1997 and FCNB Annual Reports on Form 10-K filed with
the Securities and Exchange Commission (the "SEC") for the fiscal years
ended December 31, 1996 and 1997; reviewed the FCNB Annual Proxy Statement
dated March 20, 1998; reviewed FCNB Quarterly Reports on Form 10-Q filed
with the SEC for the fiscal quarters ended March 31, 1998, September 30,
1997 and June 30, 1997;
2. reviewed Capital Annual Report to Shareholders for the fiscal years ended
December 31, 1996 and 1997 and Capital Annual Report on Form 10-KSB filed
with the Office of the Comptroller of the Currency (the "OCC") for the
fiscal year ended December 31, 1995, 1996 and 1997; reviewed the Capital
Annual Proxy Statement dated April 21, 1998; reviewed Capital Quarterly
Reports on Form 10-QSB filed with the OCC for the quarters ended March 31,
1998,
<PAGE>
Board of Directors
Capital Bank, N.A.
June 23, 1998
Page -45-
September 30, 1997, June 30, 1997 and March 31, 1997;
3. reviewed and discussed the unaudited financial statements of Capital for
the five months ended May 31, 1998 with the management of Capital;
4. reviewed the reported market prices and trading activity for FCNB common
stock for the period January 1, 1995 through June 22, 1998;
5. discussed the financial condition, results of operations, earnings
projections, business and prospects of Capital and FCNB with the
managements of Capital and FCNB;
6. compared the results of operations and financial condition of Capital and
FCNB with those of certain publicly-traded financial institutions (or their
holding companies) that FBR deemed to be reasonably comparable to Capital
or FCNB, as the case may be;
7. reviewed the financial terms, to the extent publicly available, of certain
acquisition transactions that FBR deemed to be reasonably comparable to the
Merger;
8. reviewed the financial terms, to the extent publicly available, of certain
acquisition transactions entered into by FCNB;
9. reviewed a copy of the Merger Agreement; and
10. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
concerning Capital and FCNB furnished to it by Capital or FCNB, or the
publicly-available financial and other information regarding Capital, FCNB and
other financial institutions (or their holding companies). FBR has assumed that
all such information is accurate and complete and has no reason to believe
otherwise. FBR has further relied on the assurances of management of Capital and
FCNB that they are not aware of any facts that would make such financial or
other information relating to such entities inaccurate or misleading. With
respect to financial forecasts for Capital provided to FBR by its management,
FBR has assumed, for purposes of this opinion, that the forecasts have been
reasonably prepared on bases reflecting the best available estimates and
judgments of such management at the time of preparation as to the future
financial performance of Capital. FBR has assumed that there has been no
undisclosed material change in Capital's assets, financial condition, result of
operations, business or prospects since March 31, 1998. FBR did not undertake an
independent appraisal of the assets or liabilities of Capital nor was FBR
furnished with any such appraisals. FBR is not an expert in the evaluation of
allowances for loan losses, was not requested to and did not review such
allowances, and was not requested to and did not review any individual credit
files of Capital. FBR's conclusions and opinion are necessarily based upon
economic,
<PAGE>
Board of Directors
Capital Bank, N.A.
June 23, 1998
Page -46-
market and other conditions and the information made available to FBR as of the
date of this opinion. FBR expresses no opinion on matters of a legal,
regulatory, tax or accounting nature related to the Merger.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
savings institutions and financial institution holding companies, initial and
secondary offerings and mutual-to-stock conversions of savings institutions, as
well as business valuations for other corporate purposes for financial
institutions and real estate related companies. FBR has experience in, and
knowledge of, the valuation of bank and thrift securities in the Maryland,
Virginia, the District of Columbia and the rest of the United States.
FBR has acted as a financial advisor to Capital in connection with the Merger
and will receive a fee for services rendered which is contingent upon the
consummation of the Merger. In the ordinary course of FBR's business, it may
effect transactions in the securities of Capital or FCNB for its own account
and/or for the accounts of its customers and, accordingly, may at any time hold
long or short positions in such securities. From time to time, principals and/or
employees of FBR may also have positions in such securities.
Based upon and subject to the foregoing, as well as any such other matters as we
consider relevant, it is FBR's opinion, as of the date hereof, that the Exchange
Ratio is fair, from a financial point of view, to the Shareholders of Capital.
This letter is solely for the information of the Board of Directors and
Shareholders of Capital and may not be relied upon by any other person or used
for any other purpose, reproduced, disseminated, quoted from or referred to
without FBR's prior written consent; provided, however, this letter may be
referred to and reproduced in its entirety in proxy materials sent to the
Shareholders in connection with the solicitation of approval for the Merger.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
/s/ Friedman, Billings, Ramsey & Co., Inc.
<PAGE>
EXHIBIT C
Section 214a of the National Bank Act
Banking Circular 259
<PAGE>
12 USC SECTION 214A. PROCEDURE FOR CONVERSION, MERGER, OR CONSOLIDATION;
VOTE OF STOCKHOLDERS
A national banking association may, by vote of the holders of at least
two-thirds of each class of its capital stock, convert into, or merge or
consolidate with, a State bank in the same State in which the national banking
association is located, under a State charter, in the following manner:
(a) Approval of board of directors; publication of notice of stockholders'
meeting; waiver of publication; notice by registered or certified mail. The plan
of conversion, merger, or consolidation must be approved by a majority of the
entire board of directors of the national banking association. The bank shall
publish notice of the time, place, and object of the shareholders' meeting to
act upon the plan, in some newspaper with general circulation in the place where
the principal office of the national banking association is located, at least
once a week for four consecutive weeks: Provided, That newspaper publication may
be dispensed with entirely if waived by all the shareholders and in the case of
a merger or consolidation one publication at least ten days before the meeting
shall be sufficient if publication for four weeks is waived by holders of at
least two-thirds of each class of capital stock and prior written consent of the
Comptroller of the Currency is obtained. The national banking association shall
send such notice to each shareholder of record by registered mail or by
certified mail at least ten days prior to the meeting, which notice may be
waived specifically by any shareholder.
(b) Rights of dissenting stockholders. A shareholder of a national banking
association who votes against the conversion, merger, or consolidation, or who
has given notice in writing to the bank at or prior to such meeting that he
dissents from the plan, shall be entitled to receive in cash the value of the
shares held by him, if and when the conversion, merger, or consolidation is
consummated, upon written request made to the resulting State bank at any time
before thirty days after the date of consummation of such conversion, merger, or
consolidation, accompanied by the surrender of his stock certificates. The value
of such shares shall be determined as of the date on which the shareholders'
meeting was held authorizing the conversion, merger, or consolidation, by a
committee of three persons, one to be selected by majority vote of the
dissenting shareholders entitled to receive the value of their shares, one by
the directors of the resulting State bank, and the third by the two so chosen.
The valuation agreed upon by any two of three appraisers thus chosen shall
govern; but, if the value so fixed shall not be satisfactory to any dissenting
shareholder who has requested payment as provided herein, such shareholder may
within five days after being notified of the appraised value of his shares
appeal to the Comptroller of the Currency, who shall cause a reappraisal to be
made, which shall be final and binding as to the value of the shares of the
appellant. If, within ninety days from the date of consummation of the
conversion, merger, or consolidation, for any reason one or more of the
appraisers is not selected as herein provided, or the appraisers fail to
determine the value of such shares, the Comptroller shall upon written request
of any interested party, cause an appraisal to be made, which shall be final and
binding on all parties. The expenses of the Comptroller in making the
reappraisal, or the appraisal as the case may be, shall be paid by the resulting
State bank. The plan of conversion, merger, or consolidation shall provide the
manner of disposing of the shares of the resulting State bank not taken by the
dissenting shareholders of the national banking association.
<PAGE>
Office of the Comptroller of the Currency (O.C.C.)
Banking Circular Number 259
March 5, 1992
To: Chief Executive Officers of National Banks, Deputy Comptrollers (District),
Department and Division Heads, and Examining Personnel
PURPOSE
This banking circular informs all national banks of the valuation methods used
by the Office of the Comptroller of the Currency (OCC) to estimate the value of
a bank's shares when requested to do so by a shareholder dissenting to the
conversion, merger, or consolidation of its bank. The results of appraisals
performed by the OCC between January 1, 1985 and September 30, 1991 are
summarized.
References: 12 U.S.C. 214a, 215 and 215a; 12 CFR 11.590 (Item 2)
BACKGROUND
Under 12 U.S.C. Section 214a, a shareholder dissenting from a conversion,
consolidation, or merger involving a national bank is entitled to receive the
value of his or her shares from the resulting bank. A valuation of the shares
shall be made by a committee of three appraisers (a representative of the
dissenting shareholder, a representative of the resulting bank, and a third
appraiser selected by the other two). If the committee is formed and renders an
appraisal that is acceptable to the dissenting shareholder, the process is
complete and the appraised value of the shares is paid to the dissenting
shareholder by the resulting bank. If, for any reason, the committee is not
formed or if it renders an appraisal that is not acceptable to the dissenting
shareholder, an interested party may request an appraisal by the OCC. 12 U.S.C.
Section 215 provides these appraisal rights to any shareholder dissenting to a
consolidation. Any dissenting shareholder of a target bank in a merger is also
entitled to these appraisal rights pursuant to 12 U.S.C. Section 215a.
The above provides only a general overview of the appraisal process. The
specific requirements of the process are set forth in the statutes themselves.
METHODS OF VALUATION USED
Through its appraisal process, the OCC attempts to arrive at a fair
estimate of the value of a bank's shares. After reviewing the particular facts
in each case and the available information on a bank's shares, the OCC selects
an appropriate valuation method, or combination of methods, to determine a
reasonable estimate of the shares' value.
Market Value
The OCC uses various methods to establish the market value of shares being
appraised. If sufficient trading in the shares exists and the prices are
available from direct quotes from the Wall Street Journal or a market-maker,
those quotes are considered in determining the market value. If no market value
is readily available, or if the market value available is not well established,
the OCC may use other methods of estimating market value, such as the investment
value and adjusted book value methods.
Investment Value
Investment value requires an assessment of the value to investors of a
share in the future earnings of the
<PAGE>
target bank. Investment value is estimated by applying an average price/earnings
ratio of banks with similar earnings potential to the earnings capacity of the
target bank.
The peer group selection is based on location, size, and earnings patterns.
If the state in which the subject bank is located provides a sufficient number
of comparable banks using location, size and earnings patterns as the criteria
for selection, the price/earnings ratios assigned to the banks are applied to
the earnings per share estimated for the subject bank. In order to select a
reasonable peer group when there are too few comparable independent banks in a
location that is comparable to that of the subject bank, the pool of banks from
which a peer group is selected is broadened by including one-bank holding
company banks in a comparable location, and/or by selecting banks in less
comparable locations, including adjacent states, that have earnings patterns
similar to the subject bank.
Adjusted Book Value
The OCC also uses an "adjusted book value" method for estimating value.
Historically, the OCC has not placed any weight on the bank's "unadjusted book
value", since that value is based on historical acquisition costs of the bank's
assets, and does not reflect investors' perceptions of the value of the bank as
an ongoing concern. Adjusted book value is calculated by multiplying the book
value of the target bank's assets per share times the average market price to
book value ratio of comparable banking organizations. The average market price
to book value ratio measures the premium or discount to book value, which
investors attribute to shares of similarly situated banking organizations.
Both the investment value method and the adjusted book value method present
appraised values which are based on the target bank's value as a going concern.
These techniques provide estimates of the market value of the shares of the
subject bank.
OVERALL VALUATION
The OCC may use more than one of the above-described methods in deriving
the value of shares of stock. If more than one method is used, varying weights
may be applied in reaching an overall valuation. The weight given to the value
by a particular valuation method is based on how accurately the given method is
believed to represent market value. For example, the OCC may give more weight to
a market value representing infrequent trading by shareholders than to the value
derived from the investment value method when the subject bank's earnings trend
is so irregular that it is considered to be a poor predictor of future earnings.
PURCHASE PREMIUMS
For mergers and consolidations, the OCC recognizes that purchase premiums
do exist and may, in some instances, be paid in the purchase of small blocks of
shares. However, the payment of purchase premiums depends entirely on the
acquisition or control plans of the purchasers, and such payments are not
regular or predictable elements of market value. Consequently, the OCC's
valuation methods do not include consideration of purchase premiums in arriving
at the value of shares.
STATISTICAL DATA
The chart below lists the results of appraisals the OCC performed between
January 1, 1985 and September 30, 1991. The OCC provides statistical data on
book value and price/earnings ratios for comparative purposes, but does not
necessarily rely on such data in determining the value of the banks' shares.
Dissenting shareholders should not view these statistics as determinative for
future appraisals.
In connection with disclosures given to shareholders under 12 CFR 11.590
(Item 2), banks may provide
<PAGE>
shareholders a copy of this banking circular or disclose the information in the
banking circular, including the past results of OCC appraisals. If the bank
discloses the past results of the OCC appraisals, it should advise shareholders
that: (1) the OCC did not rely on all the information set forth in the chart in
performing each appraisal; and, (2) the OCC's past appraisals are not
necessarily determinative of its future appraisals of a particular bank's
shares.
APPRAISAL RESULTS
- -----------------
Appraisal Date [FN*] OCC Appraisal Price Book Value Average
Value Offered Price/Earnings
Ratio of Peer
Group
- -------------------------------------------------------------------------------
1/1/85 107.05 110.00 178.29 5.3
1/2/85 73.16 NA 66.35 6.8
1/15/85 53.41 60.00 83.95 4.8
1/31/85 22.72 20.00 38.49 5.4
2/1/85 30.63 24.00 34.08 5.7
2/25/85 27.74 27.55 41.62 5.9
4/30/85 25.98 35.00 42.21 4.5
7/30/85 3,153.10 2,640.00 6,063.66 NC
9/1/85 17.23 21.00 21.84 4.7
11/22/85 316.74 338.75 519.89 5.0
11/22/85 30.28 NA 34.42 5.9
12/16/85 66.29 77.00 89.64 5.6
12/27/85 60.85 57.00 119.36 5.3
12/31/85 61.77 NA 73.56 5.9
12/31/85 75.79 40.00 58.74 12.1
1/12/86 19.93 NA 26.37 7.0
3/14/86 59.02 200.00 132.20 3.1
4/21/86 40.44 35.00 43.54 6.4
5/2/86 15.50 16.50 23.69 5.0
7/3/86 405.74 NA 612.82 3.9
7/31/86 297.34 600.00 650.63 4.4
8/22/86 103.53 106.67 136.23 NC
12/26/86 16.66 NA 43.57 4.0
12/31/86 53.39 95.58 69.66 7.1
5/1/87 186.42 NA 360.05 5.1
6/11/87 50.46 70.00 92.35 4.5
6/11/87 38.53 55.00 77.75 4.5
7/31/87 13.10 NA 20.04 6.7
8/26/87 55.92 57.52 70.88 NC
8/31/87 19.55 23.75 30.64 5.0
8/31/87 10.98 NA 17.01 4.2
10/6/87 56.48 60.00 73.11 5.6
3/15/88 297.63 NA 414.95 6.1
6/2/88 27.26 NA 28.45 5.4
6/30/88 137.78 NA 215.36 6.0
8/30/88 768.62 677.00 1,090.55 10.7
3/31/89 773.62 NA 557.30 7.9
5/26/89 136.47 180.00 250.42 4.5
<PAGE>
5/29/90 9.87 NA 11.04 9.9
- -------------------------------------------------------------------------------
FN* --The "Appraisal Date" is the consummation date for the conversion,
consolidation, or merger.
NA--Not Available
NC--Not Computed
For more information regarding the OCC's stock appraisal process, contact
the Office of the Comptroller of the Currency, Bank Organization and Structure.
Frank Maguire
Acting Senior Deputy Comptroller
Corporate Policy and Economic Analysis
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and Bylaws of FCNB provide for the
indemnification of the officers and directors of FCNB to the fullest extent
permitted by the Maryland General Corporation Law (the "MGCL"), and for the
indemnification of other persons to the extent permitted by law and as
determined by the Board of Directors. The MGCL provides, in general, that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation, who was, is or is threatened to be made a defendant or
respondent to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he served as a
director, officer, employee or agent of the corporation, or served at the
corporation's request in any capacity of another enterprise or employee benefit
plan, unless (i) the act or omission giving rise to the liability of such person
was material to the matter giving rise to the proceeding and (a) was committed
in bad faith or (b) was the result of active and deliberate dishonesty; (ii) the
director received an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceeding, such person had reasonable
cause to believe the act or omission was unlawful. Notwithstanding the
foregoing, no indemnification shall be authorized in the case of any proceeding
by or in the right of the corporation, if the person has been adjudged liable to
the corporation, except that a court may order indemnification against expenses
(including attorney fees) only. The indemnification is mandatory in the case of
success, on the merits or otherwise, in the defense of any proceeding.
Indemnification is against judgements, penalties, fines, settlements, and
reasonable expenses actually incurred (including attorney's fees) in connection
with the proceeding. A corporation has the power to purchase and maintain
insurance or maintain other arrangements in respect of such indemnification. The
indemnification provided by the MGCL is not exclusive of other rights to
indemnification to which any person may otherwise be entitled.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C> <C>
2 Agreement and Plan of Reorganization and Merger, included as Exhibit A to the
combined Proxy Statement/Prospectus. Schedules are omitted. FCNB agrees to
furnish copies of such schedules to the Commission upon request.
5 Opinion of Kennedy, Baris & Lundy, L.L.P.
8 Form of Opinion of Kevin Kennedy, Esquire
13(a) Capital's Annual Report on Form 10-KSB for year ended December 31, 1997
13(b) Capital's Quarterly Report on Form 10-QSB for quarter ended June 30, 1998
23(a) Consent of Hoffman, Morrison & Fitzgerald P.C., independent certified public
accountants to Capital
23(b) Consent of Keller Bruner & Company, L.L.C. independent certified public
accountants to FCNB
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
23(c) Consent of Kennedy, Baris & Lundy, L.L.P., included in Exhibit 5
23(d) Consent of Kevin Kennedy, Esquire, inclucded in Exhibit 8
23(e) Consent of Friedman, Billings, Ramsey & Company, Inc., included in Exhibit B
to the Proxy Statement
99(a) Form of Proxy for Capital Shareholder Meeting
99(b) Form of Proxy for FCNB Shareholder Meeting
99(c) Form of Letter to Shareholders of Capital
99(d) Form of Voting Agreement dated as of June 23, 1998 by and among FCNB and the
directors of Capital
99(e) Form of Letter to Shareholders of FCNB
99(f) Form of Non-Competition Agreement, dated as of June 23, 1998, among FCNB and
directors of Capital
99(g) Form of Termination Agreement dated June 23, 1998 between FCNB and Stephen
Ashman
</TABLE>
(b) Financial Statement Schedules
Not Applicable
(c) The form of opinion of Friedman, Billings, Ramsey & Company, Inc. is
provided as Exhibit B to the combined Proxy Statement/Prospectus which forms a
part of this Registration Statement, and is incorporated herein by reference.
ITEM 22. UNDERTAKINGS
The Registrant hereby undertakes that it will:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by section 10(a)(3) of the Securities Act of 1933 (the
"Act"); (ii) reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information in the registration statement; and (iii)
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) for the purpose of determining liability under the Act, treat each
post-effective amendment as a new registration statement relating to the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-2
<PAGE>
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act") (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to section 15(d) of the Exchange Act) that
is incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Frederick,
State of Maryland on August 11, 1998.
FCNB CORP
By:/s/ A. Patrick Linton
-------------------------------
A. Patrick Linton, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
- ---------------------
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ George B. Callan, Jr. Director August 11, 1998
- ----------------------------
George B. Callan, Jr.
/s/ Miles M. Circo Director August 11, 1998
- ----------------------------
Miles M. Circo
/s/ Shirley D. Collier Director August 11, 1998
- ---------------------------- Chairman of the Board of Directors
Shirley D. Collier
/s/ Clyde C. Crum August 11, 1998
- ----------------------------
Clyde C. Crum
Director August 11, 1998
- ----------------------------
James S. Grimes
/s/ Bernard L. Grove, Jr. Director August 11, 1998
- ----------------------------
Bernard L. Grove, Jr.
/s/ Gail T. Guyton Director August 11, 1998
- ----------------------------
Gail T. Guyton
/s/ Frank L. Hewitt, III Director August 11, 1998
- ----------------------------
Frank L. Hewitt, III
/s/A. Patrick Linton President, Chief Executive Officer
- ---------------------------- and Director August 11, 1998
A. Patrick Linton
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Jacob R. Ramsburg, Jr. Director August 11, 1998
- ----------------------------
Jacob R. Ramsburg, Jr.
_________, 19__
Director
- ----------------------------
Ramona C. Remsberg
/s/ Kenneth W. Rice Director August 11, 1998
- ----------------------------
Kenneth W. Rice
/s/ Rand D. Weinberg Director August 11, 1998
- ----------------------------
Rand D. Weinberg
Director _________, 19__
- ----------------------------
DeWalt J. Willard, Jr.
/s/ Mark A. Severson Senior Vice President, Treasurer,
- ---------------------------- Principal Financial and Accounting August 11, 1998
Mark A. Severson Officer
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description Page
- -------------- ----------- ----
<S> <C>
2 Agreement and Plan of Reorganization and Merger, included as Exhibit A to the combined Proxy
Statement/Prospectus. Schedules are omitted. FCNB agrees to furnish copies of such schedules
to the Commission upon request.
5 Opinion of Kennedy, Baris & Lundy, L.L.P.
8 Form of Opinion of Kevin Kennedy, Esquire
13(a) Capital's Annual Report on Form 10-KSB for year ended December 31, 1997
13(b) Capital's Quarterly Report on Form 10-QSB for quarter ended June 30, 1998
23(a) Consent of Hoffman, Morrison & Fitzgerald P.C., independent certified public accountants to
Capital
23(b) Consent of Keller Bruner & Company, L.L.C. independent certified public accountants to FCNB
23(c) Consent of Kennedy, Baris & Lundy, L.L.P., included in Exhibit 5
23(d) Consent of Kevin Kennedy, Esquire, included in Exhibit 8
23(e) Consent of Friedman, Billings, Ramsey & Company, Inc., included in Exhibit B to the Proxy
Statement
99(a) Form of Proxy for Capital Shareholder Meeting
99(b) Form of Proxy for FCNB Shareholder Meeting
99(c) Form of Letter to Shareholders of Capital
99(d) Form of Voting Agreement dated as of June 23, 1998 by and among FCNB and the directors of
Capital
99(e) Form of Letter to Shareholders of FCNB
99(f) Form of Non-Competition Agreement, dated as of June 23, 1998, among FCNB and directors of
Capital
99(g) Form of Termination Agreement dated June 23, 1998 between FCNB and Stephen Ashman
</TABLE>
EXHIBIT 5
KENNEDY, BARIS & LUNDY, L.L.P.
