SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended Commission file number
September 30, 1998 0-15645
FCNB Corp
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 52-1479635
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
7200 FCNB COURT, FREDERICK, MARYLAND 21703
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (301)662-2191
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $1 par value per share, 7,818,216 shares outstanding as of October
31, 1998.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FCNB CORP AND SUBSIDIARY
<TABLE>
<CAPTION>
- --------------------------------------------------------------- ------------------------- --------------------------
Consolidated Balance Sheets (Unaudited) (Unaudited)
(dollars in thousands, except per share amounts) September 30, 1998 December 31, 1997
- --------------------------------------------------------------- ------------------------- --------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 28,051 $ 27,329
Interest-bearing deposits in other banks 559 755
Federal funds sold 25,401 14,231
- --------------------------------------------------------------- ----------- -----------
Cash and cash equivalents 54,011 42,315
- --------------------------------------------------------------- ----------- -----------
Loans held for sale 3,627 909
Investment securities held to maturity at amortized
cost-fair value of $31,500 in 1998 and $48,729 in 1997 30,986 48,389
Investment securities available for sale-at fair value 320,458 202,850
- --------------------------------------------------------------- ----------- -----------
Loans 596,465 574,205
Less: Allowance for credit losses (5,977) (5,713)
Unearned income (31) (100)
- --------------------------------------------------------------- ----------- -----------
Net loans 590,457 568,392
- --------------------------------------------------------------- ----------- -----------
Bank premises and equipment 23,313 22,705
Other assets 50,840 32,524
- --------------------------------------------------------------- ----------- -----------
Total assets $ 1,073,692 $ 918,084
=============================================================== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 94,603 $ 85,902
Interest-bearing deposits 608,247 530,610
- --------------------------------------------------------------- ----------- -----------
Total deposits 702,850 616,512
- --------------------------------------------------------------- ----------- -----------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 51,971 65,163
Other short-term borrowings 187,134 152,138
Long-term debt:
Guaranteed preferred beneficial interests in the
Company's subordinated debentures 40,250 --
Accrued interest and other liabilities 8,515 6,753
- --------------------------------------------------------------- ----------- -----------
Total liabilities 990,720 840,566
- --------------------------------------------------------------- ----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, per share par value $1.00;
1,000,000 shares authorized; none outstanding -- --
Common stock, per share par value $1.00;
20,000,000 shares authorized: 7,901,411
shares in 1998 and 5,912,284 shares in 1997
issued and outstanding 7,901 5,912
Capital surplus 41,619 43,398
Retained earnings 28,685 24,792
Accumulated other comprehensive income 4,767 3,416
- --------------------------------------------------------------- ----------- -----------
Total shareholders' equity 82,972 77,518
- --------------------------------------------------------------- ----------- -----------
Total liabilities and shareholders' equity $ 1,073,692 $ 918,084
=============================================================== =========== ===========
</TABLE>
2
<PAGE>
FCNB CORP AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------- --------------------------- --------------------------------
For the 3 months ended For the 9 months ended
- ----------------------------------------------------------------------- ------------- ------------- ---------------- ---------------
September 30, September 30, September 30, September 30,
(dollars in thousands, except per share amounts) 1998 1997 1998 1997
- ----------------------------------------------------------------------- ------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 13,332 $ 12,477 $ 39,097 $ 35,658
Interest and dividends on investment securities:
Taxable 4,485 3,486 12,113 9,692
Tax exempt 88 90 233 274
Dividends 258 151 731 441
Interest on federal funds sold 231 70 455 319
Other interest income 12 8 42 79
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Total interest income 18,406 16,282 52,671 46,463
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 6,471 5,586 18,113 16,334
Interest on federal funds purchased and securities
sold under agreements to repurchase 299 673 1,473 1,894
Interest on other short-term borrowings 2,403 1,891 7,082 4,264
Interest on long-term debt 679 -- 679 --
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Total interest expense 9,852 8,150 27,347 22,492
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Net interest income 8,554 8,132 25,324 23,971
Provision for credit losses 350 452 800 914
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Net interest income after provision for credit losses 8,204 7,680 24,524 23,057
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Noninterest income:
Service fees 980 742 2,522 2,084
Net securities gains 268 214 581 358
Gain on sale of loans 209 63 541 299
Other operating income 1,065 644 2,681 1,667
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Total noninterest income 2,522 1,663 6,325 4,408
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Noninterest expenses:
Salaries and employee benefits 3,909 3,230 11,093 9,467
Occupancy expenses 841 656 2,133 1,800
Equipment expenses 692 518 1,907 1,519
Merger-related expenses 57 -- 110 460
Other operating expenses 1,828 1,412 5,193 4,652
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Total noninterest expenses 7,327 5,816 20,436 17,898
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Income before provision for income taxes 3,399 3,527 10,413 9,567
Income tax expense 1,065 1,160 3,279 3,143
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Net income 2,334 2,367 7,134 6,424
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Other comprehensive income, net of tax:Unrealized gains (losses) on
securities:
Unrealized holding gains (losses) arising
during period 820 1,687 1,709 2,460
Less: reclassification adjustment for gain
(losses) included in net income, net of taxes of
$104, $79, $223 and $133, respectively 164 135 358 225
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Other comprehensive income