ATTORNEYS AT LAW
SEVENTH FLOOR
<TABLE>
<S> <C> <C>
TEXAS OFFICE: 1225 NINETEENTH STREET, NW MARYLAND OFFICE:
SUITE 1775 WASHINGTON, DC 20036 SUITE 300
112 EAST PECAN STREET (202) 835-0313 4719 HAMPDEN LANE
SAN ANTONIO, TX 78205 FAX: (202) 835-0319 BETHESDA, MD 20814
(210) 228-9500 (301) 654-6040
FAX: (210) 228-0781 FAX: (301) 654-1733
</TABLE>
August 11, 1998
Board of Directors
FCNB Corp
7200 FCNB Court
Frederick, Maryland 21703
Ladies and Gentlemen:
As counsel to FCNB Corp (the "Company"), we have participated in the
preparation of the Company's Registration Statement on Form S-4 to be filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933,
as amended, relating to the issuance of up to 1,987,357 shares of the Company's
Common Stock (as adjusted for the stock split in the form of a dividend payable
on August 14, 1998) (the "Shares") in connection with the proposed merger of
Capital Bank, National Association with and into FCNB Bank, the Company's wholly
owned subsidiary.
As counsel to the Company, we have examined such corporate records,
certificates and other documents of the Company, and have made such examinations
of law and inquiries of such officers of the Company, as we have deemed
necessary or appropriate for purposes of this opinion. Based upon such
examinations we are of the opinion that the Shares, when issued in the manner
set forth in the Registration Statement, will be duly authorized, validly
issued, fully paid and non-assessable shares of the Common Stock of the Company.
We hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement on Form S-4 filed by the Company, and to the reference to
our Firm contained therein under the caption "Legal Matters."
Very truly yours,
/s/ Kennedy, Baris & Lundy, L.L.P.
August ____, 1998
FCNB Corp
FCNB Bank
7200 FCNB Court
Frederick, Maryland 21703
Capital Bank, N. A.
One Church Street
Rockville, Maryland 20850
Re: Merger of Capital Bank, N.A. with and into FCNB Bank
Gentlemen:
You have requested my opinion as to the United States Federal income tax
consequences of the merger (the "Merger") of Capital Bank, N. A., a national
banking association ("Capital") with and into FCNB Bank, a Maryland chartered
commercial bank ("FCNB") and the wholly owned subsidiary of FCNB Corp (the
"Company").
This opinion is based upon (i) the Agreement and Plan of Reorganization and
Merger, dated June 23, 1998 (the "Merger Agreement"); (ii) the Registration
Statement on form S-4 to be filed with the Securities and Exchange Commission
with respect to the Merger; (iii) the Application to the Board of Governors of
the Federal Reserve System and the Application to the Commissioner of Financial
Regulation of Maryland; and (iv) the letter signed by an officer of Capital and
the letter signed by an officer of FCNB and the Company (collectively referred
to as the "Representation Letters").
Based upon (i) the foregoing materials, (ii) present statutes, existing
regulations and judicial decisions now outstanding, which are subject to change
either prospectively or retroactively, and (iii) the accuracy of the
representations set forth in the Representation Letters and the Merger
Agreement, it is my opinion,
assuming the conditions enumerated below under the caption entitled "Conditions"
are fulfilled, that:
1. The Merger, if carried out in accordance with the terms of the Merger
Agreement, will constitute a reorganization within the meaning of
Section 368(a)(1)(A) and (a)(2)(D) of the Internal Revenue Code of
1986, as amended (the "Code");
2. No gain or loss will be recognized by Capital upon consummation of the
Merger (Code Sections 361 and 357(a));
3. The federal income tax basis of the assets of Capital in the hands of
FCNB will be the same as the tax basis of such assets in the hands of
Capital immediately prior to the effective time of the Merger (Code
Section 362(b));
4. The holding period of the assets of Capital transferred to FCNB will
include the period during which such assets were held by Capital prior
to the effective time of the Merger (Code Section 1223(2));
5. No gain or loss will be recognized by FCNB upon the receipt of the
assets of Capital in exchange for Company common stock, cash and the
assumption of Capital's liabilities (Rev. Rul. 57-278, 1957-1 C.B.
124));
6. No gain or loss will be recognized by the shareholders of Capital on
the receipt by them of shares of Company common stock, $1 par value,
pursuant to the Merger (Code Section 354(a)(1));
7. The federal income tax basis of the shares of Company common stock
received by a shareholder of Capital will be the same as the basis of
the Capital stock surrendered in exchange therefor (Code Section
358(a)(1));
8. The holding period of the Company common stock received by a
shareholder of Capital will be the same as the
holding period of the Capital stock surrendered in exchange therefor,
assuming that the surrendered Capital stock was a capital asset in the
hands of the exchanging shareholder (Code Section 1223(1));
<PAGE>
FCNB Corp
FCNB Bank
Capital Bank, N.A.
Page 2
9. Cash received in exchange for Capital common stock by shareholders of
Capital who exercise their dissenter's rights will be treated as
received by such shareholders as distributions in redemption of such
shares subject to the limitations and conditions of Section 302 of the
Code.
10. Cash received by shareholders of Capital in lieu of fractional shares
of Company common stock will be treated as received by such
shareholders as distributions in redemption of the fractional share
interests and will be treated as distributions in full payment in
exchange for the fractional shares redeemed, subject to the provisions
and limitations of Section 302 of the Code;
11. No gain or loss will be recognized by holders of outstanding options
to purchase Capital common stock that were granted under Capital
option plans solely as a result of the assumption by the Company of
such options. (Code Section 424(a)).
CONDITIONS
- ----------
In connection with your request that I render the above opinions, FCNB, the
Company and Capital have made representations in the Representation Letters and
in the Merger Agreement with respect to the existence of certain facts. These
constitute material representations relied upon by me as a basis for my opinion,
and my opinion is conditioned upon both the initial accuracy and the continuing
fulfillment of such representations. Specifically, the following representations
have been made which I assume to be true and correct:
1. The Merger will be consummated in compliance with the material terms
of the Merger Agreement, and none of the material terms and conditions
of such Merger Agreement have been waived or modified and FCNB, the
Company and Capital have no plan or intention to waive or modify any
material term or condition.
2. Management of FCNB, the Company and Capital know of no plan or
intention on the part of the Capital shareholders to sell or otherwise
dispose of an amount of shares of Company common stock to be received
in the proposed transaction which will reduce their holdings in
Company common stock to a number of shares having, in the aggregate, a
value at the time of the Merger of less than fifty percent (50%) of
the total value of all the formerly outstanding stock of Capital as of
the same date. For the purposes of this representation, shares of
Capital stock held by shareholders who dissent from the Merger will be
considered to be outstanding stock of Capital as of the same date. In
addition, shares of Capital sold, redeemed, or otherwise disposed of
prior or subsequent to or as part of the Merger will be considered to
be outstanding stock of Capital as of the same date.
3. Prior to the Merger, the Company will be in control of FCNB within the
meaning of Section 368(c) of the Code.
4. Following the Merger, FCNB will not issue additional shares of its
stock that would result in the Company losing control, within the
meaning of Section 368(c) of the Code, of FCNB.
5. Company has no plan or intention to liquidate FCNB; to merge FCNB with
and into another corporation; to sell or otherwise dispose of the
stock of FCNB; or to cause FCNB to sell or otherwise dispose of the
assets of Capital acquired in the Merger, except for dispositions made
in the ordinary course of business or made to a subsidiary of FCNB.
6. No stock of FCNB will be issued in the Merger.
7. FCNB will acquire at least 90 percent of the fair market value of the
net assets and at least 70 percent of the fair market value of the
gross assets held by Capital prior to the Merger. For purposes of this
representation, amounts paid by Capital to dissenters, amounts paid by
Capital to shareholders who receive cash or other property, assets of
Capital used to pay its Merger expenses, and all redemptions and
distributions (except for regular, normal dividends) made by Capital
immediately preceding the Merger, will be included as assets of
Capital held immediately prior to the Merger.
8. Following the Merger, FCNB will continue the business of Capital in a
substantially unchanged manner or use a significant portion of
Capital's business assets in a business.
9. The Company has no plan or intention to redeem or otherwise reacquire
any of its stock issued in the Merger.
10. The fair market value of the Company common stock, $1 par value, to be
received by each of the Capital
<PAGE>
FCNB Corp
FCNB Bank
Capital Bank, N.A.
Page 3
shareholders has been determined by Capital, FCNB and the Company to
be approximately equal to the fair market value of the Capital common
stock to be exchanged therefore.
11. The Company, Capital and the shareholders of Capital will pay their
own expenses in connection with the proposed transaction.
12. There is no intercorporate indebtedness existing between FCNB, the
Company or Capital which was issued, acquired or will be settled at a
discount.
13. Other than Company common stock issued with respect to certain options
held by directors, officers or other employees, none of the Company
common stock, $1 par value, to be issued in the Merger will be issued
for services.
14. Neither the Company, FCNB nor Capital is an "Investment Company" as
defined in Sections 368(a)(2)(F)(iii) and (iv) of the Internal Revenue
Code of 1986.
15. The total fair market value of the Capital assets to be transferred to
FCNB will equal or exceed the sum of the liabilities assumed by FCNB
plus the amount of liabilities to which the transferred assets are
subject.
16. The liabilities of Capital to be assumed by FCNB and the amount of
liabilities to which the transferred assets are subject were incurred
by Capital in the ordinary course of its business.
17. Capital is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the
Internal Revenue Code of 1986.
18. The payment of cash in lieu of fractional shares of Company common
stock is solely for the purpose of avoiding the expense and
inconvenience to the Company of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the transaction to the Capital
shareholders instead of issuing fractional shares of Company common
stock will not exceed one percent of the total consideration that will
be issued in the transaction to the Capital shareholders in exchange
for their shares of Capital stock. The fractional share interests of
each Capital shareholder will be aggregated, and no Capital
shareholder will receive cash in an amount equal to or greater than
the value of one full share of Company common stock.
19. No distribution has been or will be made with respect to the stock of
Capital immediately preceding the proposed transaction, except for
regular, normal distributions.
20. Neither the Company nor FCNB owns, directly or indirectly, any stock
of Capital, and neither has any intention of acquiring any stock of
Capital prior to the proposed Merger.
21. None of the compensation received by any shareholder-employees of
Capital will be separate consideration for, or allocable to, any of
their shares of Capital stock; none of the shares of the Company
received by any shareholder-employees will be separate consideration
for, or allocable to any employment agreement; and the compensation
paid to any shareholder-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arms length for similar services.
22. With respect to the assumption by the Company of the rights and
obligations of Capital under the Capital 1988 Incentive Stock Option
Plan, the substituted rights relating to the Company shares will have
the same terms and conditions as the rights relating to the Capital
shares, and will not give any option holder additional benefits which
he did not have prior to the assumption.
23. The excess of the aggregate fair market value of the shares subject to
the options immediately after the assumption by the Company over the
aggregate option price of such shares will not be more than the excess
of the aggregate fair market value of all shares subject to the
options immediately before such assumption over the aggregate option
price of such shares.
LIMITATIONS
- -----------
This opinion concerns only the effect of this transaction under the income
tax laws of the United States. No opinion is expressed as to the effect under
the tax, revenue or other laws of the State of Maryland or any other state or
the District of Columbia.
<PAGE>
FCNB Corp
FCNB Bank
Capital Bank, N.A.
Page 4
I have not reviewed the specific tax or financial situation of any
individual shareholder. Each individual shareholder should consult with his or
her own tax advisor concerning the federal, state or local tax consequences of
the Merger, in light of the shareholder's particular tax or financial situation.
In particular, a shareholder who receives cash for his Capital stock should seek
individualized tax advice.
I have not been asked to and have not rendered an opinion on the tax
consequences of the receipt of Company common stock by option holders whose
options are canceled in exchange for Company shares. Such holders will be
considered to have exercised their options. The tax consequences to the holders
of such options will depend upon a number of factors which will vary from holder
to holder. The tax consequences could include (and with respect to any options
which are non-statutory options, will likely include) the recognition of
personal service income. Personal service income is generally subject, in
addition to Federal income taxation, taxation under the Federal Insurance
Contributions Act (FICA), which includes both social security and Medicare
taxes. Holders of Capital options who receive FCNB shares in cancellation of
their options are urged to consult with their own tax advisors as to the tax
consequences to them of the receipt of Company common stock.
I hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission, and I consent to necessary references to me in the Registration
Statement.
Respectfully submitted,
Kevin P. Kennedy
<PAGE>
EXHIBIT D
Capital's Annual Report on Form 10-KSB
for the Year Ended December 31, 1997
<PAGE>
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [ No Fee Required]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1943 [No Fee Required]
For the transition period to
--------- ---------
Commission file number
--------------------------
CAPITAL BANK, NATIONAL ASSOCIATION
---------------------------------------------------------------
(Name of small business issuer as specified in its charter)
United States 52-0989458
-------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Church Street, Rockville, MD 20850
-------------------------------------------
(Address of Principal Offices) (Zip Code)
Issuer's Telephone Number (301) 279-8900
-------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE NONE
------------------- -----------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
-------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X ]
State issuer's revenues for the most recent fiscal year $ 12,282,761.
-------------
As of December 31, 1997, the aggregate market value of the voting stock held by
non-affiliates of the issuer was $7,755,664 as of December 31, 1997 the number
of outstanding shares of the issuer's common stock was 973,392.
DOCUMENTS INCORPORATED BY REFERENCE
Audited Financial Statements for 1997
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Capital Bank, N.A. (the "Bank") was founded in the District of Columbia as
Hemisphere National Bank in 1974 and was renamed Capital Bank in 1981. The Bank
primarily serves small to medium-sized businesses, professionals, not-for-profit
organizations and investors in the Washington, D.C. metropolitan area.
In 1995 the Bank relocated its main office and headquarters to One Church
Street, Rockville, Maryland. This move allowed the Bank to explore additional
growth opportunities in Montgomery County while continuing to operate its
offices in the Farragut Square and Friendship Heights areas of the District. In
January 1997, the Bank opened its first branch in Northern Virginia.
Business of the Bank
The Bank offers a full range of commercial banking services to its business and
professional clients as well as basic retail banking services to individuals
living or working within its service area.
Credit services are offered as follows:
o Commercial Loans are provided to a broad base of small and medium-sized
businesses, with emphasis on the financing of accounts receivable,
equipment, inventory, and general working capital. These loans are tailored
to the individual requirements of each borrower.
o Real Estate Loans are granted for the purpose of acquisition, construction
and rehab, and mini-perm financing on commercial and residential
income-producing properties.
o Consumer Loans are granted for such purposes as automobile or personal
expenses. Financing options include traditional installment loans, personal
lines of credit and home equity lines of credit.
Deposit services include business and personal checking, NOW, money market,
savings and certificate of deposit accounts. The Bank also offers ancillary
services such as cash management products, a business PC banking product,
customer repurchase agreements, telephone banking, ATM services, electronic
funds transfers, and safe deposit rental.
Competition
Banking in the Washington, D.C. metropolitan area is highly competitive. The
Bank competes with other community banks, credit unions, savings and loan
associations, larger regional banks, and non-bank financial service
organizations. The enactment of state and federal laws
2
<PAGE>
easing restrictions on interstate banking may increase the level of competition
in the Bank's markets.
The larger regional institutions possess a significant competitive advantage in
the ability to heavily market their products and services as well as to achieve
major economies of scale in retail loan products. Further, higher levels of
capitalization provide these institutions with considerably higher legal lending
limits than community bank.
Supervision and Regulation
The Bank is subject to the supervision of, and is regularly examined by, the
Office of the Comptroller of the Currency (the "OCC") and to the regulations of
the Federal Deposit Insurance Corporation (the "FDIC"). Deposit accounts in the
Bank are insured by the FDIC to the maximum extent allowed by law and a
semi-annually statutory assessment is paid to the FDIC in exchange for this
deposit insurance. As a member of the Federal Reserve System (the "FRS"), the
Bank is also subject to certain provisions of the Federal Reserve Act and
regulations issued by the Board of Governors of the FRS.
Certain provisions of the laws and regulations of the States of Maryland,
Commonwealth of Virginia and the District of Columbia also apply to the Bank
insofar as they do not conflict with or are not preempted by federal law.
The Bank is required to satisfy the risk based capital requirements promulgated
by the OCC. These guidelines establish minimum capital standards for national
banks in relation to assets and off-balance sheet exposure as adjusted for
credit and other risk. Total capital is divided into two tiers. For the Bank,
Tier One consists of common stockholders' equity, while Tier Two capital
includes the qualifying portion of the Bank's allowance for loan losses. For
purposes of meeting the capital tests, Tier Two cannot exceed 100% of Tier One
capital and the qualifying portion of the allowance for loan losses is limited
to 1.25% of total risk-weighted assets. The risk-based capital guidelines
require that the Bank meet minimum ratios of capital to risk- weighted assets of
4% and 8% for Tier One capital and total risk-based capital (Tier One and Tier
Two), respectively.
In addition, the Bank must meet leverage ratio capital guidelines adopted by the
OCC. Under the guidelines, the Bank is required to maintain a minimum ratio of
capital, defined to be equal to Tier One capital described above, to average
quarterly assets of 3% or such higher level as may be required by the OCC. By
Bank policy, the Bank maintains the leverage ratio in excess of 5%. The OCC has
publicly stated its expectation that most banks should maintain a leverage ratio
of 1% to 2% above the minimum requirement.
On August 9, 1989, Congress enacted the Financial Institution Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"). FIRREA substantially changed the deposit
insurance system and the regulatory environment within which all depository
institutions, including commercial banks, operate. FIRREA established the
requirement, among others, that the OCC issue accounting standards for
determining a bank's capital adequacy. If these standards are not maintained,
the OCC can determine that the bank is engaging in unsafe banking practices and
may take control of the bank, usually reducing shareholder's equity to zero.
FIRREA also established a system of uniform national real estate appraisal
standards, imposes restrictions
3
<PAGE>
on the addition of officers and directors of banks under certain circumstances,
mandates annual audits for each federally-insured financial institution, and
requires them to report to regulators on compliance with safety and soundness
rules and with applicable laws and regulations. Finally, FIRREA broadened the
enforcement authorities of bank regulators, and increased the civil and criminal
penalties that may be assessed for violations of law.
In December 1991, Congress passed the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FDICIA revised the regulation and
supervision of foreign banks and changed the OCC examination process. It revised
auditing and accounting standards, outlined new requirements for real estate
lending, added new consumer provisions for retail deposit accounts, and
restricted brokered deposits and deposit solicitation. Finally, FDICIA requires
prompt regulatory action aimed at resolving the problems of insured depository
institutions at the least possible long-term loss to the deposit insurance fund.
Capital categories were established in furtherance of this goal. A "well
capitalized" institution is one which significantly exceeds the required minimum
level for each relevant capital measure; an "adequately capitalized" institution
is one which meets the required minimum levels; an "undercapitalized"
institution is one which fails to meet the required minimum level for any
relevant capital measure; a "significantly undercapitalized" institution is one
which is significantly below the required minimum level of any relevant capital
measure; and a "critically undercapitalized" institution is one which fails to
meet any level specified under the regulation. Capital measures include leverage
limits and risk-based capital requirements. Any institution categorized
"undercapitalized" or below is required to submit an acceptable capital
restoration plan and is subject to additional regulatory monitoring and
requirements. Based on capital levels at December 31, 1996, the Bank is in the
"well capitalized" category.
As of December 31, 1997, the Bank had a total of 47 employees, of which 46 were
full-time employees and 1 was a part-time employee. The Bank believes its
relationship with its employees to be satisfactory.
4
<PAGE>
ITEM 2. PROPERTIES
The principal properties of the Bank are described below:
<TABLE>
<CAPTION>
Square Leased Annual Lease Expira- Rent Option
Footage or Rent tion Date Through
Owned
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Executive Office:
One Church Street 6,888 Leased $157,508 02/28/05 02/28/15
Branch Offices:
Rockville 1,907 Leased $ 39,039 02/28/05 02/28/15
Farragut Square Branch 3,659 Leased $135,840 10/31/05
Friendship Heights
Building 3,000 Owned --
Land -- Leased $ 72,438 01/01/03 01/01/33
Tysons Branch 2,700 Leased $ 43,260 12/31/00 12/31/20
Other:
Adams Morgan Building 7,000 Leased $183,620 10/31/04 10/31/14
</TABLE>
The Bank holds the master lease to the building in Adams Morgan where the Adams
Morgan Branch was located until it was destroyed by fire in February, 1997. The
Bank has filed notice with the OCC of its intent to close this branch effective
April 30, 1998 and is in the process of leasing the 2,400 square feet of space
on the ground floor it previously occupied. The remaining ground floor space is
subleased to a restaurant while the second floor space is subleased to a
financial services firm.
None of the leases to which the Bank is a party are with persons related to the
Bank, its directors, officers, or principal shareholders.
ITEM 3. LEGAL PROCEEDINGS
At the present time, the Bank is not involved in any material legal proceedings,
other than the ordinary routine litigation incidental to the business.
The Bank is not aware of any material proceedings to which any director, officer
or affiliate of the Bank or any owner of record or beneficiary of more than five
percent (5%) of securities of
5
<PAGE>
the Bank or any associate of any such director, officer, affiliate of the Bank
or security holder is a party adverse to the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. The Annual Meeting of Shareholders is scheduled for April 21, 1998.
6
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------
Average Average Average
Average Yield Average Yield Average Yield
Balance Interest* or Rate* Balance Interest* or Rate* Balance Interest* or Rate*
------- --------- -------- ------- --------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets:
Loans, net of unearned income $ 91,915 $ 8,928 9.71% $ 71,206 $ 7,077 9.94% $ 55,236 $ 5,519 9.99%
Tax-exempt loans 119 11 9.24% 132 13 9.85% 145 14 9.66%
Total loans net of
unearned income 92,034 8,939 9.71% 71,338 7,090 9.94% 55,381 5,533 9.99%
Securities:
Taxable 24,439 1,445 5.91% 22,340 1,301 5.82% 18,272 1,040 5.69%
Federal funds sold 14,548 807 5.47% 9,426 504 5.26% 9,451 543 5.67%
------- ------ ------- ----- ------ -------
Net interest earning assets 131,021 11,191 8.54% 103,104 8,895 8.63% 83,104 7,116 8.56%
------- ------ ------- ----- ------ -------
Allowance for loan losses (907) (1,049) (1,162)
Cash and due from banks 5,128 4,238 3,613
Premises and equipment, net 1,649 1,676 1,416
Other assets 2,733 4,872 3,796
------- ------- ------
Total assets $ 139,624 112,841 90,767
========= ======= ======
</TABLE>
*Loans in nonaccrual status, which have been reclassified as other assets, have
not been included in average balances for the purposes of computing average
yield or rate. Loan fees are not included in interest income.
7
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(All Dollar Amounts in Thousands)
(Continued)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------
Average Average Average
Average Yield Average Yield Average Yield
Balance Interest* or Rate* Balance Interest* or Rate* Balance Interest* or Rate*
------- --------- -------- ------- --------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
Deposits:
Savings and money market $ 40,412 1,242 3.07% $ 32,411 927 2.86% $ 28,112 842 3.00%
Time 51,452 2,826 5.49% 38,427 2,079 5.41% 29,049 1,562 5.38%
------ ----- ------ ----- ------ -----
Total interest
bearing deposits 91,864 4,068 4.43% 70,838 3,006 4.24% 57,161 2,404 4.21%
------ ----- ------ ----- ------ -----
Federal funds purchased and
short-term borrowings 13,576 609 4.49% 12,358 527 4.26% 8,180 379 4.63%
------ ----- ------ ----- ----- ---
Total interest
bearing liabilities 105,440 4,677 4.44%** 83,196 3,533 4.25%** 65,341 2,783 4.26%**
------- ----- ------ ----- ------ -----
Non-interest bearing deposits 22,169 3.67%*** 20,426 3.41%*** 16,703 3.39%***
Other liabilities 1,958 425 1,521
Stockholders' equity 10,057 8,794 7,202
------ ----- -----
Total liabilities and
stockholders' equity $139,624 $ 112,841 $ 90,767
======== ========= ========
Net interest earnings/margin (as a
percent of interest earning assets) $ 6,514 4.97% $ 5,362 5.20% $ 4,333 5.21%
======== ====== ======= ====== ======== ======
Net interest spread (Cost of Money as
a percent of interest bearing
deposits and borrowings) 4.11% 4.38% 4.30%
====== ====== ======
Net interest spread (Cost of Money as
a percent of all deposits
and borrowings) 4.88% 5.22% 5.17%
====== ====== ======
Utilization rate 93.84% 91.37% 91.56%
====== ====== ======
</TABLE>
* See previous page for explanation
** Cost of interest bearing deposits and borrowings
*** Cost of all deposits and borrowings
8
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(All Dollar Amounts in Thousands)
(Continued)
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
---------------------------------------- -----------------------------------
Change Change Net Change Change Net
Due to Due to Increase Due to Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------- ---------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Changes in Income and Expense
Interest on interest-earning assets:
Loans $ 2,034 $ (185) $ 1,849 $ 596 $ (480) $ 116
Securities:
Taxable 123 20 143 (107) (34) (141)
Federal funds sold 274 25 299 35 (22) 13
--------- -------- -------- ------- -------- -----
Total $ 2,430 $ (138) $ 2,291 $ 524 $ (536) $ (12)
========= ======== ======== ======= ======== =====
Interest on interest-bearing liabilities:
Savings and Money market deposits $ 237 $ 78 $ 315 $ 181 $ (100) $ 81
Time deposits 710 37 747 (365) (372) (737)
Federal funds purchased and
short-term borrowings 53 29 82 65 (6) 59
--------- -------- -------- ------- -------- -----
Total $ 1,001 $ 143 $ 1,144 $ (119) $ (478) $(597)
========= ======== ======== ======= ======== =====
</TABLE>
Because of the numerious and simultaneous balance and rate changes during the
periods, it is not possible to allocate the change in net interest income
precisely between balances and rates. For purposes of this table, changes that
are not solely attributable to balance changes or rate changes have been
allocated equally to the Volume and Rate changes above.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Trading Market
There is currently no trading market for shares of the Bank's common stock and
it is not anticipated that such a market will develop in the near future. The
Bank's common stock is not quoted by NASDAQ (the automated quotation system of
the National Association of Securities Dealers, Inc.) or by local brokers and
accordingly, all sales are privately negotiated. To the best knowledge of Bank
management, the last transaction in the Bank's common stock during 1997 occurred
on December 26, 1997 when 50,000 shares were sold at a price of $16.00 per
share.
Stockholders
As of December 31, 1997, there were approximately 470 holders of record of the
Bank's common stock.
Dividends
The National Bank Act and OCC regulations prohibit national banks from paying
any dividend on common stock out of capital. In general, dividends can be paid
only to the extent of net profits then on hand, less any losses and provisions
for loan losses. In addition, dividends may generally be paid without OCC
approval out of current year net profits on hand plus retained net profits for
the prior two years. Dividends have not been paid on the Bank's common stock for
the past five years.
In determining whether to declare any dividends, the Board of Directors will
consider the Bank's earnings, the financial condition and business of the Bank,
and other relevant factors such as the above described regulatory requirements
and the need for the Bank to retain capital to finance its growth and
operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion focuses on information about the Bank's financial
condition and results of operations which may not be readily apparent from a
review of the financial statements. The discussion should be read in conjunction
with the financial statements and the selected financial data presented
elsewhere in the report.
Financial Condition
10
<PAGE>
Total assets increased to $161.5 million at December 31, 1997 , a 26% increase
from the prior year. An increase of $14.5 million in net loans and $15.2 million
in federal funds derived from a $30.6 million increase in deposits and customer
repurchase accounts. Deposit growth led growth in the net loan portfolio, as new
volume was offset by a high level of runoff. The Bank concentrated on lending to
its target market, increasing commercial loans and real estate loans by $9.9
million and $3.6 million, respectively.
During 1996, total assets grew at a rate of 22% from $105.6 to $128.4 million.
An increase of $24.6 million in net loans was funded by a $21.8 million increase
in deposits and customer repurchase accounts coupled with a $3.4 million
decrease in investment securities and federal funds sold. Growth in the loan
portfolio led deposit growth in 1996, putting to work the deposits garnered in
1995. The Bank concentrated on lending to its target market, increasing
commercial loans and real estate loans by $11 million and $13 million,
respectively.
During 1997, the Bank's lending and retail banking officers continued to focus
their attention on developing profitable customer relationships with small and
medium sized businesses, professionals, not-for-profit organizations and
investors within the metropolitan area. The Rockville and DC branches
facilitated business development in Montgomery County and the District while the
addition of our first Virginia branch increased our geographic reach.
Management continues to place a high priority on increasing and diversifying the
Bank's core deposit base. At December 31, 1997, demand, savings and time
deposits represented 19%, 36% and 45%, respectively, of total deposits. Customer
repurchase agreements, a form of secured deposit classified as other borrowed
funds on the Bank's Statement of Condition, increased to $19.7 million at
December 31, 1997 compared to $14.5 million at December 31, 1996.
Capital Resources
Stockholders' equity increased by $1,234,000 during 1997 as a result of net
income of $1,223,332 and issuance of stock to advisory board members. During
1996, stockholder's equity increased by $1.1 million, primarily from net income
of $931,000 combined with $130,000 from the exercise of stock options and
compensation of Advisory Board members.
As explained in Part 1, Item 1 above, the OCC has adopted risk based capital
guidelines to assess the adequacy of capital in national banks which vary
according the institution's risk profile. The Bank's Capital Plan calls for
maintenance of capital measures above the level required to be considered
"well-capitalized" under these regulatory guidelines. The minimum ratios
required for this classification are: Leverage of 5% ; Tier One Risk-based of
6%; and Total Risk-based of 10%. At December 31, 1997, the Bank's capital ratios
were 7.0%, 9.9% and 10.9% respectively as compared to 8.1%, 10.2%, and 11.1% for
the prior year.
In the opinion of management, these ratios are sufficient to facilitate future
growth. The Bank's management continually reviews capital adequacy and
identifies the most effective alternatives for generating equity from internal
and external sources.
11
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
INVESTMENT PORTFOLIO
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and other Government
obligations $27,605 $22,054 $24,480
Other(1) $ 338 $ 295 $ 239
Total $27,943 $22,349 $24,719
======= ======= =======
<CAPTION>
TYPE AND MATURITY GROUPING
December 31, 1997 Balance Yield
---------------------------------------------------------------
<S> <C> <C>
U.S. Government Obligations:
Within one year $13,455 6.02%
After one year, but within five years $14,105 5.72%
After five years, but within ten years - -
After ten years - -
Other(1) 383 5.80%
------- -----
Total $27,943 5.85%
======= =====
</TABLE>
(1) Federal Reserve Bank and Atlantic Central Banker's Bank stock
12
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
FEDERAL FUNDS PURCHASED
AND SHORT-TERM BORROWINGS
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Maxiumum
Weighted Avg. Outstanding
Balance at Interest Rate during the
Year End at Year End Period (1)
-------- ----------- ------------
<S> <C> <C> <C>
December 31, 1997
Federal funds purchased $ - - $ -
Bank repurchase agreements - - -
Customer repurchase agreements 19,664 4.48% 19,664
Treasury Tax & Loan 1,089 4.82% 1,089
----------
$ 20,753
==========
December 31, 1996
Federal funds purchased $ - - $ -
Bank repurchase agreements - - -
Customer repurchase agreements 14,464 4.27% 14,464
Treasury Tax & Loan 267 4.21% 763
----------
$ 14,731
==========
</TABLE>
(1) Amount represents the maximum outstanding at any month end during the
period.
13
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
DEPOSITS
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
AVERAGE BALANCES
Year Ended December 31,
-----------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Demand deposits $ 22,169 $ 19,230
Savings, NOW and money market accounts 40,412 32,397
Time deposits 51,452 38,417
--------- --------
$ 114,033 $ 90,044
========= ========
Average rate paid on
interest-bearing deposits 4.43% 4.25%
========= ========
</TABLE>
Certificates of Deposits in amounts of $100,000 or more at December 31, 1997
(In Thousands of Dollars):
<TABLE>
<CAPTION>
Time Remaining until Maturity Amount
----------------------------- ------
<S> <C>
3 months or less $ 11,289
Over 3 through 6 months 4,703
Over 6 through 12 months 11,450
Over 12 months 1,209
---------
Total $ 28,651
=========
</TABLE>
14
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
RETURN ON EQUITY AND RETURN ON ASSETS
(All Dollar Amounts Except Per Share
Information are Stated in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996
---------- ---------
<S> <C> <C>
Net income (loss) $ 1,223 $ 931
========== =========
Average assets $ 139,624 $ 112,841
========== =========
Average equity $ 10,107 $ 8,794
========== =========
Per share information:
Dividends declared $ - $ -
========== =========
Net income (loss) $ 1.26 $ 0.96
========== =========
Average number of common
shares outstanding $ 999,493 $ 970,935
========== =========
Return on average assets (%) 0.88 0.83
========== =========
Return on average equity (%) 12.10 10.59
========== =========
Dividend payout ratio (%) - -
========== =========
Average equity to average
assets ratio (%) 7.24 7.79
========== =========
</TABLE>
15
<PAGE>
Liquidity and Asset Liability Management
Liquidity represents the Bank's ability to support asset growth, meet customers'
borrowing needs, fund deposit withdrawals and maintain reserve requirements. On
the asset side, the primary sources of liquidity are Federal funds sold,
investment securities and scheduled repayments on outstanding loans. On the
liability side, the principal source of liquidity is deposit growth.
The liquidity position is evaluated daily by management to maintain a level of
liquidity conducive to efficient operations. Attention is directed primarily to
assets or liabilities that mature or can be repriced within a period of 30 to
365 days. The Bank attempts to match a portion of its assets and liabilities in
order to minimize variability in net interest income. This practice also serves
to minimize both liquidity and interest rate risk. Prudent risks are taken,
however, by leaving certain assets and liabilities unmatched in an effort to
benefit from the interest rate sensitivity created.
Following is a summary analysis of maturity and repricing characteristics of
assets and liabilities at December 31, 1997 (in millions of dollars):
<TABLE>
<CAPTION>
Maturity or Repricing
------------------------------------------------------------------------------------------
30 days 31-90 91-180 181-365 Over
or less days days days one year
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Securities $1.0 $ 2.0 $3.5 $ 7.0 $14.4
Loans 56.5 0.9 3.8 4.4 34.0
Other earning assets 26.8 - - - -
Other assets - - - - 7.0
------------------------------------------------------------------------------------------
Total assets 84.3 2.9 7.3 11.4 55.4
==========================================================================================
Liabilities:
Interest-bearing deposits 56.5 8.0 13.3 21.2 6.2
Non-interest bearing deposits - - - - 24.9
Other liabilities 19.7 - - - 0.7
Stockholders' equity - - - - 10.7
------------------------------------------------------------------------------------------
Total liabilities 76.2 8.0 13.3 21.2 42.5
==========================================================================================
Gap 8.1 (5.1) (6.0) (9.8) 12.9
------------------------------------------------------------------------------------------
Cumulative gap $ 8.1 $ 3.0 $( 3.1) $(12.9) $ 0.0
==========================================================================================
</TABLE>
The Bank accepts a certain portion of liabilities in the form of certificates of
deposit over $100,000, customer repurchase agreements, and other short-term
borrowings. As of December 31, 1997, the Bank had $28.7 million, or 22% of total
deposits in time deposits in denominations of $100,000 or more, $19.7 million in
customer repurchase agreements, and $1.2 million in Treasury Tax and Loan note
option funds which are classified as other short-term borrowing.
16
<PAGE>
As of December 31, 1996, the Bank had $22.7 million, or 22% of total deposits in
time deposits in denominations of $100,000 or more, $14.5 million in customer
repurchase agreements, and $267,000 in Treasury Tax and Loan note option funds.
The liabilities previously discussed are classified as non-core funding sources,
as defined in A User's Guide for the Uniform Bank Performance Report. Bank
policy requires that non-core funding less temporary assets as a percent of
total earning assets (the volatile liability dependency ratio) not exceed 25%.
As of December 31, 1997, the Bank's non-core funding dependency ratio stood at
7.76%, compared to 17.76% as of December 31, 1996.
A portion of the Bank's time deposits come from deposit brokers (brokered
deposits). As of December 31, 1997, brokered deposits totaled $2.7 million, or
1.8% of total deposits, compared to $3.2 million, or 3% of total deposits, as of
December 31, 1996.
At December 31, 1997, the Bank had outstanding commitments to extend credit and
standby letters of credit amounting to $16.4 million and $1.9 million,
respectively. The Bank expects to meet funding requirements resulting from these
commitments by using its traditional sources of liquidity. As of December 31,
1996, total outstanding commitments to extend credit and standby letters of
credit amounted to $11.4 million and $1.5 million, respectively.
Results of Operations
Core earnings increased significantly in 1997 resulting in pre-tax income of
$2.0 million compared to $1.5 million for the prior year and net income of
$1,223,332 compared to $931,135 the previous year. This included charges to
earnings of $190,000, net of tax, resulting from the closure of the Adams Morgan
branch.
The improvement in core earnings is attributable to the growth of earning assets
and the control of operating expenses. Investments in personnel and fixed assets
have contributed to a third year of growth. Further, the Bank is positioned to
continue the positive trends in growth and profitability during the coming year.
Net Interest Income
Net interest income is the difference between interest and fees earned on loans
and investments and interest paid on deposits and other sources of funds. Net
interest income can be viewed as the product of earning assets and the net
interest margin. Net interest income totaled $6.7 million and $5.5 million in
1997 and 1996, respectively. Loan fees included in interest income were $226,000
and $194,000 in 1997 and 1996, respectively.
The improved net interest income is the result of strong growth in earning
assets. The growth rate of net interest income was 22%, 24%. and 7% for 1997,
1996 and 1995, respectively, while net interest margin was 4.95%, 5.16% and
5.21% for the same periods.. The slower growth rate for 1995 is attributable to
a substantial amount of funds invested in short-term instruments such as Federal
funds sold and U.S. Treasury Notes as loan growth lagged behind deposit growth.
This reversed itself in 1996 as lower earning assets were replaced with higher
earning loans.
The utilization rate, the ratio of average earning assets to total assets rose
to 93.84% in 1997
17
<PAGE>
as compared to 91.37% and 91.56% for the two prior years. This improvement in
this ratio resulted from continued reductions in the level of non-accrual loans
and other real estate owned.
Provision for loan losses
The allowance for loan losses is maintained at a level deemed adequate by
management to absorb potential loan losses in the portfolio after evaluating the
loan portfolio, the financial condition of borrowers, current economic
conditions, changes in the nature and volume of the portfolio, past loan-loss
experience and other pertinent factors. Many of these factors involve a
significant degree of estimation and are subject to rapid change which could be
unforeseen by management. As a consequence, the possibility exists that
management's evaluation of the adequacy of the allowance could change, and such
change could be material in amount, as additional information becomes known.
While the Bank considers the allowance for loan losses to be adequate at
December 31, 1997, management is unable to predict the amount, if any, of future
provisions to the allowance.
The allowance for loan losses is created by direct charges to operations. Losses
on loans are charged against the allowance in the period in which management
believes the loans become uncollectible, and recoveries are credited to the
allowance when realized. Provisions for loan losses aggregated $195,000 in 1997
as compared to $90,000 in 1996 The allowance for loan losses totaled $988,191
and $874,205 at December, 31 1997 and 1996, respectively, representing 0.98% and
1.01% of outstanding loans. Non-accrual loans and loans past due 90 days or more
totaled $1.1 million and $1.2 million at December 31, 1997 and 1996,
respectively. The ratio of net loans charged-off to average loans outstanding
was 0.22%, 0.47% and .91% for the years ended December 31, 1997, 1996 and 1995,
respectively.
Other Income
Non-interest income totaled $847,000 in 1997 and $731,000 in 1996. The increase
of $116,000 from 1996 to 1997 resulted from an increase in service charges on
deposits and miscellaneous recoveries, offset by an decrease in loan fees, while
the $45,000 decrease from 1995 to 1996 was attributable to a decrease in service
charges on deposits and non-amortizing loan fees. Non-amortizing loan fees
include documentation fees, loan advance fees, and real estate equity kicker
fees.
Other Expenses
Non-interest expense totaled $5.3 million in 1997 and $4.7 million in 1996. This
included expenses relating to the Adams Morgan branch fire and the Board's
subsequent decision to close the branch. In 1997, the Bank recorded $315,000 in
expenses to write off capitalized expenses and leasehold improvements, and to
provide a reserve against future lease obligations. The remaining $285,000
increase from 1996 resulted primarily from an increase in personnel expense
combined with other operating expenses such as OREO expense, data processing and
loan servicing. The increase from 1995 to 1996 resulted primarily from an
increase in other operating expenses such as legal, data processing, loan
servicing, and director fees.
Benefit for Income Taxes
Effective January 1, 1993, the Bank adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109). The adoption of SFAS
109
18
<PAGE>
resulted in the Bank recording a tax provision of $811,000 and $591,200 for 1997
and 1996, respectively and a tax benefit of $705,000 1995. For a discussion on
the Bank's income taxes refer to page 14 of the Bank's audited 1997 Financial
Statements.
Impact of Inflation and Changing Prices
The impact of inflation on the Bank is reflected primarily in the increased
costs of operations. These increased costs are generally passed on to Bank
customers in the form of increased service fees. Since the primary assets and
liabilities of the Bank are monetary in nature, the impact of inflation on
interest rates has had, and is expected to continue to have, an effect on net
income.
In structuring fees, negotiating loan margins and developing customer
relationships, management concentrates its efforts on maximizing earnings
capacity while attempting to contain increases in operating expenses. In
addition, management continually reviews the feasibility of new and additional
fee-generating services to offset the effects of inflation and changing prices
with an objective of increased earnings.
Loan Review
The Bank manages the risk characteristics of the loan portfolio in such ways as
conducting thorough credit evaluations of potential borrowers, establishing
lending limits on certain segments of the portfolio, requiring adequate
collateral, and obtaining guarantees of principal parties. Risk is further
monitored and controlled by procedures which include periodic reviews by the
Bank's Loan Review Committee and an annual review by an independent loan review
organization. These procedures are designed to minimize the adverse impact from
any one event or set of conditions. Nonetheless, in certain instances, it is
necessary to charge-off loans as uncollectible. Management maintains the
allowance for loan losses at a sufficient level to meet present and potential
risk characteristics inherent in the loan portfolio, based on information
currently available.
Non-accruing and Past Due Loans
Non-accruing loans aggregated $1.0 million at year end 1997 compared with $1.2
million at year end 1996. Included in non-accrual loans were commercial,
consumer and real estate loans of $130,000, $70,000 and $800,000, respectively,
at December 31, 1997, as compared to $91,000, $0 and $1.1 million, respectively,
at December 31, 1996. At December 31, 1997, non-accruing loans aggregated
approximately 1.0% of loans outstanding as compared to 1.4% at December 31,
1996.
Past due loans are reviewed regularly in connection with management's review of
the allowance for loan losses as it relates to the evaluation of collateral and
the prospects for repayment of principal and interest. Loans are placed on a
non-accrual status when management deems that collection in full of principal
and interest is doubtful. Generally, loans that are more than 90 days past due
are placed on non-accrual status, unless they are well secured and in the
process of collection. Charge-offs to the allowance are made when a loss is
deemed probable.
19
<PAGE>
Other Potential Problems Loans
In addition to non-accruing loans and loans past due 90 days or more, management
has identified other potential problem loans where known information about
possible credit problems causes management to have doubts as to the ability of
borrowers to comply with present loan repayment terms. In placing loans in this
category, management considers the current status of the loan and previous
payment history, the nature and quality of collateral, current economic
conditions which may affect the borrower, and other information deemed pertinent
in the circumstances. At December 31, 1997, other potential problem loans
included commercial loans of $1.8 million and real estate loans of $2.2 million.
Statistical Information
Set forth on the following pages is a breakdown of the loan portfolio by major
category for the two years ended December 31, 1997 along with the respective
maturity of loan balances at year end. Additionally, a breakdown of non-accrual,
past due and restructured loans for the two year period is also presented.
20
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Amount Percent of loans to total loans
For the Year Ended For the Year Ended
------------------------ -------------------------------
Balances Applicable to: 1997 1996 1997 1996
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Commercial and Industrial $ 277 $ 168 42% 38%
Real estate 513 420 53% 58%
Consumer 64 46 5% 4%
Unallocated 134 240 N/A N/A
------- ------ ----- -----
$ 988 $ 874 100% 100%
======= ====== ===== =====
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
December 31,
------------------------------
1997 1996
-------- ---------
<S> <C> <C>
Allowance for loan losses at
begining of period $ 874 $ 1,122
-------- -------
Loans Charged off:
Real estate (201) (113)
Installment (4) (24)
Commercial 0 (288)
Foreign 0 0
-------- -------
Total charge-offs (205) (425)
-------- -------
Recoveries:
Real estate 20 34
Installment 9 3
Commercial 95 50
Foreign - -
-------- -------
Total recoveries 124 87
-------- -------
Net loans charged-off (81) (338)
-------- -------
Additions to allowance charged
to operating expense 195 90
-------- -------
Allowance for loan losses
at period end $ 988 $ 874
======== =======
Average amount of loans
outstanding for the year $ 92,104 $ 72,377
======== =======
Ratio of net loans charged-off
to average loans outstanding
for the period 0.09% 0.47%
======== =======
</TABLE>
21
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
LOAN PORTFOLIO
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
TYPES OF LOANS
- -------------------------
December 31, 1997
Maturity of Loan Balances
-------------------------------------
December 31, One Year After
-------------------------- One Year Through Five
1997 1996 Or Less Five Years (1) Years(1)
----------- ------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 42,444 $ 32,496 $ 24,337 $ 17,770 $ 1,573
Real estate construction
and land development 2,375 1,317 2,375 - -
Real estate mortgage 51,214 48,711 (2) (2) (2)
Consumer 4,598 3,634 (2) (2) (2)
Other 108 12 (2) (2) (2)
---------- ----------
$ 100,739 $ 86,170
========== ==========
</TABLE>
(1) The total amount of commercial and industrial, real estate construction and
land development loans due after one year which have floating or adjustable
interest rates is approximately $9,217,400.
(2) Not required to provide.
22
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
(All Dollar Amounts in Thousands Except Notes Below)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- ----------
<S> <C> <C> <C>
Nonaccruing loans $ 1,009 $ 1,207 (1)
90 Days past Due or More 57 --
Restructured loans (2) 128 31
------- ----------
$ 1,194 $ 1,238
</TABLE>
(1) During 1996, interest income recorded on loans in nonaccrual status was
$44,156 while interest income not recorded on loans in nonaccrual status was
$133,115
(2) Troubled debt restructuring as defined by Statement of Financial Accounting
Standards No. 15.
Note: See commentaries on above classifications for further information.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
In addition to the schedules presented herein, the Bank's financial statements
and accompanying notes and the Independent Auditors' Report prepared on an
audited basis by Hoffman, Morrison & Fitzgerald, PC are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with accountants on accounting
and financial disclosure. The Bank's audited 1994, 1995, 1996 and 1997 Financial
Statements were prepared by Hoffman, Morrison & Fitzgerald, PC.
24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities and Exchange Act of 1934 requires the Bank's
directors, executive officers and beneficial owners of in excess of 10% of the
Common Stock to file reports of ownership and changes in ownership on Forms 3, 4
and 5 with the OCC., and to provide the Bank with copies of all such forms they
file. Based solely on the review of copies of forms which have been received by
the Bank and written representations from the Bank's directors and executive
officers, the Bank is aware of the following:
- - Form 5 filings were submitted late by Stephen N. Ashman, Frank E.
Williams, Javier J. Holtz and Patricia Ghiglino for the year ending
12/31/96.
- - Javier J. Holtz and Patricia Ghiglino each submitted one Form 4 late.
As of December 31, 1997 the following individuals served as directors or
executive officers. On February 17, 1998, Javier J. Holtz resigned as Chairman
of the Board and Frank E. Williams, Jr. was elected to that position.
DIRECTORS OF THE BANK
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME (AGE) DIRECTOR PRINCIPAL OCCUPATION
POSITION WITH BANK SINCE DURING LAST FIVE YEARS(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen N. Ashman (49) 1991 President, CEO and Director, Capital
President, CEO and Director Bank, N.A.; Director, Capital Factors,
Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Frank E. Williams, Jr. (63) 1977 President, The Williams and Beasley
Chairman of the Board Company, Inc. since 1994; President,
Williams Industries, Inc. until 1994.
- ------------------------------------------------------------------------------------------------------------------------------------
George H. Walker (62) 1982 President and majority owner,
Vice Chairman of the Board Opportunity Systems, Inc.
Chairman, Audit Committee
- ------------------------------------------------------------------------------------------------------------------------------------
Joshua Bernstein (35) May 1996 President, Bernstein Management
Director Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
Patricia Ghiglino (47) April 1995 President and CEO, Professional
Director Restoration, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Javier J. Holtz (37) April 1994 Executive Vice President and
Director Director, Union Planters Bank of
Florida since 1994; Senior Vice
President, Union Planters Bank of
Florida from 1990 to 1994;Chairman
of the Board, Capital Factors, Inc.
since 1994.
- ------------------------------------------------------------------------------------------------------------------------------------
Jay E. Katzen (53) May 1996 Private Medical Practice,
Director Ophthalmology; Vice President,
Culmore Realty Company; Vice
President, Mozel Development Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. Mozer (66) February 1995 Partner, Attorney-at-Law, Mozer and
Director Swetnick, PA.
- ------------------------------------------------------------------------------------------------------------------------------------
Steven J. Schwartz (43) July 1995 Chief Financial Officer and General
Director Counsel, Blake Construction Co.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) If dates are not given, the same position has been held in excess of five
years.
OFFICERS OF THE BANK
The persons named below are executive officers of the Bank who are not directors
and are not, therefore, included in the directors' table above.
Michael Paul serves as Executive Vice President of the Bank. Mr. Paul manages
the Bank's lending and retail divisions and is the Bank's Chief Credit Officer,
and is a member of the asset/liability, management, and planning committees. Mr.
Paul joined the Bank in 1995.
Marilyn M. Ayres serves as Senior Vice President and Cashier of the Bank. Ms.
Ayres manages the Bank's operations, credit administration, and accounting
departments, serves as chairperson of the loan review and asset/liability
committees, and is a member of the loan, management and planning committees. Ms.
Ayres has been with the Bank since 1987.
J. Kevin Clarke is Senior Vice President/Retail Banking. Mr. Clarke manages the
Bank's retail division and is a member of the management and planning committee.
Mr. Clarke has been with the bank since 1983.
26
<PAGE>
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS COMPENSATION
The following table sets forth the aggregate compensation for services in all
capacities to the Bank during the years ended December 31, 1997, 1996 and 1995
for the Bank's Chief Executive Officer and the only other executive officer who
received salary and bonus of more than $100,000 in 1997 :
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
NAME AND PRINCIPAL YEAR SALARY BONUS(1) OTHER ANNUAL STOCK
POSITION COMPENSATION(2) OPTIONS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stephen N. Ashman 1997 170,000 106,905 16,400 0
President and CEO 1996 165,000 66,695 16,000 2,000
1995 165,000 45,000 16,000 0
- ---------------------------------------------------------------------------------------
Michael Paul (3) 1997 115,000 10,000 10,500 5,000
Executive Vice 1996 95,000 10,000 9,900 5,000
President/Lending 1995 70,000 0 6,100 0
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Ashman's bonuses for 1995, 1996 and 1997 were granted in
accordance with his employment contract as discussed on page 10. At his
election, these bonuses were paid in January of the following years
(1996, 1997 and 1998).
(2) The 1995 salary shown above for Mr. Paul is annualized.
The amounts shown as other annual compensation consist of transportation
allowances and Bank contributions to the 401-k Plan. The Bank also provides to
the Executive Officers indirect compensation in the form of insurance and other
non-cash personal benefits. In 1995, 1996, and 1997 the average amount of such
indirect compensation was less than ten percent (10%) of the compensation
reported for each individual.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Number of % of Total Exercise or Expiration
Securities Options/SARs Base Price Date
Name Underlying Granted to Employees ($/sh)
Options/ SARs in Fiscal Year
Granted (#)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen N. Ashman --- ---
- --------------------------------------------------------------------------------------------------------
Michael Paul 5,000 29% $10.50 01/16/02
- --------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCALYEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Shares Value Number of Securities Value of Unexercised
Acquired Realized Underlying Unexercised In-the-the Money
on ($) Options/SARs at FY-End Options /SARs at FY-
Exercise (#)Exercisable/ End ($) EXERCISABLE/
Name (#) Unexercisable UNEXERCISABLE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stephen N. Ashman --- $ --- 22,000/0 $203,000/Not
Applicable
- ----------------------------------------------------------------------------------------------------------------------
Michael Paul --- $ --- 10,000/0 $ 66,250/Not
Applicable
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Value determined using an independent appraisal dated December,
1997.
In December, 1996 the Bank modified the employment contract of Stephen N. Ashman
as President and Chief Executive Officer and agreed to pay Mr. Ashman a base
salary as follows:
1998 $175,000
1999 $185,000
In addition, Mr. Ashman is eligible to receive bonuses, which are based on the
performance of the Bank. The bonus formula for Mr. Ashman is as follows: 5% of
the Bank's earnings before income taxes and accrual for Mr. Ashman's bonus with
the following limits:
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
1998 $40,000 $150,000
1999 $50,000 $175,000
</TABLE>
Expressed as a formula, the bonus is:
Bonus = .05 x income before taxes
.95
In 1999, if the earnings of the Bank before taxes and accrual exceed $2.5
million, the bonus shall be 4% of the Bank's earnings before income taxes and
accrual over $2.5 million in addition to the 5% bonus for amounts under $2.5
million.
Mr. Ashman is also entitled to a car allowance and stock options at the Board's
discretion. In the event of termination or diminishment of title or authority,
as described below, or in the event of a change in control of the Bank, all
outstanding but unexercised options would be considered fully vested,
exercisable without restriction and not subject to any buy-back rights of the
Bank.
Mr. Ashman's contract provides for salary continuation as follows: Employment
will continue through December 31, 1999. In the event of termination for any
reason other than theft, willful violation of law or resignation, or if title or
authority are diminished, salary, minimum bonus and fringe benefits will
continue through December 31, 1999. In the event that Mr. Ashman is reemployed
by another organization prior to December 31, 1999, salary, bonus, and fringe
benefit
28
<PAGE>
obligations would be reduced by the amounts earned on the new job. In addition
to continuation of salary and benefits, in the event that termination or
diminishment of title or authority follows a change of control, the Bank would
pay Mr. Ashman an additional $100,000 at the date of termination or diminishment
of title or authority.
Commencing July 1, 1995, Mr. Michael Paul joined the Bank as Executive Vice
President and Chief Credit Officer. Mr. Paul entered into an employment contract
with the Bank which specifies his salary, bonus and other compensation issues.
For the five years prior to joining the Bank, Mr. Paul served as Senior Vice
President in the Real Estate Division of the Bank's affiliate in Miami, Florida.
Other than the 401-K retirement savings plan, the Employee Stock Option Plan and
the contract described above, there currently is no existing plan calling for
the payment of any incentive, pension or deferred compensation benefits to any
officer or director.
DIRECTORS COMPENSATION
The Directors of the Bank have been compensated for their service to the Bank as
follows:
(1) All Directors receive a $2,400 annual retainer payable at a rate of $200
per month.
(2) All Directors were paid $300 for each Board meeting they attended in 1996
and 1995.
(3) Audit, Compliance and Organizational Committee meetings. All Directors are
paid $100 for each committee meeting they attend.
401-K RETIREMENT SAVINGS PLAN
In November 1993, the Board of Directors of the Bank adopted a 401-K Retirement
Savings Plan (the "401-K") which became effective January 1, 1994. The purpose
of the 401-K is to enable the Bank to secure and retain the services of highly
qualified persons, to provide employees with an additional incentive to make
every effort to enhance the success of the Bank, and to assist employees in
accumulating retirement funds.
The 401-K is available to all full time employees who are age 18 or older and
have completed one year of service with the Bank. In adopting the 401-K, the
Board of Directors did not obligate the Bank to make any contributions.
Contributions will be made at the discretion of the Board of Directors up to the
highest amount permitted by law. For 1995, 1996 and the first six months of
1997, the Board of Directors agreed to contribute 3.5% of employees' base
compensation and to match employee contributions up to an additional 2.5% of
base compensation. The Board of Directors increased the Bank's contribution to
4.5% of base compensation for the latter six months of 1997.
None of the directors of the Bank, except Stephen N. Ashman, and none of their
associates, is eligible for the 401-K. Any officer of the Bank who is also a
full-time salaried employee of the Bank is eligible for the 401-K.
29
<PAGE>
EMPLOYEE STOCK OPTION PLAN
In February 1988, the Board of Directors of the Bank adopted an Employee Stock
Option Plan (the "Plan"), which became effective April 1, 1988. The purpose of
the Plan is to advance the interests of the Bank by encouraging stock ownership
on the part of employees. Similar to the 401-K, the Plan enables the Bank to
secure and retain the services of highly qualified persons, and provides
employees with additional incentive to make every effort to enhance the success
of the Bank.
At the 1994 shareholder meeting, an amendment to the Plan was adopted by the
Bank's shareholders which permitted the issuance of non-incentive stock options
to outside Directors. The amendment also stated that the Plan be administered by
the full Board of Directors.
The Plan authorizes the issuance of both "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1954, as amended (the
"Code"), and "non-incentive stock options." Incentive stock options which
satisfy the issuance and holding provisions of the Code will not cause the
employee to recognize any gross income when received or exercised, but do
produce long-term gain or loss upon the disposition of the stock to the extent
of the difference between the option price and the amount for which the stock is
sold. The Bank will not be entitled to take any deduction with respect to the
incentive stock option except to the extent that the employee is required to
recognize income because of his failure to meet the Code's holding requirements.
Non-incentive options, with a readily ascertainable market value, will cause the
employee to realize ordinary income to the extent of the difference between the
fair market value of the option less any amount paid by the employee, either
when the employee's rights in the option become transferable or when his rights
in the option are not subject to a substantial risk of forfeiture. The Bank will
be entitled to a deduction for compensation paid at the same time as which, and
in the same amount in which, the employee who received the non-incentive option
is considered to have realized compensation.
At the 1997 Annual Meeting an amendment to the Plan was adopted by the Bank's
shareholders which increased the number of shares allotted to be issued under
the Employee Stock Option Plan from 100,000 to 200,000, limited the number of
shares granted in any one year to 30,000 shares, and extended the last date for
issuing options from January 18, 1998 to December 31, 2003
Other material provisions of the Plan are as follows.
1. Options may be granted to full-time salaried employees and directors.
2. The option price is determined by the Board and must be not less than the
fair market value of the stock at the time the option is granted.
3. The shares to be purchased upon each exercise of any option shall be paid
for in cash at the time of such exercise.
4. If an option holder's employment terminates as a result of death, his
option may (within described limits) be exercised by his administrator,
executor or certain devisees or heirs.
30
<PAGE>
5. No option to be granted under the Plan is transferable by an option holder
otherwise than by the laws of descent and distribution.
6. Except in the case of death, permanent and total disability, and other
defined circumstances, an option granted to an employee may be exercised by
that person only if he has been a full-time salaried employee of the Bank
continuously from the date the option was granted to the date of its
exercise.
7. Provision is made for the adjustment of the shares available under an
option upon the happening of certain re-capitalizations, reclassifications,
split-ups, combinations or exchanges of shares.
8. Shares of stock acquired through the exercise of options are subject to
certain restrictions upon their disposition.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
To the knowledge of Management, the following is a complete list of persons who
are known to the Bank to be beneficial owners of more than five percent (5%) of
the Bank's securities as of December 31, 1997. The number of shares owned and
percentage of class are as March 17, 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER RELATIONSHIP TO THE BANK BENEFICIAL % OF
OWNERSHIP CLASS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stephen N. Ashman(1) President, CEO, and 99,684 9.94
2540 Massachusetts Ave, NW Director
Washington, DC 20008
- -------------------------------------------------------------------------------------------------------------------------------
Frank E. Williams, Jr.(2) Chairman of the Board 69,556 7.04
3008 Cyrandall Road
Oakton, VA 22124
- -------------------------------------------------------------------------------------------------------------------------------
Graciella Geller(3) Stockholder 100,000 10.19
Eltorando 2151
Beccar 1643
Buenos Aires, Argentina
- -------------------------------------------------------------------------------------------------------------------------------
Abel Holtz(4) Stockholder 97,186 9.90
9999 Collins Avenue
Bal Harbour. FL 33154
- -------------------------------------------------------------------------------------------------------------------------------
Fana Holtz(4) Stockholder 58,954 6.01
9999 Collins Avenue
Bal Harbour, FL 33154
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Dickinson Fidelity, S.A. Stockholder 65,000 6.62
c/o Cowan Liebowitz & Latman PC
1133 Avenue of the Americas
New York, NY 10036
- -------------------------------------------------------------------------------------------------------------------------------
Jorge Cohen TR UA July 8, 1996 Stockholder 85,000 8.66
c/o Cowan Liebowitz & Latman PC
1133 Avenue of the Americas
New York, NY 10036
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Stephen Ashman's shares owned beneficially include stock options for
22,000 shares , 2,161 owned by his wife, and 1,500 shares owned by a family
trust. An additional 2,000 in options granted in January 1998 are not
included as they are not exercisable for two years without the approval of
a majority of the Board of Directors.
(2)Frank E. Williams, Jr.'s shares owned beneficially include stock options
for 7,500 shares.
(3)Graciella Geller's voting rights are limited to 96,365 shares, or 9.9%
of the outstanding stock. Under an OCC Order applicable to Ms. Geller's
ex-husband, the 3,635 shares held by Ms. Geller which are in excess of 9.9%
of the outstanding shares (as of November 12, 1997) may not be voted.
(4)Abel Holtz disclaims any beneficial interest in the 58,954 shares owned
by his wife, Fana Holtz and 15,943 shares owned in the aggregate by his
sons. In accordance with an OCC Order applicable to Mr. Holtz, he granted
an irrevocable proxy to an independent third party, pursuant to which the
proxyholder will vote Mr. Holtz's shares, on all matters submitted to
shareholders, in the same proportion as all other shares are voted. Fana
Holtz disclaims any beneficial interest in the 97,186 shares owned by her
husband, Abel Holtz.
Shares of Common Stock owned directly and beneficially at March 17, 1998 by each
of the directors listed above, and executive officers and directors as a group
was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NAME SHARES OF STOCK OWNED PERCENT OF CLASS(1)
BENEFICIALLY
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen N. Ashman (2) 99,684 9.94%
- --------------------------------------------------------------------------------------------------------------
Joshua Bernstein(2), (4) 25,500 2.59%
- --------------------------------------------------------------------------------------------------------------
Patricia Ghiglino(2) 6,479 0.66%
- --------------------------------------------------------------------------------------------------------------
Javier J. Holtz(2), (3) 14,389 1.46%
- --------------------------------------------------------------------------------------------------------------
Jay Katzen, MD(2), (5) 28,741 2.92%
- --------------------------------------------------------------------------------------------------------------
Robert J. Mozer, Esq.(2) 13,300 1.35%
- --------------------------------------------------------------------------------------------------------------
Steven Schwartz(2) 25,517 2.58%
- --------------------------------------------------------------------------------------------------------------
George H. Walker(2) 14,469 1.46%
- --------------------------------------------------------------------------------------------------------------
Frank E. Williams, Jr.(2) 69,556 7.04%
- --------------------------------------------------------------------------------------------------------------
Executive officers, directors, and nominees
for directors as a group (12 persons)(2) 323,565 30.58%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
(1) Based on the number of shares outstanding as of January 31, 1998 plus,
with respect to each individual, the number of shares subject to options
held by that individual, and with respect to Executive Officers, Directors
and nominees for Director as a group, the number of shares subject to
options held by all such persons.
(2)For the following directors, shares owned beneficially include stock
options to purchase shares of the Bank's Common Stock: Stephen Ashman
(22,000), Patricia Ghiglino (5,500), Javier Holtz (7,500), Robert J. Mozer
(5,500), Steven Schwartz (5,500),George Walker (7,500), Frank Williams
(7,500), Joshua Bernstein (3,500), and Dr. Jay Katzen (3,500). For the
executive officers, excluding Stephen N. Ashman, shares owned beneficially
include stock options to purchase 9,000 shares of the Bank's Common Stock.
(3)Javier Holtz disclaims any beneficial interest in 97,186 shares owned by
his father, Abel Holtz, 58,954 shares owned by his mother, Fana Holtz, and
1,554 shares owned by his brother, Mr. Daniel Holtz.
(4)Mr. Josh Bernstein's beneficial interest includes 14,000 shares owned by
Bernstein Fund Ltd. Partnership, of which he is Managing Partner.
(5)Jay Katzen's beneficial interest includes 17,241 shares owned by The
Cyrus Katzen Foundation, Inc., of which he is a Trustee.
33
<PAGE>
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
In preceding years, the Bank has made, and will continue to make, loans to some
of its directors, officers and their associates in the ordinary course of
business, on substantially the same terms, including interest rates, repayment
terms and collateral on loans as those prevailing for comparable transactions
with its other customers. In the opinion of Management, these loans have not
presented a greater than normal risk of collectibility than did the loans to
other customers or any other unfavorable features, and did not exceed the Bank's
legal lending limits.
As of February 28, 1998, Director Frank E. Williams, Jr. and his associates were
indebted to the Bank for $915,254, which represented 8.3% of capital as of that
date. As of February 28, 1998, Director George H. Walker and his associates were
indebted to the Bank for $109,145, which represented 1.0% of capital as of that
date. As of February 28, 1998, Director Patricia Ghiglino and her associates
were indebted to the Bank for $298,798, which represented 2.7% of capital as of
that date. As of February 28, 1998, Director Robert Mozer was indebted to the
Bank for $85,219, which represented 0.8% of capital as of that date. As of
February 28, 1998, $218,075 was outstanding on a home loan and equity line to
Director, President and CEO Stephen N. Ashman and his wife, which represented
2.0% of capital as of that date. As of February 28, 1998, $4,938 was outstanding
on a credit line to J. Kevin Clarke, Senior Vice President, which represented
.04% of capital as of that date. On May 31, 1997, the highest aggregate
indebtedness (for 1997 through February 28, 1998) of directors, officers and
associates thereof was reached. The amount outstanding was $2,867,427, which
represented 26.8% of capital as of that date.
The Bank is not aware of any material proceedings to which any director, officer
or affiliate of the Bank or any owner of record or beneficiary of more than five
percent (5%) of securities of the Bank or any associate of any such director,
officer, affiliate of the Bank or security holder is a party adverse to the
Bank.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K (FORM F-3)
(A) Independent Auditors' Report, Statements of Condition - December 31, 1997
and 1996, Statements of Operations - Years Ended December 31, 1997, 1996
and 1995, Statements of Changes in Stockholders' Equity - Three Years Ended
December 31, 1997, Statements of Cash Flows - Years Ended December 31,
1997, 1996 and 1995, and Notes to Financial Statements, incorporated by
reference to pages 1 through 22 of Capital Bank, N.A.'s Audited Financial
Statements for 1997.
Capital Bank, N.A.'s Definitive Proxy Statement dated March 17, 1998,
incorporated by reference to pages 1 through 13.
Stipulation and Consent Order between the Office of Comptroller of the
Currency and Horacio Rozenblum, Shareholder
34
<PAGE>
Settlement Agreement between the Office of Comptroller of the Currency and
Martin Rozenblum, Shareholder
Stipulation and Consent Order between the Office of Comptroller of the
Currency and Salem Eduardo Nazar, Shareholder
(B) Reports on
Form 8-K There were no reports on Form 8-K filed during the fourth
quarter.
35
<PAGE>
SIGNATURES
In accordance with 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.
Capital Bank, N.A.
March 17, 1998 By:/s/ MARILYN M. AYRES
-----------------------------------
Marilyn M. Ayres
Senior Vice President and Cashier
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 17, 1998 /s/ FRANK E. WILLIAMS
--------------------------------------------
Frank E. Williams, Jr., Chairman of the Board
March 17, 1998 /s/ GEORGE H. WALKER
--------------------------------------------
George H. Walker, Vice Chairman
March 17, 1998 /s/ STEPHEN N. ASHMAN
--------------------------------------------
Stephen N. Ashman, President, Chief
Executive Officer, Secretary of the Board,
and Director
March 17, 1998 /s/ JOSHUA B. BERNSTEIN
--------------------------------------------
Joshua B. Bernstein, Director
March 17, 1998 /s/ PATRICIA GHIGLINO
--------------------------------------------
Patricia Ghiglino, Director
March 17, 1998 /s/ JAVIER J. HOLTZ
--------------------------------------------
Javier J. Holtz, Director
March 17, 1998 /s/ JAY KATZEN
--------------------------------------------
Jay Katzen, M.D., Director
March 17, 1998 /s/ ROBERY J. MOZER
--------------------------------------------
Robert J. Mozer, Esq, Director
March 17, 1998 /s/ STEVEN J. SCHWARTZ
--------------------------------------------
Steven J. Schwartz, Director
March 17, 1998 /s/ MARILYN M. AYRES
--------------------------------------------
Marilyn M. Ayres, Senior Vice President and
Cashier
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description Page Number
------ ----------- -----------
<S> <C> <C>
23 Consent of Independent Auditors 38
13 1997 Audited Financial Statements 39
19 Definitive Proxy Statement dated 60
March 17, 1998
99 Stipulation and Consent Order between 73
the OCC and Horacio Rozenblum,
Shareholder
Settlement Agreement between the OCC 83
Martin Rozenblum, Shareholder
Stipulation and Consent Order between 93
the OCC and Salem Eduardo Nazar,
Shareholder
</TABLE>
37
<PAGE>
CAPITAL BANK, N.A.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
WITH
INDEPENDENT AUDITORS' REPORT
CAPITAL BANK, N.A.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
WITH
INDEPENDENT AUDITORS' REPORT
C O N T E N T S
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS:
Statements of Condition
Statements of Operations
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
NOTES TO FINANCIAL STATEMENTS
35
<PAGE>
[HOFFMAN, MORRISON & FITZGERALD, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
CAPITAL BANK, N.A.
Rockville, Maryland
We have audited the statements of condition of CAPITAL BANK, N.A. as of December
31, 1997 and 1996, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 31, 1997, 1996
and 1995. These financial statements are the responsibility of the Bank'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 require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of CAPITAL BANK, N.A. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/ HOFFMAN, MORRISON & FITZGERALD, P.C.
McLean, Virginia
January 22, 1998
36
<PAGE>
CAPITAL BANK, N.A.
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31
---------------------------------------
1997 1996
------------------ ------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 4,515,491 $ 5,293,388
Federal funds sold 26,800,000 11,600,000
---------------- ----------------
Total cash and cash equivalents 31,315,491 16,893,388
---------------- ----------------
Securities available-for-sale 27,443,174 18,849,158
Securities held-to-maturity 500,000 3,500,064
---------------- ----------------
Total securities 27,943,174 22,349,222
---------------- ----------------
Loans 100,739,353 86,170,067
Less: Allowance for loan losses (988,191) (874,205)
Unearned income (276,023) (339,435)
---------------- ----------------
Loans, net 99,475,139 84,956,427
---------------- ----------------
Premises and equipment, net 1,312,070 1,664,138
Other real estate owned, net 105,351 701,687
Accrued interest and other assets 1,335,418 1,868,768
---------------- ----------------
TOTAL ASSETS $ 161,486,643 $ 128,433,630
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits $ 24,743,649 $ 22,820,388
Savings and NOW deposits 46,890,313 35,579,238
Other time deposits 57,340,344 45,236,037
---------------- ----------------
Total deposits 128,974,306 103,635,663
Customer repurchase agreements 19,664,110 14,464,370
Other short-term borrowed funds 1,248,700 429,969
Other liabilities 908,479 446,664
---------------- ----------------
Total liabilities 150,795,595 118,976,666
---------------- ----------------
STOCKHOLDERS' EQUITY:
Common stock, $6 par value; 2,000,000 shares
authorized, 973,392 and 971,117 shares issued and
outstanding at December 31, 1997 and 1996, respectively 5,840,352 5,826,702
Capital surplus 2,760,427 2,748,765
Retained earnings 2,059,889 836,557
Net unrealized gain on securities available-for-sale 30,380 44,940
---------------- ----------------
Total stockholders' equity 10,691,048 9,456,964
---------------- ----------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 161,486,643 $ 128,433,630
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CAPITAL BANK, N.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------
1997 1996 1995
----------------- ---------------- ----------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 9,166,139 $ 7,283,595 $ 5,691,660
Taxable securities 1,463,224 1,316,149 1,051,771
Federal funds sold 806,737 504,089 543,344
--------------- -------------- --------------
Total interest income 11,436,100 9,103,833 7,286,775
INTEREST EXPENSE:
Savings and NOW deposits 1,241,998 927,341 842,190
Time deposits 2,826,094 2,079,351 1,562,109
Federal funds purchased and securities
sold under agreements to repurchase 608,692 527,234 379,226
Other borrowed funds 32,367 21,000 33,059
--------------- -------------- --------------
Total interest expense 4,709,151 3,554,926 2,816,584
--------------- -------------- --------------
Net interest income 6,726,949 5,548,907 4,470,191
Provision for loan losses 195,000 90,000 370,000
--------------- -------------- --------------
Net interest income after
provision for loan losses 6,531,949 5,458,907 4,100,191
--------------- -------------- --------------
OTHER INCOME:
Service charges on deposit accounts 548,245 477,112 511,792
Loan fees 193,934 215,985 220,120
Other operating income 104,482 37,923 44,405
--------------- -------------- --------------
Total other income 846,661 731,020 776,317
--------------- -------------- --------------
OTHER EXPENSES:
Salaries and employee benefits 2,470,761 2,297,279 2,126,438
Occupancy expense, net 807,414 751,736 708,019
Other real estate, net 64,234 4,811 111,072
Other operating expenses 2,001,869 1,613,766 1,359,692
--------------- -------------- --------------
Total other expenses 5,344,278 4,667,592 4,305,221
--------------- -------------- --------------
Income before income taxes 2,034,332 1,522,335 571,287
Provision (benefit) for income taxes 811,000 591,200 (704,751)
--------------- -------------- --------------
NET INCOME $ 1,223,332 $ 931,135 $ 1,276,038
=============== ============== ==============
Basic earnings per common share $ 1.26 $ 0.97 $ 1.42
=============== ============== ==============
Diluted earnings per common share $ 1.22 $ 0.96 $ 1.42
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CAPITAL BANK, N.A.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Retained gain (loss) Total
Common stock earnings on securities stock-
-------------------------- Capital (accumulated available- holders'
Shares Amount surplus deficit) for-sale equity
---------- ------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 790,407 $ 4,742,442 $ 2,524,330 $ (1,370,616) $ (150,130) $ 5,746,026
Issuance of common stock 164,885 989,310 189,922 - - 1,179,232
Net income - - - 1,276,038 - 1,276,038
Change in unrealized gain (loss)
on securities available-for-sale,
net of income taxes - - - - 194,588 194,588
---------- ------------ ------------- -------------- ------------- --------------
BALANCE, DECEMBER 31, 1995 955,292 5,731,752 2,714,252 (94,578) 44,458 8,395,884
Issuance of common stock 15,825 94,950 34,513 - - 129,463
Net income - - - 931,135 - 931,135
Change in unrealized gain (loss)
on securities available-for-sale,
net of income taxes - - - - 482 482
---------- ------------ ------------- -------------- ------------- --------------
BALANCE, DECEMBER 31, 1996 971,117 5,826,702 $ 2,748,765 $ 836,557 $ 44,940 $ 9,456,964
Issuance of common stock 2,275 13,650 11,662 - - 25,312
Net income - - - 1,223,332 - 1,223,332
Change in unrealized gain (loss)
on securities available-for-sale,
net of income taxes - - - - (14,560) (14,560)
---------- ------------ ------------- -------------- ------------- --------------
BALANCE, DECEMBER 31, 1997 973,392 $ 5,840,352 $ 2,760,427 $ 2,059,889 $ 30,380 $ 10,691,048
========== ============ ============= ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CAPITAL BANK, N.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,223,332 $ 931,135 $ 1,276,038
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 195,000 90,000 370,000
Depreciation and amortization 357,480 378,038 244,119
(Gain) loss on sale of other real estate owned 32,182 (9,454) (5,982)
Loss on disposal of premises and equipment 306,325 - -
Provision for losses on other real estate owned, net 10,353 31,256 100,550
Accrued interest and other assets 539,224 507,985 (773,410)
Increase (decrease) in other liabilities 461,815 (41,481) 155,562
--------------- --------------- ---------------
Net cash provided by operating activities 3,125,711 1,887,479 1,366,877
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in cash realized from:
Sale of securities available-for-sale 1,492,500 - -
Maturities or prepayments of securities available-
for-sale 5,500,000 17,363,769 5,087,918
Purchase of securities available-for-sale (15,602,029) (17,543,955) (11,126,500)
Maturities of securities held-to-maturity 3,000,000 2,500,799 -
Loans, net (14,713,712) (25,294,347) (7,114,529)
Purchase of premises and equipment (316,594) (379,288) (829,996)
Net expenditures on other real estate owned (1,244) (51,412) (47,160)
Proceeds from sale of other real estate owned 555,045 955,932 420,591
--------------- --------------- ---------------
Net cash used in investing activities (20,086,034) (22,448,502) (13,609,676)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in cash realized from:
Deposits, net 25,338,643 18,539,565 14,246,334
Customer repurchase agreements 5,199,740 3,256,105 6,415,070
Other short-term borrowed funds 818,731 29,897 (2,726,014)
Issuance of common stock 25,312 129,463 1,179,232
--------------- --------------- ---------------
Net cash provided by financing activities 31,382,426 21,955,030 19,114,622
--------------- --------------- ---------------
Net increase in cash and cash equivalents 14,422,103 1,394,007 6,871,823
Cash and cash equivalents, beginning of year 16,893,388 15,499,381 8,627,558
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 31,315,491 $ 16,893,388 $ 15,499,381
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION
Capital Bank, N.A. is headquartered in Rockville, Maryland where it also
operates a branch. In addition, the Bank has two branches in the District of
Columbia and one in Virginia.
The Bank provides a variety of banking services to individuals and
businesses. Its primary deposit products are demand and savings deposits and
certificates of deposit. Its primary lending products are commercial business
and real estate mortgage loans.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to general practice within the banking
industry.
Investment securities - The Bank's investment securities are classified as
either held-to- maturity, available-for-sale or trading. At December 31, 1997
and 1996, the Bank held no trading securities.
Debt securities that management has the ability and positive intent to hold
to maturity are classified as held-to-maturity and stated at cost, adjusted
for amortization of premiums and accretion of discounts using methods that
approximate the interest method.
Securities not classified as held-to-maturity or trading securities are
available-for-sale and stated at fair value. Unrealized gains and losses, net
of deferred income taxes, are reported as direct increases or decreases in
stockholders' equity. Gains and losses from the sale of available-for-sale
securities are recognized based on the specific identification method and
included in results of operations.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below amortized cost that are determined by
management to be other than temporary result in write-downs of the individual
securities to their fair value as a new cost-basis. The write-down is
included in earnings as a realized loss. Subsequent increases in the fair
value of available-for- sale securities are included as a separate component
of stockholders' equity, as noted in the preceding paragraph.
Investments also include Federal Reserve Bank stock in the amount of $312,700
and $270,250 at December 31, 1997 and 1996, respectively. This stock is
recorded at cost because its ownership is restricted and it lacks a market
for resale. The Bank is required to maintain Federal Reserve Bank stock at a
level of 6% above capital and surplus.
Loans - Loans are stated at unpaid principal balances, less the allowance for
loan losses, net deferred loan fees and unearned income. Unearned income is
recognized over the terms of the loans using a method that approximates the
interest method.
6
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of a loan - A loan is impaired when it is probable that the Bank
will be unable to collect all amounts due according to the contractual terms
of the loan agreement, including contractual interest payments. Impairment is
measured as the difference between the recorded investment in the loan and
the present value of expected future cash flows discounted at the loan's
effective interest rate or the loan's observable market price. If repayment
of the loan is expected to be provided by the underlying collateral,
impairment is based on the fair value of the collateral. Impairments are
charged to the allowance for loan losses.
Allowance for loan losses - The allowance for loan losses is maintained at a
level which, in management's view, is adequate to absorb credit losses
inherent in the loan portfolio. Management determines the adequacy of the
allowance based on reviews of individual credits, recent loan loss
experience, current economic conditions, the volume, growth, and composition
of the loan portfolio, and other relevant factors. When appropriate, the
provisions are based on management's estimate of net realizable value or fair
value of the collateral underlying the loans. The allowance is increased by a
provision for loan losses, and reduced by charge-offs, net of recoveries.
Interest income on loans - The accrual of interest on loans is discontinued
when a loan is specifically determined to be impaired. When loans are placed
on non-accrual status, interest accrued in the current year is charged
against interest income, and interest accrued in prior years is charged to
the allowance for loan losses. 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.
Loan origination fees and costs - Loan fees and certain related direct loan
origination costs are deferred and amortized as an adjustment of yield over
the life of the related loan or currently upon the sale or repayment of the
loan.
Premises and equipment - Premises and equipment are stated at cost, less
accumulated depreciation and amortization computed principally on the
straight-line basis over the estimated useful life of each asset, which
ranges from three to seven years. Leasehold improvements are amortized over
the shorter of the related lease term or the estimated useful lives of the
improvements.
Other real estate owned - Other real estate owned includes both formally
foreclosed property and in-substance foreclosed property. In-substance
foreclosed properties are those properties for which the Bank has taken
physical possession, regardless of whether formal foreclosure proceedings
have taken place.
7
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other real estate owned (continued) - At the time of foreclosure, other real
estate owned is recorded at the lower of the Bank's cost or the asset's fair
value less costs to sell, which becomes the property's new basis. Any
write-downs based on the asset's fair value at date of acquisition are
charged to the allowance for loan losses. After foreclosure, these assets are
carried at the lower of their new cost basis or fair value less costs to
sell. Fair value is determined using quoted market prices or the present
value of estimated expected future cash flows at a discount rate commensurate
with the risks involved. Costs incurred in maintaining other real estate
owned and subsequent write-downs to reflect declines in the fair value of the
property are included in income (loss) on other real estate owned.
Income taxes - The Bank uses an asset and liability approach in financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future. The principal items relate primarily to
differences between the basis of available-for-sale securities, allowance for
loan losses, allowance for losses on foreclosed real estate, net operating
loss carry forwards, deferred loan fees, and accumulated depreciation.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Earnings per share - During 1997, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per share," which replaces
the presentation of primary and fully diluted earnings per share ("EPS") with
basic and diluted EPS, respectively. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of shares
outstanding for the period. Diluted EPS is computed by dividing net income by
the weighted-average number of shares outstanding for the period plus the
incremental shares that would have been outstanding under the stock option
plan, upon the assumed exercise of the dilutive options. All prior period EPS
data have been restated. The adoption of this new pronouncement did not have
a material effect on the Bank's reported EPS amounts.
Cash and cash equivalents - For purposes of reporting cash flows, cash and
cash equivalents are defined as cash on hand, amounts due from banks,
interest-bearing deposits with other banks and federal funds sold.
Derivative financial instruments - All derivative financial instruments held
or issued by the Bank are held or issued for purposes other than trading.
o Off-balance-sheet instruments - In the ordinary course of business the
Bank has entered into off-balance-sheet financial instruments consisting
of commitments to extend credit, commercial letters of credit, and standby
letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
8
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair values of financial instruments - The following methods and assumptions
were used by the Bank in estimating fair values of financial instruments as
disclosed herein:
o Cash and cash equivalents - The carrying amounts of cash and short-term
instruments approximate their fair value.
o Available-for-sale and held-to-maturity securities - Fair values for
securities are based on quoted market prices.
o Loans - For variable-rate loans that re-price frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for certain mortgage loans, and other consumer loans
are based on quoted market prices of similar loans sold in conjunction
with securitization transactions, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
o Deposit liabilities - The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of variable-rate,
fixed-term money-market accounts and certificates of deposit ("CDs")
approximate their fair values at the reporting date. Fair values for
fixed-rate CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on CDs to a schedule of
aggregated expected monthly maturities on time deposits.
o Short-term borrowings - The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of
other short-term borrowings are estimated using discounted cash flow
analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements. The carrying amounts of accrued
interest approximate their fair values.
o Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counter parties' credit standings.
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 those
estimates.
9
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates (continued) - Material estimates that are particularly
susceptible to significant change relate to the determination of the
allowance for losses on loans and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with
the determination of the allowances for losses on loans and foreclosed real
estate, management obtains independent appraisals for significant properties.
Prospective accounting pronouncements - During 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
pronouncement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income is defined as
the change in equity during a period from transactions and other events from
non-owner sources. The Bank plans to adopt SFAS 130 in 1998 and does not
anticipate that the future adoption of this pronouncement will have a
significant impact on the results of operations or financial position.
During 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997. This pronouncement requires public
business enterprises to report certain information about operating segments,
including products and services, geographic areas of operation and major
customers. The Bank plans to adopt SFAS 131 in 1998 and does anticpate that
the future adoption of this pronouncement will have a significant impact, if
any, on results of operations or financial position.
C. INVESTMENT SECURITIES
The amortized cost, unrealized holding gains and losses, and the fair value
of investment securities are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
cost gains losses value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Available-for-sale securities:
- ------------------------------
December 31, 1997:
U.S. Treasury securities $27,058,736 $47,419 $ 681 $27,105,474
Other 337,700 - - 337,700
---------- ------ ---- ----------
Total $27,396,436 $47,419 $ 681 $27,443,174
========== ====== ==== ==========
December 31, 1996:
U.S. Treasury securities $18,484,771 $77,000 $7,863 $18,553,908
Other 295,250 - - 295,250
---------- ------ ----- ----------
Total $18,780,021 $77,000 $7,863 $18,849,158
========== ====== ===== ==========
</TABLE>
10
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
C. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
cost gains losses value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Held to maturity securities:
December 31, 1997:
U.S. Government agencies $ 500,000 $950 $ - $500,950
========= === ===== =======
December 31, 1996:
U.S. Treasury securities $1,000,064 $ - $ 64 $1,000,000
U.S. Government agencies 500,000 - 1,505 498,495
Collateralized mortgage obligations 2,000,000 - 3,871 1,996,129
--------- - ----- ---------
Total $3,500,064 $ - $5,440 $3,494,624
========= === ===== =========
</TABLE>
In 1997, the Bank sold available for sale securities totaling $1,492,500,
resulting in a $1,965 realized gain. There were no sales of securities in
1996. At December 31, 1997 and 1996, investment securities with carrying
amounts of $26,057,000 and $20,654,000 respectively, were pledged to secure
public deposits and repurchase agreements.
The scheduled maturities of investment securities at December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
Available-for-sale securities Held-to-maturity securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- --------- --------
<S> <C> <C> <C> <C>
Due in one year or less $13,832,549 $13,860,515 $ - $ -
Due after one year through five years 13,563,887 13,582,659 500,000 500,950
---------- ---------- ------- -------
Total $27,396,436 $27,443,174 $500,000 $500,950
========== ========== ======= =======
</TABLE>
D. LOANS
<TABLE>
<CAPTION>
Loans are summarized as follows at December 31:
1997 1996
------------ -------------
<S> <C> <C>
Real Estate:
Construction and land development $ 2,374,622 $ 1,317,250
Residential real estate 14,183,901 15,404,919
Commercial real estate 37,030,717 33,283,751
Commercial and industrial 42,444,326 32,518,212
Consumer 4,705,787 3,645,935
--------- ----------
Total $100,739,353 $86,170,067
=========== ==========
</TABLE>
11
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
E. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are summarized as follows for the
years ended December 31:
<TABLE>
<S> <C> <C> <C>
Balance, beginning of year $ 874,205 $1,122,640 $1,262,439
Provision for loan losses 195,000 90,000 370,000
Loans charged off (205,044) (425,538) (718,044)
Recoveries of loans charged off 124,030 87,103 208,245
------- --------- ---------
Balance, end of year $ 988,191 $ 874,205 $1,122,640
======= ========= =========
</TABLE>
Impairment of loans having recorded investments of $1,008,360 and $1,207,326
at December 31, 1997 and 1996, respectively, has been recognized in
conformity with SFAS 114 as amended by SFAS 118. The average recorded
investment in impaired loans was $1,131,576 during 1997, and $1,224,210
during 1996. The total allowance for loan losses related to impaired loans
was $162,761 and $156,338 at December 31, 1997 and 1996, respectively.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
F. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Building $ 707,775 $ 777,291
Leasehold improvements 991,864 1,575,184
Furniture, fixtures and equipment 741,860 921,812
----------- -----------
2,441,499 3,274,287
Less: accumulated depreciation and amortization (1,129,429) (1,665,051)
----------- -----------
1,312,070 1,609,236
Construction in progress -- 54,902
----------- -----------
Premises and equipment, net $ 1,312,070 $ 1,664,138
=========== ===========
</TABLE>
Depreciation and amortization charged to operations totaled $362,337, $328,599,
and $236,630 in 1997, 1996 and 1995, respectively.
12
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
G. OTHER REAL ESTATE OWNED
The carrying value of other real estate owned was as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Developed properties held for sale $ 210,174 $ 843,010
Less: allowance for losses (104,823) (141,323)
--------- ---------
Other real estate owned, net $ 105,351 $ 701,687
========= =========
</TABLE>
Developed properties held for sale includes one foreclosed property. The
property is a residential development with multiple units, the majority of
which have been sold.
Net gains (losses) of $(32,182), $9,454, and $5,982 were recognized from the
sale of properties during 1997, 1996, and 1995, respectively.
Changes in the allowance for losses on other real estate owned was as follows
for the years ended December 31:
<TABLE>
<S> <C> <C> <C>
Balance, beginning of year $ 141,323 $ 110,067 $ 697,793
Provision for losses, net 10,353 31,256 100,550
Charge-offs, net (46,853) -- (688,276)
--------- --------- ---------
Balance, end of year $ 104,823 $ 141,323 $ 110,067
========= ========= =========
</TABLE>
Expenses related to other real estate owned are included in other expenses,
net of any gains and losses recognized on the sale of such properties. These
expenses totaled $64,234, $4,811, and $111,072 in 1997, 1996 and 1995,
respectively.
H. LINES OF CREDIT AND REPURCHASE AGREEMENTS
The Bank has two lines of credit. The first in the amount of $4,000,000 is
with a bank in Florida. Advances bear interest at approximately the federal
funds rate and are payable on demand. The line is collateralized by certain
loans owned by the Bank, which should at all times equal no less than 120% of
the advances outstanding.
The second line of credit is a $2,000,000 unsecured line with a state
chartered banker's bank. The agreement requires a demand deposit account
balance of not less than $10,000 and ownership of a specified amount of
common stock in the lending bank. At December 31, 1997, the Bank was in
compliance with all terms of the agreement.
13
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
H. LINES OF CREDIT AND REPURCHASE AGREEMENTS (CONTINUED)
At December 31, 1997 and 1996, the Bank had no indebtedness outstanding under
either line of credit.
The Bank has a Master Repurchase Agreement with a major financial
institution, under which, the Bank may borrow short-term funds by selling
securities under an agreement to repurchase them. Generally, these securities
will be limited to U.S. Government and government agency securities and
agency mortgage-backed securities.
I. INCOME TAXES
The provision (benefit) for income tax for the years ended December 31 were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Current $ 271,200 $ 25,000 $ 30,249
Deferred tax expense 539,800 566,200 241,000
Adjustment to the valuation allowance -- -- (976,000)
--------- --------- ---------
Provision (benefit) $ 811,000 $ 591,200 $(704,751)
========= ========= =========
</TABLE>
A reconciliation of income tax at the statutory rate to the Bank's effective
rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed at the expected statutory rate $ 692,000 $ 518,000 $ 236,500
State income tax-net of Federal tax benefit 119,000 73,200 34,749
Adjustment to the valuation allowance -- -- (976,000)
--------- --------- ---------
Provision (Benefit) $ 811,000 $ 591,200 $(704,751)
========= ========= =========
</TABLE>
Deferred tax assets and liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on securities $ (19,000) $ (24,000)
Bad debt expense (13,000) (111,000)
---------
Gross deferred tax liabilities (32,000) (135,000)
---------
Deferred tax assets:
Net operating loss carryforwards -- 518,800
Alternative minimum tax credit -- 37,000
Other real estate write-downs 1,000 17,000
Depreciation and amortization 6,000 44,000
Deferred loan fees 113,000 139,000
Interest income on non-accrual loans 107,000 107,000
Contribution carryforwards -- 7,000
--------- ---------
Gross deferred tax assets 227,000 869,800
--------- ---------
Net deferred tax assets $ 195,000 $ 734,800
========= =========
</TABLE>
14
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
J. STOCKHOLDERS' EQUITY
On April 25, 1996, the Bank adopted a stockholder protection rights plan.
Pursuant to the Rights Agreement, dated April 25, 1996, by and between the Bank
and Chemical Mellon Shareholder Services, L.L.C., as Rights Agent, one right was
issued for each outstanding share of Common Stock. Each of the rights entitles
the registered holder to purchase from the Bank one-half of one share of Common
Stock at a price of $6.00 per whole share. The rights, however, will not become
exercisable unless and until, among other things, any person acquires 10 percent
or more of the outstanding common stock of the Bank (subject to certain
conditions and exceptions more fully described in the Rights Agreement). Each
right will entitle the holder (other than the person or persons who acquired 10
percent or more of the outstanding Common Stock) to purchase Common Stock of the
Bank at the price specified above. The rights are redeemable by the Bank under
certain circumstances at $.01 per right and will expire, unless earlier
redeemed, on December 31, 1999.
K. STOCK OPTION PLAN
The Bank has a fixed stock option plan that provides for both incentive stock
options, within the meaning of the Internal Revenue Code, and non-incentive or
non-qualified stock options. As permitted by SFAS 123, "Accounting for
Stock-based Compensation," the Bank applies APB Opinion 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed stock option plan. The maximum number of
shares which may be issued under the plan is 200,000 shares of common stock
which have been reserved for this purpose and the maximum number of shares which
may be issued per year is 30,000. All full-time, salaried employees are eligible
to receive stock options. The Directors are eligible to receive non-incentive
stock options. No options may be granted after December 31, 2003. The exercise
price will not be less than the fair market value per share as determined by the
Board of Directors at the date the options are granted and the term of each
stock option granted will not exceed five years.
15
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
K. STOCK OPTION PLAN (CONTINUED)
A summary of the stock options granted and exercised are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ------------------ --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING,
JANUARY 1 54,300 $ 7.42 46,250 $7.14 62,000 $7.32
Granted 17,000 $ 10.50 25,200 8.25 -- --
Exercised -- -- (10,000) 8.00 -- --
Canceled (1,100) -- (7,150) $7.73 (15,750) $7.85
------ ------ -------
OUTSTANDING
AND
EXERCISABLE,
DECEMBER 31 70,200 $ 8.17 54,300 $7.42 46,250 $7.14
====== ====== ======
Weighted average
fair-value of options
granted during year $49,525
======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted-
Average Weighted- Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$6.00 10,000 .96 years $6.00 10,000 $6.00
$7.25 21,500 1.96 $7.25 21,500 $7.25
$8.25 21,700 3.04 $8.25 21,700 $8.25
$10.50 17,000 4.06 $10.50 17,000 $10.50
------ ------
$6.00-
$10.50 70,200 2.65 $8.17 70,200 $8.17
====== ======
</TABLE>
Had compensation expense been determined based on the fair value of the
options at the grant dates consistent with the method of accounting under
SFAS 123, the Bank's net income and net income per share would have been
decreased to the proforma amounts indicated below:
16
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
K. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---- ----
Net income
<S> <C> <C>
As reported $1,223,332 $931,135
Proforma $1,173,807 $873,453
Basic net income per common share
As reported $1.26 $.97
Proforma $1.21 $.91
</TABLE>
There were no options granted during 1995. The fair value of each option is
estimated on the date of grant using a type of Black-Scholes option-pricing
model with the following assumptions used for grants during the years ended
December 31, 1997 and 1996: dividend yield of 0%, volatility of effectively
0%, risk-free interest rate based on the 10-year bond Treasury yield at the
date of grant, and expected life of 5 years.
L. OTHER OPERATING EXPENSES
The components of other operating expenses for the years ended December 31 were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Data processing $ 398,065 $ 335,688 $ 285,396
Insurance 55,302 42,757 123,146
Equipment expenses 282,377 245,099 171,844
Audits and examinations 93,868 82,638 68,304
Legal 39,842 91,730 62,555
Other 1,132,415 815,854 648,447
---------- ---------- ----------
$2,001,869 $1,613,766 $1,359,692
========== ========== ==========
<CAPTION>
M. NET INCOME PER SHARE
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Net income available to common
stockholders (numerator) $1,223,332 $ 931,135 $1,276,038
---------- ---------- ----------
Weighted average shares (denominator) 972,360 960,200 896,881
---------- ---------- ----------
Basic net income per share $ 1.26 $ .97 $ 1.42
========== ========== ==========
Dilutive effect of stock options 27,133 9,697 3,304
---------- ---------- ----------
Dilutive shares (denominator) 999,493 969,897 900,185
---------- ---------- ----------
Diluted net income per share $ 1.22 $ .96 $ 1.42
========== ========== ==========
</TABLE>
17
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
N. RELATED PARTY TRANSACTIONS
The Bank was affiliated with a bank in Florida until December 31, 1997 when
the affiliate was purchased by another financial institution. During 1997,
the Bank purchased from and repaid to the affiliate, federal funds in the
amount of $800,000. As of December 31, 1996, loan participations sold to the
Florida affiliate aggregated $14,245,000 and loans purchased amounted to
$1,329,000. These loans were subject to the same underwriting standards as
other loans of the Bank.
The Bank grants loans to its executive officers, directors and their
affiliated entities. Such loans are made in the ordinary course of business
on substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with unrelated persons, and, in the opinion of management, do not involve
more than normal risk or present other unfavorable features.
The aggregate amount of such loans at December 31, 1997 and 1996 was
$1,999,000 and $2,532,000, respectively. During 1997, new loans to such
related parties totaled $1,472,000 and repayment totaled $2,006,000. During
1996, new loans to such related parties totaled $1,430,000 and repayments
totaled $1,647,000.
O. COMMITMENTS AND CONTINGENCIES
The Bank is obligated under noncancelable operating leases, which expire on
various dates through 2005, for its office facilities and is also liable for
payment of taxes and operating expenses of the leased property exceeding a
base year amount. Total rental expense charged to operations for the years
ended December 31, 1997, 1996 and 1995 approximated $505,000, $461,000, and
$453,000, net of sublease income of $79,000, $87,000, and $83,000,
respectively.
Minimum annual rental commitments under these leases are as follows for the
year ended December 31:
<TABLE>
<S> <C> <C>
1998 $ 536,327
1999 552,097
2000 568,287
2001 537,288
2002 551,242
Thereafter 1,190,941
---------
3,936,182
Less: Sublease income (515,645)
Total $3,420,537
=========
</TABLE>
18
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
P. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possible additional discretionary,
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's 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 Bank to maintain minimum amounts and ratios (set forth in the
table below) 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, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank 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 that management believes have
changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------- -------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) 11,648,859 10.9% > $8,586,850 > 8.0 > $10,733,563 > 10.0
- - - -
Tier I Capital
(to Risk Weighted Assets) 10,660,668 9.9% > $4,293,425 > 4.0 > $ 6,440,138 > 6.0
- - - -
Tier I Capital
(to Average Assets) 10,660,668 7.0% > $6,115,715 > 4.0 > $7,644,643 > 5.0
- - - -
</TABLE>
19
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
P. REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
As of December 31, 1996:
Total Capital
<S> <C> <C> <C> <C> <C> <C>
(to Risk Weighted Assets) $10,286,229 11.1% > $7,395,160 > 8.0 > $9,243,951 > 10.0
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 9,412,024 10.2% > $3,708,832 > 4.0 > $5,563,248 >6.0%
- - - -
Tier I Capital
(to Average Assets) $ 9,412,024 8.1% > $4,637,450 > 4.0 > $5,796,812 > 5.0
- - - -
</TABLE>
Q. DEPOSITS
Time deposits in denominations of $100,000 or more approximated $28,651,000
and $22,875,000 at December 31, 1997 and 1996 respectively. During the years
ended December 31, 1997, 1996, and 1995, interest expense on time deposits of
$100,000 or more totaled $770,000, $762,000, and $536,000, respectively.
Maturities of time deposits are as follows for the year ended December 31:
<TABLE>
<S> <C>
1998 $51,933,000
1999 3,886,000
2000 1,127,000
2001 229,000
2002 165,344
-------
Total $57,340,344
</TABLE>
R. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank's financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit.
A summary of the contract amounts of such commitments and contingent
liabilities at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Commitments to extend credit $ 16,436,992 $11,358,689
Standby letters of credit $ 1,916,942 $ 1,533,069
</TABLE>
20
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
R. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance of the customer.
The Bank's credit policies and procedures for credit commitments and
financial guarantees are the same as those for extensions of credit that are
recorded on the Statements of Condition. Because these instruments have fixed
maturity dates, and because many of them expire without being drawn upon,
they do not generally present any significant liquidity risk to the Bank. The
Bank has not incurred any losses on commitments in 1997, 1996 or 1995.
S. SIGNIFICANT CONCENTRATIONS OF CREDIT
Substantially all of the Bank's loans, commitments and standby letters of
credit have been granted to customers located in the Washington, DC
metropolitan area. The concentrations of credit by type of loan are set forth
in Note D. At December 31, 1997 and 1996, the Bank had federal funds sold to
various correspondent banks totaling $26,800,000 and $11,600,000,
respectively, each of which had a balance of $500,000 or more. These are
overnight investments and are rolled over on a daily basis. The Bank does not
normally require collateral for this type of investment.
T. RETIREMENT PLAN
The Bank established a Section 401(k) retirement plan, effective January 1,
1994. This plan is available to all employees who have one year of service
and have attained eighteen (18) years of age. Employees may make pre-tax
contributions not to exceed the maximum percentage allowed by the Internal
Revenue Service. The Bank may make matching contributions at its discretion.
The Bank made matching contributions in the amount of $85,000, $70,500 and
$69,800 for the years ended December 31, 1997, 1996, and 1995 respectively.
U. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
-------- ----------- ---------
<S> <C> <C> <C>
Interest paid during the year $ 4,487,377 $ 3,518,258 $2,718,481
=========== ============ ==========
Income taxes paid $ 86,560 $ -- $ --
=========== ============ ==========
Loans transferred to other real estate owned
during the year $ -- $ 614,042 $ 753,350
=========== ============ ==========
</TABLE>
21
<PAGE>
CAPITAL BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
V. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments were as follows
at December 31:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ------------------------------
Carrying Fair Carrying Fair
amount value amount value
----------------------------- ------------------------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $31,315,402 $31,315,402 $16,893,388 $16,893,388
Securities available-for-sale $27,443,174 $27,443,174 $18,849,158 $18,849,158
Securities held-to-maturity $ 500,000 $ 500,950 $ 3,500,064 $ 3,494,624
Loans, net of allowance and
unearned income $99,475,139 $99,804,486 $84,956,427 $85,542,224
Financial liabilities:
Non-interest bearing deposits $24,743,649 $24,743,649 $22,820,388 $22,820,388
Savings and NOW deposits $46,890,313 $46,890,313 $35,579,238 $35,579,238
Other time deposits $57,340,344 $57,463,880 $45,236,037 $45,342,574
</TABLE>
The carrying amounts in the preceding table are included in the 1997 and 1996
statements of condition under the applicable captions.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Bank to have
disposed of such items at December 31, 1997 and 1996, the estimated fair
values would necessarily have been achieved at those dates, since market
values may differ depending on various circumstances. As the majority of the
Bank's financial instruments lack an available trading market, significant
estimates, assumptions and present value calculations are required to
determine estimated fair value. The estimated fair values at December 31,
1997 and 1996 should not necessarily be considered to apply at subsequent
dates.
The Bank's remaining assets and liabilities, not considered financial
instruments, have not been valued differently than customary, historical cost
accounting. Also, non-financial instruments typically not recognized in the
financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the trained work force, customer goodwill,
and similar items.
W. SUBSEQUENT EVENT
During January 1998, the Board of Directors approved the closing of the Adams
Morgan branch located in Washington, D.C. The branch was damaged by fire in
February 1997 and management has determined that the closure will have
neither an adverse affect on the Bank nor impede the availability of
financial services in the community. In the process of closing the branch,
the Bank recorded a loss of $190,000, net of tax, or $.19 per share, which is
included in 1997 net income from operations.
22
<PAGE>
EXHIBIT E
Capital's Quarterly Report on Form 10-QSB
for the Period Ended June 30, 1998
<PAGE>
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
---------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
CAPITAL BANK, NATIONAL ASSOCIATION
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Rockville, MD 52-0989458
----------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or origination) Identification No.)
One Church Street, Rockville, MD 20850
----------------------------------------------------------------
(Address of principal executive offices)
(301) 279-8900
--------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 .
--- ---
As of June 30, 1998 there were 999,752 shares of the registrant's common stock
outstanding.
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM1.
Capital Bank, N.A.
STATEMENTS OF CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
- -------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 5,737,702 $ 4,515,491
Federal funds sold 25,400,000 26,800,000
- -------------------------------------------------------------------------------------------------
Total cash and cash equivalents 31,137,702 31,315,491
- -------------------------------------------------------------------------------------------------
Securities:
Available for sale: at market 28,495,368 27,443,174
Held to maturity: at cost (market value - $ 0 and $500,950) 0 500,000
- -------------------------------------------------------------------------------------------------
Total securities 28,495,368 27,943,174
- -------------------------------------------------------------------------------------------------
Loans 106,235,697 100,739,353
Less: Allowance for loan losses (1,010,213) (988,191)
Deferred fees and unearned income (279,299) (276,023)
- -------------------------------------------------------------------------------------------------
Loans, net 104,946,185 99,475,139
- -------------------------------------------------------------------------------------------------
Premises and equipment, net 1,244,214 1,312,070
Other real estate owned 115,336 105,351
Accrued interest and other assets 1,233,613 1,335,418
- -------------------------------------------------------------------------------------------------
Total Assets $ 167,172,418 $ 161,486,643
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Non-interest-bearing deposits $ 25,872,816 $ 24,743,649
Savings, NOW and Money Market deposits 44,892,820 46,890,313
Other time deposits 64,477,493 57,340,344
- -------------------------------------------------------------------------------------------------
Total deposits 135,243,129 128,974,306
- -------------------------------------------------------------------------------------------------
Customer repurchase agreements 18,133,003 19,664,110
Other short-term borrowed funds 886,756 1,248,700
Other liabilities 1,174,071 908,479
- -------------------------------------------------------------------------------------------------
Total liabilities 155,436,959 150,795,595
- -------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock - $6 par value
Authorized - 2,000,000 ;
Outstanding - 982,192 and 973,392 shares 5,998,512 5,840,352
Capital surplus 2,832,897 2,760,427
Retained earnings( accumulated deficit ) 2,881,896 2,059,889
Net unrealized gain (loss) on securities available-for-sale 22,154 30,380
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 11,735,459 10,691,048
- -------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 167,172,418 $ 161,486,643
=================================================================================================
</TABLE>
See notes to financial statements
2
<PAGE>
Capital Bank, N.A.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- ----------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 2,520,771 $ 2,265,334 $4,946,682 $4,453,448
Taxable securities 416,817 365,187 830,489 709,456
Tax-exempt loans 2,507 2,891 4,086 5,835
Federal funds sold 255,917 153,017 526,661 273,086
- ----------------------------------------------------------------------------------------------------------
Total interest income 3,196,012 2,786,428 6,307,918 5,441,826
- ----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings, NOW and Money Market deposits 357,153 302,245 722,250 565,147
Time deposits 804,481 686,867 1,559,230 1,271,417
Federal funds purchased and securities
sold under agreements to repurchase 190,661 138,254 407,407 300,793
Other borrowed funds 7,000 8,500 16,500 15,000
- ----------------------------------------------------------------------------------------------------------
Total interest expense 1,359,294 1,135,866 2,705,387 2,152,357
- ----------------------------------------------------------------------------------------------------------
Net interest income 1,836,718 1,650,562 3,602,531 3,289,469
Provision for loan losses 50,000 45,000 120,000 95,000
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,786,718 1,605,562 3,482,531 3,194,469
- ----------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposits 151,053 118,084 306,146 235,613
Fees on loans 56,910 66,397 109,199 110,987
Gain (loss) on sale of investment securities -- -- -- 1,964
Other operating income 10,948 10,498 29,765 21,199
- ----------------------------------------------------------------------------------------------------------
Total other income 218,910 194,980 445,109 369,764
- ----------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 655,364 601,435 1,296,008 1,208,276
Occupancy, net 191,783 202,831 387,169 415,344
Furniture & equipment 66,672 71,489 134,350 140,383
Advertising 3,739 18,344 18,770 36,521
Audits & examinations (437) 23,130 23,266 46,261
Courier 26,103 22,886 49,152 42,254
Security & protection 8,796 20,043 24,746 43,580
Data processing 102,063 93,432 214,872 190,741
Director fees 13,100 13,200 25,700 26,100
Travel 5,170 2,368 12,052 9,292
Stationary & supplies 21,634 26,081 44,565 47,505
Communications 19,768 13,177 37,356 25,390
Insurance 16,014 13,543 32,153 26,049
Other real estate, net 7,908 27,293 10,777 58,132
Other operating expenses 152,558 119,871 268,697 247,572
- ----------------------------------------------------------------------------------------------------------
Total other expenses 1,290,235 1,269,123 2,579,633 2,563,400
- ----------------------------------------------------------------------------------------------------------
Net income before income taxes 715,393 531,419 1,348,007 1,000,833
Provision (benefit) for Income taxes 279,000 214,000 526,000 400,000
- ----------------------------------------------------------------------------------------------------------
Net income $ 436,393 $ 317,419 $ 822,007 $ 600,833
==========================================================================================================
Income per common & common equivalent shares $ 0.43 $ 0.32 $ 0.82 $ 0.61
==========================================================================================================
Weighted average number of shares outstanding 1,003,040 992,725 1,003,041 992,443
==========================================================================================================
</TABLE>
See notes to financial statements
3
<PAGE>
Capital Bank, N.A.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
RETAINED GAIN (LOSS)
EARNINGS ON SECURITIES TOTAL
COMMON STOCK CAPITAL (ACCUMULATED AVAILABLE- STOCKHOLDERS'
SHARES AMOUNT SURPLUS DEFICIT) FOR-SALE* EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 971,117 $ 5,826,702 $ 2,748,765 $ 836,557 $ 44,940 $ 9,456,964
Issuance of common stock 2,275 13,650 11,662 -- -- 25,312
Net income -- -- -- 1,223,332 -- 1,223,332
Change in unrealized loss
on securities available-for-sale,
net of applicable deferred
income taxes -- -- -- -- (14,560) (14,560)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 973,392 5,840,352 2,760,427 2,059,889 30,380 10,691,048
Issuance of common stock 26,360 158,160 72,470 -- -- 230,630
Net income -- -- -- 822,007 -- 822,007
Change in unrealized gain
on securities available-for-sale,
net of applicable deferred
income taxes -- -- -- -- (8,226) (8,226)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 999,752 $ 5,998,512 $ 2,832,897 $ 2,881,896 $ 22,154 $ 11,735,459
==================================================================================================================================
</TABLE>
*net of applicable deferred income taxes
See notes to financial statements.
4
<PAGE>
Capital Bank, N.A.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
- -----------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 822,007 $ 600,833
Adjustments to reconcile net income to net
net cash provided by operating activities:
Provision for loan losses 120,000 95,000
Depreciation and amortization 167,295 181,961
Gain (loss) on sale of other real estate owned 0 (59,380)
Provision for losses on other real estate owned 0 39,536
Accrued interest and other assets 33,230 297,633
Other liabilities 265,592 31,981
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,408,124 1,187,563
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Maturities or prepayments of securities available-for-sale 6,500,000 3,992,500
Purchase of securities available-for-sale (7,592,835) (6,501,689)
Maturities of securities held-to-maturity 500,000 0
Net increase in loans (5,591,046) (7,357,295)
Purchase of premises and equipment (71,454) (148,601)
Proceeds from sale of other real estate owned 63,020 571,765
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (6,192,315) (9,443,321)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 6,268,823 15,868,940
Net decrease in customer repurchase agreements (1,531,107) (5,057,246)
Net decrease in other borrowed funds (361,944) 631,091
Sale of common stock 230,630 17,550
- -----------------------------------------------------------------------------------------------
Net cash used by financing activities 4,606,402 11,460,335
- -----------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (177,789) 3,204,577
Cash and cash equivalents at beginning
of the period 31,315,491 16,893,388
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 31,137,702 $ 20,097,965
===============================================================================================
Supplemental Disclosure:
Interest paid during the period $ 2,916,732 $ 2,131,751
===============================================================================================
</TABLE>
See notes to financial statements.
5
<PAGE>
Capital Bank, N.A.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
Note 1: Basis of Presentation
The Statements of Condition for Capital Bank, N.A. as of June 30, 1998 and
December 31, 1997, the Statements of Operations for the three and six months
ended June 30, 1998 and 1997, and the Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 included in Form 10- QSB have been prepared
by the Bank pursuant to the rules and regulations of the Comptroller of the
Currency. The Statements are unaudited except for the Statement of Condition as
of December 31, 1997.
The accounting policies followed for the interim reporting period are set forth
in Note 1 of the Bank's latest annual report on Form 10-KSB filed with the
Office of the Comptroller of the Currency.
In the opinion of management, the interim financial statements reflect all
adjustments (which include only recurring adjustments) necessary for a fair
presentation of the information contained therein. The interim results of
operations for the six months ending June 30, 1998 are not necessarily
indicative of the results which may be expected for the full year.
Note 2: Risk Elements - Loans
Nonaccruing loans aggregated $618,000 at June 30, 1998 compared with $968,000 at
June 30, 1997. Included in nonaccrual loans were commercial, real estate, and
consumer loans of $7,000, $550,000 and $61,000, respectively, at June 30, 1998,
as compared to $141,000, 827,000, and $0, respectively, at June 30, 1997.
Nonaccruing loans aggregated approximately 0.58% of loans outstanding as at June
30, 1998 as compared to 1.04% at June 30, 1997.
Loans 90 days or more past due at June 30, 1998 and June 30, 1997 still accruing
interest aggregated $3,000 or approximately 0.003% of loans outstanding for both
periods.
The Bank continues to receive payments on substantially all loans in non-accrual
status. Past due loans are reviewed regularly in connection with management's
review of the allowance for loan losses as it relates to the evaluation of
collateral and the prospects for repayment of principal and interest. Loans are
placed on nonaccrual status when management deems that collectibility of
principal or interest is doubtful. Generally, loans that are more than 90 days
past due are placed on nonaccrual status, unless they are well secured and in
the process of collection. Charge-offs to the allowance are made when a loss is
deemed probable.
6
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Capital Bank, N.A. (the "Bank") is a national bank with assets of $167.2 million
at June 30, 1998.
The following discussion focuses on information about the Bank's financial
condition and results of operations that may not be readily apparent from a
review of the financial statements. The discussion should be read in conjunction
with the financial statements and selected financial data presented elsewhere in
this report.
Financial Condition - June 30, 1998 vs. December 31, 1997
Assets
At June 30, 1998, total assets were $167.2 million compared to $161.5 million at
December 31, 1997. The $5.7 million increase in assets was primarily due to
increases of $5.4 million in net loans and $0.3 million in securities.
Liabilities
Total liabilities increased by $4.6 million primarily due to increases of $1.2
million in non-interest bearing demand accounts, $7.2 million in certificates of
deposit , offset by decreases in Savings, NOW and money market accounts of $2
million and customer repurchase accounts of $1.5 million.
Capital Resources
The Comptroller of the Currency utilizes guidelines in assessing the adequacy of
capital of national banks. These guidelines, which include the leverage ratio
and the risk-based capital ratios, are considered in regulators' examinations
and are reviewed periodically for potential adjustments based upon changes in
the economy, financial markets and banking practices.
The minimum leverage ratio (Tier One Capital to average quarterly total assets)
required by regulators is 4%, however, most institutions are expected to
maintain an excess of 1% to 2% above the minimum. The Bank has adopted a Capital
Plan, whereby a minimum leverage ratio of 5% will be maintained. At June 30,
1998, the Bank's leverage ratio was 7.32% compared to 7.38% at June 30, 1997.
Tier One and total risk-based capital ratios imposed on banks by regulators vary
according to a bank's risk profile. The Bank's internal capital policy requires
minimum Tier One and total risk- based capital ratios of 6% and 10%,
respectively. At June 30, 1998, the Bank's Tier One and total risk-based capital
ratios were 10.25% and 11.14%, respectively.
7
<PAGE>
In the opinion of management, these ratios are sufficient to protect depositors
and to facilitate future growth. The Bank's management continually reviews
capital adequacy. The various alternatives for generating equity from internal
and external sources are constantly under review to ascertain the most effective
approach for the Bank.
Liquidity and Asset/Liability Management
Liquidity represents the Bank's ability to support asset growth, meet customers
borrowing needs, fund deposit withdrawals and maintain reserve requirements. On
the asset side, the primary sources of liquidity are Federal funds sold,
investment securities and scheduled repayments on outstanding loans. On the
liability side, the principal source of liquidity is deposit growth.
The liquidity position is evaluated daily by management to maintain a level of
liquidity conducive to efficient operations. Attention is directed primarily to
assets or liabilities that mature or can be repriced within a period of 30 to
365 days. The Bank attempts to match a portion of its assets and liabilities in
order to minimize variability in net interest income. This practice also serves
to minimize both liquidity and interest rate risk. Prudent risks are taken,
however, by leaving certain assets and liabilities unmatched in an effort to
benefit from the interest rate sensitivity created.
The Bank accepts a certain portion of liabilities in the form of certificates of
deposit of $100,000 or more, customer repurchase agreements, and other
short-term borrowing. As of June 30, 1998, the Bank had $29,900,000 or 22.1% of
total deposits in time deposits in denominations of $100,000 or more,
$18,133,000 in customer repurchase agreements and $888,000 in Treasury Tax and
Loan note option funds which are classified as other short-term borrowings.
The liabilities previously discussed are classified as non-core funding sources,
as defined in A User's Guide for the Uniform Bank Performance Report. As of June
30, 1998, the Bank's non-core funding dependency ratio stood at 4.95%.
A portion of the Bank's time deposits come from deposit brokers (brokered
deposits). As of June 30, 1998, brokered deposits totaled $4,452,000, or 2.90%
of total deposits and repurchase accounts.
Results of Operations - Six Months Ended June 30, 1998 and 1997
The Bank recorded pre-tax income of $1,348,000 year-to-date compared to the
prior year of $1,001,000, an increase of $347,000.
The Bank recorded net income of $822,000 for the first half of 1998 compared to
net income of $601,000 during the same period in 1997. Significant differences
from prior year were:
o Net interest income was up by $313,000 as a result of the strong
growth in earning assets offsetting a decline in net interest margin.
The Bank's net interest margin decreased to 4.71% for the six months
ended June 30, 1998, as compared to 5.22% for the same period in
1997.
8
<PAGE>
o Non-interest expense increased only marginally by $17,000, as
increases in data processing and personnel expenses were offset by
reductions in occupancy expense and miscellaneous losses.
o Provision for loan losses increased by $25,000 from the prior year in
keeping with the continued growth in the loan portfolio.
o Provision for income taxes increased by $126,000 from 1997 in keeping
with the higher level of pre-tax income.
Impact of Inflation and Changing Prices
The impact of inflation on the Bank is reflected primarily in the increased
costs of operations. These increased costs are generally passed on to Bank
customers in the form of increased service fees. Since the primary assets and
liabilities of the Bank are monetary in nature, the impact of inflation on
interest rates has had, and is expected to continue to have, an effect on net
income.
In structuring fees, negotiating loan margins and developing customer
relationships, management concentrates its efforts on maximizing earnings
capacity while attempting to contain increases in operating expenses. In
addition, management continually reviews the feasibility of new and additional
fee-generating services to offset the effects of inflation and changing prices
with an objective of increased earnings.
9
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
INTEREST RATES AND INTEREST DIFFERENTIAL
(All Dollar Amounts In Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------------
1998 1997
---------------------------------- --------------------------------------
Average Average
Average Yield Average Yield
Balance Interest* or Rate* Balance Interest* or Rate*
------- --------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets:
Loans, net of unearned income $ 102,602 $ 4,847 9.53% $ 88,981 $ 4,336 9.83%
Tax-exempt loans 108 5 9.34% 122 6 9.92%
Total loans net of
unearned income 102,710 4,852 9.53% 89,103 4,342 9.83%
Securities:
Taxable 28,978 830 5.78% 23,939 710 5.98%
Federal funds sold 19,145 527 5.55% 10,080 273 5.46%
-------- ------ ------- -----
Net interest earning assets 150,833 6,209 8.30% 123,122 5,325 8.72%
-------- ----- ------- -----
Allowance for loan losses (1,042) (894)
Cash and due from banks 5,657 5,064
Premises and equipment, net 1,289 1,697
Other assets 2,395 3,278
-------- -------
Total assets $ 159,132 $132,267
======== =======
</TABLE>
*Loans in nonaccrual status, which have been reclassified as other assets, have
not been included in average balances for the purposes of computing average
yield or rate. Loan fees are not included in interest income.
10
<PAGE>
CAPITAL BANK, N.A.
SELECTED STATISTICAL INFORMATION
INTEREST RATES AND INTEREST DIFFERENTIAL
(All Dollar Amounts In Thousands)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------------
1998 1997
---------------------------------- --------------------------------------
Average Average
Average Yield Average Yield
Balance Interest* or Rate* Balance Interest* or Rate*
------- --------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
Deposits:
Savings, NOW and money market $ 46,173 723 3.16% $ 38,033 565 3.00%
Time 57,069 1,559 5.51% 47,284 1,271 5.42%
-------- ------- -------- ------
Total interest
bearing deposits 103,242 2,282 4.46% 85,317 1,836 4.34%
-------- ------- -------- ------
Customer repurchase agreements
and short-term borrowings 18,586 407 4.42% 13,557 301 4.48%
-------- ------- -------- ------
Total interest
bearing liabilities 121,828 2,689 4.45% 98,874 2,137 4.36%
-------- ------- -------- ------
Demand deposits 24,172 21,708
Other liabilities 1,954 1,979
Stockholders' equity 11,178 9,706
-------- --------
Total liabilities and
stockholders' equity $ 159,132 $ 132,267
======== ========
Net interest earnings/margin (as a
percent of interest earning assets) $ 3,520 4.71% $ 3,188 5.22%
======= ==== ====== =====
Utilization rate 94.78% 93.09%
===== =====
</TABLE>
* See previous page for explanation
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
At the present time, the Bank is not a party to any lawsuit or other legal
proceeding which is expected to have a material adverse effect on the financial
condition or results of operations of the Bank.
The Bank is not aware of any material proceedings to which any director, officer
or affiliate of the Bank or any owner of record or beneficiary of more than five
percent (5%) of securities of the Bank or any associate of any such director,
officer, affiliate of the Bank or security holder is a party, adverse to the
Bank.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 21, 1998 the Annual Meeting of Shareholders was convened at the main
office of Capital Bank, N.A. in Rockville, Maryland with a total of 840,479
shares of the Bank's stock represented in person or by proxy out of a total of
981,192 shares of common stock outstanding and 977,577 entitled to vote. The
following business was conducted at the meeting:
a. Election of Directors
The following nine individuals were elected to hold offices as Directors of the
Bank until the next Annual Meeting of Shareholders or until their successors
shall have been elected and shall have qualified:
<TABLE>
<CAPTION>
Shares Voted For
Directors Each Director
------------------------------ ------------------
<S> <C>
Stephen N. Ashman 840,479
Joshua B. Bernstein 840,479
Patricia Ghiglino 840,479
Javier J. Holtz 837,479
Jay E. Katzen 840,479
Robert J. Mozer 840,479
Steven J. Schwartz 840,479
George H. Walker 840,479
Frank E. Williams, Jr. 840,479
</TABLE>
There were no other items of business brought before the shareholders of Capital
Bank.
ITEM 5: OTHER INFORMATION
On June 23, 1998, FCNB Corp ("FCNB"), FCNB Bank (the "Bank"), and Capital Bank,
National Association ("Capital") entered into an Agreement and Plan of
Reorganization and Merger (the
12
<PAGE>
"Merger Agreement"), pursuant to which Capital will be acquired by FCNB. The
Board of Directors of Capital approved the Merger Agreement and the transactions
contemplated thereby at a meeting held on June 23, 1998.
In accordance with the terms of the Merger Agreement, FCNB will acquire Capital
pursuant to the merger (the "Merger") of Capital with and into the Bank, with
the Bank as the surviving entity resulting from the Merger.
Upon consummation of the Merger, each share of the $6.00 par value common stock
of Capital ("Capital Common Stock") (excluding shares of Capital Common Stock
held in treasury or by any Capital subsidiary, or as to which the holders have
perfected dissenters' rights in accordance with the National Bank Act) issued
and outstanding at the effective time of the Merger (the "Effective Time") shall
be converted into the number of shares (the "Conversion Ratio") of the common
stock, par value $1.00 per share, of FCNB ("FCNB Common Stock") determined by
dividing (i) forty dollars ($40.00) by (ii) the value of a share of FCNB Common
Stock as determined in accordance with the Merger Agreement, provided, however,
that except as provided in Section 8.1(h) of the Merger Agreement, in no event
shall the Conversion Ratio exceed 1.3932 shares of FCNB Common Stock for each
share of Capital Common Stock (the "Maximum Conversion Ratio") or be less than
1.1399 shares of FCNB Common Stock for each share of Capital Common Stock (the
"Minimum Conversion Ratio").
In addition, at the Effective Time, each incentive stock option to purchase or
acquire shares of Capital Common Stock granted by Capital under the Capital
stock plans, which are outstanding at the Effective Time shall be converted into
and become rights with respect to FCNB Common Stock on a basis that reflects the
Conversion Ratio. Each Capital incentive option held by an employee or officer
of Capital who will not be a continuing employee of the Bank following the
Effective Time and each stock option issued to Capital's directors outstanding
as of the Effective Time will be converted into the number of shares of FCNB
Common Stock as determined in accordance with the terms of the Merger Agreement.
The Merger is intended to constitute a tax-free transaction under the Internal
Revenue Code of 1986, as amended, and be accounted for as a pooling of
interests.
Consummation of the Merger is subject to various conditions including: (i)
receipt of the approval by the stockholders of Capital and FCNB of appropriate
matters relating to the Merger Agreement and the Merger required to be approved
under applicable law; (ii) receipt of certain federal and state regulatory
approvals; (iii) receipt of an opinion of counsel as to the tax-free nature of
certain aspects of the Merger; (iv) receipt of letters from the independent
accountants of FCNB to the effect that the Merger will qualify for pooling of
interests accounting treatment; and (v) satisfaction of certain other
conditions.
Under the Merger Agreement, Capital has the right to terminate the Merger
Agreement if, at the Closing Date, the value of FCNB Common Stock as determined
in accordance with the terms of the Merger Agreement is less than $23.93. In the
event that Capital gives notice of its intention to terminate the Merger
Agreement based on such provision, FCNB has the right, within five days of
FCNB's receipt of such notice, to elect to adjust the Conversion Ratio in
accordance with the terms of the Merger Agreement, and, thereby remove Capital's
right to terminate.
13
<PAGE>
In connection with executing the Merger Agreement, FCNB and Capital entered into
a stock option agreement (the "Stock Option Agreement") pursuant to which
Capital granted to FCNB an option to purchase up to 248,278 shares of Capital
Common Stock (representing 19.9% of the outstanding shares of Capital Common
Stock after giving effect to the exercise of the option), at a purchase price of
$35.00 per share, upon certain terms and in accordance with certain conditions.
The Merger Agreement and the Merger will be submitted for approval at separate
meetings of the stockholders of Capital and FCNB. FCNB will file a Registration
Statement with the Securities and Exchange Commission in connection with the
issuance of shares of FCNB Common Stock upon consummation of the Merger. In
connection with the stockholder meetings, FCNB and Capital will prepare and file
with the Securities and Exchange Commission and the Office of the Comptroller of
the Currency a joint proxy statement and mail such joint proxy statement to
their respective stockholders.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Agreement and Plan of Reorganization and Merger, dated as of June 23,
1998, by and among FCNB Corp, FCNB Bank, and Capital Bank, National
Association
Stock Option Agreement, dated as of June 23, 1998, by and between
FCNB Corp and Capital Bank, National Association
Text of press release, dated June 23, 1998, issued by Capital Bank,
National Association
(B) Reports filed on Form 8-K
The Bank did not file any reports on Form 8-K during the fiscal
quarter ended June 30, 1998.
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.
Capital Bank, N.A.
Date: August 6, 1998 By: /s/ MARILYN M. AYRES
--------------------------------
Marilyn M. Ayres
Senior Vice President and Cashier
(Principal Financial Officer)
14
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequential
Exhibit Page No.
- ------- --------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization and 16
Merger, dated as of June 23, 1998, by and among
FCNB Corp, FCNB Bank, and Capital Bank, National
Association
2.2 Stock Option Agreement, dated as of June 23, 57
1998, by and between FCNB Corp and
Capital Bank, National Association
99.1 Text of press release, dated June 23, 1998, issued 62
by Capital Bank, National Association
</TABLE>
15
EXHIBIT 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this
Registration Statement on Form S-4 of our report, dated January 23, 1998,
relating to the consolidated financial condition of FCNB Corp, which is
incorporated by reference in the annual report on Form 10-K of FCNB Corp for the
year ended December 31, 1997. We also hereby consent to the reference to our
Firm under the caption "Experts" in the Prospectus.
/s/ Keller Bruner & Company, L.L.C.
Frederick, Maryland
August 11, 1998
EXHIBIT 23(b)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use and incorporation by reference in this
Registration Statement on Form S-4 of our report, dated January 22, 1998,
relating to the consolidated financial condition of Capital Bank, National
Association, which is included in the annual report on Form 10-KSB of Capital
Bank, National Association for the year ended December 31, 1997, which is
included as part of the Prospectus. We also hereby consent to the reference to
our Firm under the caption "Experts" in the Prospectus.
/s/ Hoffman, Morrison & Fitzgerald, P.C.
Mclean, Virginia
August 11, 1998
EXHIBIT 99(a)
FRONT
REVOCABLE PROXY
CAPITAL BANK, NATIONAL ASSOCIATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CAPITAL BANK,
NATIONAL ASSOCIATION
The undersigned hereby makes, constitutes and appoints _______________ and
__________________ and each of them (with the power of substitution), proxies
for the undersigned to represent and to vote, as designated below, all shares of
common stock of Capital Bank, National Association (the "Bank") which the
undersigned would be entitled to vote if personally present at the Bank's
Special Meeting of Shareholders to be held on , 1998 and at any postponement or
adjournment thereof.
The proposal to approve and adopt the Agreement and Plan of Reorganization
and Merger pursuant to which the Bank will be merged with and into FCNB
Bank, and each outstanding share of the Bank's Common Stock will
automatically and without further action be converted into shares of FCNB
Corp Common Stock, as provided in the Agreement and Plan of Reorganization
and Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this proxy will
be voted FOR the proposal set forth above. In addition, this proxy will be voted
at the discretion of the persons named as proxy herein upon any other matter
properly brought before the Special Meeting or any adjournment or postponement
thereof. (over)
BACK
Important: Please date and sign your name(s) as addressed, and return this proxy
in the enclosed envelope. When signing as executor, administrator, trustee,
guardian, etc., please give full title as such. If the shareholder is a
corporation, the proxy should be signed in the full corporate name by a duly
authorized officer whose title is stated.
-------------------------------------
Signature of Shareholder
-------------------------------------
Signature of Shareholder
Dated: ________________________, 1998
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
[ ] Please check here if you plan to attend the Special Meeting.
EXHIBIT 99(b)
FRONT
REVOCABLE PROXY
FCNB CORP
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby makes, constitutes and appoints _________________ ,
______________________ and ____________________, and each of them (with the
power of substitution), proxies for the undersigned to represent and to vote, as
designated below, all shares of common stock of FCNB Corp (the "Company") which
the undersigned would be entitled to vote if personally present at the Company's
Special Meeting of Stockholders to be held on ________________, 1998 and at any
postponement or adjournment thereof.
The proposal to approve and adopt the Agreement and Plan of Reorganization
and Merger pursuant to which (i) Capital Bank, National Association will
be merged with and into FCNB Bank, and each outstanding share of Capital
Common Stock will automatically and without further action be converted
into shares of the Company's Common Stock, as provided in the Agreement
and Plan of Reorganization and Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted FOR the proposal set forth above. In addition, this proxy will be voted
at the discretion of the persons named as proxy herein upon any other matter
properly brought before the Special Meeting or any adjournment or postponement
thereof. (over)
BACK
Important: Please date and sign your name(s) as addressed, and return this proxy
in the enclosed envelope. When signing as executor, administrator, trustee,
guardian, etc., please give full title as such. If the stockholder is a
corporation, the proxy should be signed in the full corporate name by a duly
authorized officer whose title is stated.
-------------------------------------
Signature of Shareholder
-------------------------------------
Signature of Shareholder
Dated: ________________________, 1998
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
[ ] Please check here if you plan to attend the Special Meeting.
EXHIBIT 99(c)
[CAPITAL BANK LETTERHEAD]
___, 1998
Dear Shareholder:
We cordially invite you to attend a Special Meeting of the Shareholders of
Capital Bank, National Association ("Capital") to be held on , 1998 at : .m.,
local time, at . At the Special Meeting, shareholders will be asked to approve
the merger of Capital with and into and FCNB Bank (the "Merger"), the wholly
owned subsidiary of FCNB Corp, pursuant to an agreement dated June 23, 1998 (the
"Agreement"). FCNB Corp is a bank holding company which had total assets and
shareholders' equity of approximately $1.02 billion and $81 million,
respectively, as of June 30, 1998.
In connection with the Merger, each outstanding share of Capital common
stock will be converted into the number of shares of FCNB common stock
determined by dividing $40.00 by the value of a share of FCNB common stock as
determined under the Agreement, subject to certain adjustments that are
described in the enclosed Proxy Statement and Prospectus. The Agreement sets
forth a minimum conversion ratio of 1.5199 shares and a maximum conversion ratio
of 1.8576 shares of FCNB common stock for each share of Capital common stock. If
the value of a share of FCNB common stock as determined under the Agreement is
less than approximately $21.53 or greater than approximately $26.32, each share
of Capital common stock would be converted at the maximum or minimum conversion
ratio, as appropriate.
Your Board of Directors has unanimously approved the Merger and believes it
to be in the best interests of the shareholders of Capital. Capital has received
the opinion of Friedman, Billings, Ramsey & Company, Inc., its financial
advisor, that the terms of the Merger are fair, from a financial point of view,
to the shareholders of Capital.
Since the affirmative vote of at least two-thirds of the outstanding common
stock at the Special Meeting is required for approval of the Merger, it is
especially important that your shares be voted at the Meeting. Regardless of
whether you plan to attend the Special Meeting, please sign, date and mail the
enclosed proxy in the postage-prepaid envelope provided at your earliest
convenience.
Sincerely,
Stephen N. Ashman
EXHIBIT 99(d)
AGREEMENT
This Agreement, made as of this 23rd day of June, 1998, between FCNB Corp,
a Maryland corporation ("FCNB"), its wholly owed subsidiary, FCNB Bank, a
Maryland commercial bank (the "Bank") and each of the persons listed on Schedule
A attached hereto and made a part hereof (collectively the "Shareholders" and
individually, each a "Shareholder").
WHEREAS, FCNB, the Bank and Capital Bank, National Association, a national
banking association ("Capital"), have entered into an Agreement and Plan of
Reorganization and Merger dated as of the date hereof, (the "Merger Agreement"),
pursuant to which all of the outstanding shares of Capital Common Stock will be
exchanged for shares of FCNB Common Stock, in accordance with the terms of the
Merger Agreement; and
WHEREAS, the Shareholders collectively own, or possess the right to vote or
direct the voting of, an aggregate of 246,682 shares of Capital Common Stock,
and individually own, or possess the right to vote or direct the voting of, the
number of shares of Capital Common Stock set forth opposite their names on
Schedule A; and
WHEREAS, the Shareholders collectively own, or possess the power to dispose
of or to direct the disposition of 246,682 shares of Capital Common Stock, and
individually own, or possess the power to dispose of or direct the disposition
of, the number of shares of Capital Common Stock set forth opposite their names
on Schedule A; and
WHEREAS, the Shareholders collectively have the right to acquire 54,500
shares of Capital Common Stock pursuant to the exercise of options issued and
outstanding pursuant to the Capital Option Plans, and individually possess the
right to acquire pursuant to the exercise of options outstanding pursuant to the
Capital Option Plans, the number of shares of Capital Common Stock set forth
opposite their names on Schedule A; and
WHEREAS, as a material inducement for FCNB and the Bank to enter into the
Merger Agreement and consummate the transactions contemplated thereby, the
Shareholders have agreed to enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth herein and in the Merger Agreement, and intending to be
legally bound hereby, the parties agree as follows:
1. Representations and Warranties of Shareholders. Each of the Shareholders
individually represents and warrants as follows: That he is now, and at all
times until the Effective Time of the Merger will be, the owner, of record or
beneficially, or possesses and will possess the right to vote or direct the
voting of all of the shares of Capital Common Stock set forth opposite his name
on Schedule A, and possesses or will possess the power to dispose of or direct
the disposition of all of the shares of Capital Common Stock set forth opposite
his name on Schedule A. Shareholder has, and through the Effective Time will
continue to have, the sole right and power to vote and/or dispose of, or to
direct the voting or disposition of all of the shares of Capital Common Stock
set forth opposite his name on Schedule A. Shareholder has full right, power and
authority to enter into, deliver and perform this Agreement. This Agreement has
been duly executed and delivered by Shareholder, and constitutes the legal,
valid and binding obligation of Shareholder, and is enforceable in accordance
with its terms.
2. Covenants of Shareholders. (a) Each Shareholder agrees that he shall
vote all of his shares of Capital Common Stock in favor of the Merger Agreement
and the transactions contemplated thereby and against any merger, consolidation,
share exchange, business combination, sale of all or substantially all assets,
or other extraordinary corporate transaction involving Capital other than the
Merger. Each Shareholder also agrees that, except as provided in Section 5.1(k),
Section 5.3 or Section 6.17 of the Merger Agreement, until the termination of
the Merger Agreement in accordance with its terms, he shall use his best efforts
to cause the consummation of the Merger.
(b) Each Shareholder agrees that until the termination of the Merger Agreement
in accordance with its terms, he shall not, without the prior written consent of
FCNB, directly or indirectly tender or permit the tender into any
<PAGE>
tender or exchange offer, or sell, transfer, hypothecate, grant a security
interest in or otherwise dispose of or encumber any of his shares of Capital
Common Stock, or any options to acquire Capital Common Stock issued and
outstanding pursuant to the Capital Option Plans.
(c) Each Shareholder agrees that until the termination of the Merger Agreement
in accordance with its terms, he shall not, without the prior written consent of
FCNB, directly or indirectly exercise any of his Capital Options to acquire
shares of Capital Common Stock, except that any Shareholder may exercise any
Capital Incentive Option prior to the Effective Time if he shall determine in
consultation with FCNB that treatment of such Capital Incentive Options in
accordance with the provisions of Section 2.1 of the Merger Agreement will
subject such Shareholder to recognition of gain or income (for purposes other
than alternative minimum tax) in respect of all or any portion of such Capital
Incentive Options or the shares of FCNB Common Stock received in exchange
therefore.
(d) Each Shareholder agrees that he shall not, and he shall not authorize,
direct, induce, or encourage any other person, including but not limited to any
holder of Capital Common Stock, or any officer, employee or director of Capital
to, solicit from any third party any inquiries or proposals relating to the
disposition of Capital's business or assets, or the acquisition of Capital's
voting securities, or the merger of Capital with any person other than FCNB or
the Bank, or except as provided in Section 5.1(k) or Section 6.17 of the Merger
Agreement, provide any such person with information or assistance or negotiate
or conduct any discussions with any such person in furtherance of such inquiries
or to obtain a proposal.
3. Additional Shares and Options. Notwithstanding anything to the contrary
contained herein, this Agreement shall apply to all shares of Capital Common
Stock which a Shareholder currently has the sole right and power to vote and/or
dispose of, or to direct the voting or disposition of, and all such shares of
Capital Common Stock which any Shareholder may hereafter acquire, and all
Capital Options which any Shareholder may currently own or hereafter acquire.
4. Termination. This Agreement shall terminate upon the termination of the
Merger Agreement in accordance with its terms.
5. Governing Law. This Agreement shall be governed in all respects by the
law of the State of Maryland.
6. Assignment. This Agreement may not be assigned by any Shareholder
without the prior written consent of FCNB and the Bank. This Agreement may not
be assigned by FCNB or the Bank without the written consent of the Shareholders.
7. Scope of Agreement. The parties hereto acknowledge and agree that
Agreement shall not confer upon FCNB any right or ability to acquire any of the
shares of Capital Common Stock other than in connection with the Merger and
pursuant to the Registration Statement contemplated by the Merger Agreement.
8. Defined Terms. Capitalized terms used and not defined herein and defined
in the Merger Agreement shall have the meaning ascribed to them in the Merger
Agreement.
<PAGE>
9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original, and all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day first above written.
FCNB CORP
By:
----------------------------
A. Patrick Linton, President
& Chief Executive Officer
_________________________ ________________________
_________________________ ________________________
_________________________ ________________________
_________________________ ________________________
_________________________ ________________________
_________________________ ________________________
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Common Stock Owned or Common Stock Owned or
Which Have the Right to Which Have the Power to Options to Acquire
Name Vote or Direct Voting Dispose or Direct Disposition Common Stock
- --------------- --------------------- ----------------------------- ---------------------
<S> <C> <C> <C>
Stephen N. Ashman 87,684 87,684 14,000
Joshua Bernstein 22,000 22,000 3,500
Patricia Ghiglino 979 979 5,500
Javier Holtz 6,889 6,889 7,500
Jay Katzen 25,241 25,241 3,500
Robert Mozer 7,800 7,800 5,500
Steven Schwartz 25,517 25,517 0
George Walker 9,656 9,656 7,500
Frank Williams, Jr. 60,916 60,916 7,500
Total 246,682 246,682 54,500
</TABLE>
Exhibit 99(e)
[FCNB LETTERHEAD]
Dear Fellow Shareholders:
You are cordially invited to attend a Special Meeting of FCNB Corp
Shareholders, at which you will be requested to consider and vote upon a
proposal to approve the Agreement and Plan of Reorganization and Merger among
FCNB Corp, FCNB Bank and Capital Bank, National Association. The meeting will be
held at ______________________________ on_____________________________
The merger of Capital into FCNB Bank will boost FCNB Corp's assets by
approximately $170 million, propelling total assets close to the $1.2 billion
mark, and will open new and strong markets to FCNB Corp in Montgomery County,
Northern Virginia and the District of Columbia. The Board of Directors believes
that this is a very positive development for FCNB Corp, one which reinforces the
Corp's long range market expansion plans.
If approved, the merger will, based upon the number of shares of Capital
currently outstanding and subject to issuance upon the exercise of options,
result in the issuance of between 1,626,068 and 1,987,357 shares of FCNB 21
common stock to former shareholders of Capital. Details of the proposed merger
are set forth in the accompanying Proxy Statement, which you are urged to read
carefully in its entirety. Approval of the merger requires the affirmative vote
of at least two-thirds of the outstanding shares of FCNB Corp common stock.
The Board of Directors of FCNB Corp has unanimously approved the merger
with Capital Bank, National Association. Accordingly, the Board of Directors
unanimously recommends that you vote to APPROVE the merger.
We look forward to seeing you at the Special Meeting of FCNB Corp
Shareholders. However, if you are unable to attend, please sign and return the
proxy card, to ensure that your shares will be included in the vote.
Sincerely,
A. Patrick Linton
President
and Chief Executive Officer
EXHIBIT 99(f)
This Agreement, made as of this 23rd day of June, 1998, by and among FCNB
Corp, a Maryland corporation ("FCNB"), FCNB Bank, a Maryland chartered
commercial Bank and the wholly owned subsidiary of FCNB (the "Bank"), and
_______________ a director (a "Director") of Capital Bank, National Association
("Capital").
WHEREAS, FCNB, the Bank and Capital have entered into an Agreement and Plan
of Reorganization and Merger, of even date herewith (the "Merger Agreement"),
pursuant to which Capital will be merged with and into the Bank, and each share
of Capital Common Stock will be converted into shares of FCNB Common Stock as
set forth in the Merger Agreement; and
WHEREAS, as a condition of FCNB's and the Bank's obligations under the
Merger Agreement and as a material inducement to FCNB and the Bank to enter into
the Merger Agreement, FCNB has requested that the members of the Board of
Directors of Capital agree, and the Director desires to agree, to certain
restrictions on their respective ability to compete with FCNB and the Bank
following consummation of the Merger; and
WHEREAS, FCNB, the Bank and the Director desire to enter into this
Agreement to set forth the duration, scope and other terms and conditions of
such limitations;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein and in the Merger Agreement, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. From and after the Effective Time until June 30, 2000 (the "Covenant
Period"), the Director shall not, directly or indirectly, engage or participate
in the ownership, management, operation, control or financing of, or otherwise
be connected with or have any interest in, whether as organizer, director,
advisory director, officer, employee, consultant, partner, contractor,
stockholder (other than as a holder of less than 3% of the capital stock of a
financial institution reporting under the Securities Exchange Act of 1934), or
otherwise, of any financial institution competitive with that of FCNB or the
Bank which has a branch or loan production office (or in the case of financial
institutions other than banking (including thrift) institutions, an office) in
the District of Columbia, the counties of Montgomery, Prince George's and
Frederick in Maryland, the counties of Arlington, Fairfax and Loudoun in
Virginia and the Cities of Fairfax and Alexandria in Virginia (the "Designated
Area"), including but not limited to any entity engaged in, or which controls
any entity engaged in, retail banking services, commercial banking services,
deposit production, loan production or commercial lending services and mortgage
banking services. Notwithstanding the foregoing (i) the provisions of this
Section 1 shall not apply to any relationship of the types described, which the
Director has with any institution other than Capital as of the date hereof, (ii)
the provisions of this Section 1 shall not apply any employee or officer
relationship which the Director has or commences with any institution other than
Capital or FCNB after the date hereof or after the consummation of the Merger,
provided that the Director's position with such other institution would not
involve responsibilities or relate to activities of such other institution
within the Designated Area during the Covenant Period, and (iii) the provisions
of this Section 1 do not apply to advisory relationships with a financial
institution which the Director may have as of the date hereof or may hereafter
have, solely in the capacity as legal counsel or independent public accountant.
2. During the Covenant Period, the Director shall not, directly or
indirectly, disclose or use, or authorize any person or entity to disclose or
use, any confidential or nonpublic information relating to FCNB of which such
Director is aware or to which such Director has access, as a result of such
Director's service on the Board of Directors or as an officer of Capital,
including but not limited to information regarding the customers, products,
manners of business and product development, or employees of Capital or FCNB
(whether or not any of the foregoing is novel or known by any other person);
provided however, that this restriction shall not apply to the disclosure of
confidential information (i) to any governmental entity to the extent required
by law, or (ii) which is publicly known and available through no wrongful act of
such Director or any affiliate of such Director.
3. During the Covenant Period, the Director shall not, directly or
indirectly, for on behalf of such
<PAGE>
Director or any other person or entity, call upon, accept banking business from
or solicit the banking business of any person or entity who was a customer of
Capital as of the date hereof or at the Effective Time.
4. During the Covenant Period, the Director shall not, directly or
indirectly, for on behalf of such Director or any other person or entity,
initiate any offer of employment to or hiring process with respect to, or in any
manner solicit the services, or hire any person who was an employee of Capital
at the date hereof or at the Effective Time.
5. In the event of a breach or violation of this Agreement by the Director,
the running of the Covenant Period shall be tolled during the continuance of
such breach or violation, and the Covenant Period shall be extended by the
period of time for which such breach or violation was continuing.
6. The parties hereto agree that the subject matter of this Agreement is
unique and that the damages accruing to the parties hereto as a result of a
breach hereof are not readily subject to calculation, and that the failure of
any party to perform hereunder will result in irreparable damage to the other
parties, and that specific performance of the obligations of the parties hereto
is an appropriate and authorized remedy for a breach hereof.
7. This Agreement constitutes the entire agreement among the parties with
respect to the subject matter hereof, superseding all prior understandings and
agreements, written and oral.
8. This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland.
9. Any illegality, invalidity or unenforceability of any provision hereof
in any jurisdiction shall not invalidate or render illegal or unenforceable in
such jurisdiction the remaining provisions hereof and shall not invalidate or
render illegal or unenforceable such provision in any other jurisdiction. In the
event that the scope or duration of any provision hereof shall be found to be
unenforceable in any jurisdiction, then such provision shall be interpreted to
provide for the broadest scope or longest duration which would be enforceable in
such jurisdiction.
10. Capitalized terms used and not defined herein and defined in the Merger
Agreement shall have the meaning ascribed to them in the Merger Agreement.
11. This Agreement may be executed in one or more counterparts, each of
which shall be an original, and all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day first above written.
FCNB CORP
By:
------------------------------------
A. Patrick Linton, President
& Chief Executive Officer
----------------------------------------
EXHIBIT 99(g)
This Agreement, made as of this 23rd day of June, 1998, by and among FCNB
Corp, a Maryland corporation ("FCNB"), and Stephen N. Ashman, an individual
resident in the District of Columbia ("Ashman").
WHEREAS, Ashman is the currently serving President and Chief Executive
Officer of Capital Bank, National Association ("Capital"); and
WHEREAS, FCNB, its wholly owned subsidiary FCNB Bank (the "Bank") and
Capital have entered into an Agreement and Plan of Reorganization and Merger, of
even date herewith (the "Merger Agreement"), pursuant to which Capital will be
merged with and into the Bank, and each share of Capital Common Stock will be
converted into shares of FCNB Common Stock as set forth in the Merger Agreement;
and
WHEREAS, as a condition of FCNB's and the Bank's obligations under the
Merger Agreement and as a material inducement to FCNB and the Bank to enter into
the Merger Agreement, FCNB has requested that Ashman agree to the termination of
his existing employment agreement with Capital, originally entered into on
November 5, 1991, and as amended to date (the "Employment Agreement"), effective
as of the Effective Time of the Merger; and
WHEREAS, FCNB, the Bank and Ashman desire to enter into this Agreement to
effect the termination of such Employment Agreement and to set forth the amounts
which Ashman shall be entitled to receive in severance and other compensation
and benefits following the Effective Time,
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein and in the Merger Agreement, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. At the Effective Time, the Employment Agreement shall be terminated and
of no further force or effect, and Ashman shall have no further rights or
obligations thereunder except with respect to the payment of Base Salary for the
period ending at the Effective Time, neither FCNB nor the Bank shall have any
rights or obligations thereunder.
2. (a) FCNB agrees that at the Effective Time it shall pay Ashman, or shall
cause the Bank to pay Ashman, a lump sum payment equal to that portion of
Ashman's base salary, at a rate of $175,000 per year, which would have been
payable during the period from the Effective Time until December 31, 1998. If
the Effective Time shall not occur during 1998, Ashman shall not be entitled to
any payment under this subsection (a).
(b) FCNB agrees that during the first week of January 1999 it shall pay Ashman,
or shall cause the Bank to pay Ashman, a lump sum payment of $185,000, provided,
however, that if the Effective Time shall not occur prior to January 1, 1999,
then, in lieu of such payment, the FCNB shall pay Ashman of shall cause the Bank
to pay Ashman, a lump sum payment equal to that portion of Ashman's base salary,
at a rate of $185,000 per year, which would have been payable during the period
from the Effective Time until December 31, 1999.
(c) FCNB agrees that at the time of payment of the amount set forth in
subsection (b) above, it shall pay Ashman, or shall cause the Bank to pay
Ashman, a lump sum payment equal to the product of $500 multiplied by the number
of months beginning the month after the month in which the Effective Time occurs
through December 1999, plus $10,000.
<PAGE>
3. FCNB agrees that it shall pay Ashman, or shall cause the Bank to pay
Ashman, additional bonus compensation as follows:
Amount Time Payable
- --------------------------------- -------------------------------------
$141,000 First week of January 1999
$50,000 First week of January 2000
4. FCNB agrees that it shall pay Ashman, or cause the Bank to pay Ashman,
change in control severance compensation in the amount of $100,000, payable
during the first week of January 2000.
5. All compensation payable to Ashman pursuant to this Agreement shall be
subject to deduction and withholding of all necessary Social Security, income
and withholding taxes and any other sums required by law or authorized by
Ashman.
6. FCNB agrees that it shall cause Ashman to be provided with coverage
under all of the FCNB welfare benefit plans, including but not limited to life,
health, dental, vision and long term disability insurance (not its 401(k) or
pension or retirement programs or plans, or cash, stock or option incentive
plans), from the Effective Time until December 31, 1999, to the same extent as
if he were a senior executive officer of FCNB.
7. Ashman shall have no obligation hereunder to perform any services for
FCNB or the Bank in order to receive the compensation and benefits set forth
herein.
8. Ashman's rights hereunder to receive the payments set forth in Section 4
hereof shall terminate in the event of a material breach of the provisions of
the agreement of even date herewith, among FCNB, the Bank and Ashman in his
capacity as a director of Capital, with respect to Ashman's activities in
competition with FCNB and the Bank (the "Non-Compete"). Upon any such material
breach, neither FCNB nor the Bank shall be required to make such payment if it
is due at or subsequent to the date of such breach. Ashman shall have no
obligation to disgorge any payment made under Section 4 as a result of any
subsequent breach of the Non-Compete. Ashman's obligations with respect to
activities in competition with FCNB and the Bank shall be governed solely by the
Non-Compete. Nothing contained herein shall be construed as a limitation on or
waiver of, any remedies, at law or equity, which FCNB or the Bank may have under
the Non-Compete.
9. This Agreement constitutes the entire agreement among the parties with
respect to the subject matter hereto, superseding all prior understandings and
agreements, written and oral.
10. This Agreement shall be governed by and construed in accordance with
the laws of the State of Maryland.
11. Any illegality, invalidity or unenforceability of any provision hereof
in any jurisdiction shall not invalidate or render illegal or unenforceable in
such jurisdiction the remaining provisions hereof and shall not invalidate or
render illegal or unenforceable such provision in any other jurisdiction. In the
event that the scope or duration of any provision hereof shall be found to be
unenforceable in any jurisdiction, then such provision shall be interpreted to
provide for the broadest scope or longest duration which would be enforceable in
such jurisdiction.
12. Capitalized terms used and not defined herein and defined in the Merger
Agreement shall have the meaning ascribed to them in the Merger Agreement.
<PAGE>
13. This Agreement may be executed in one or more counterparts, each of
which shall be an original, and all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day first above written.
FCNB CORP
By:
------------------------------------
A. Patrick Linton, President
& Chief Executive Officer
----------------------------------------
Stephen N. Ashman
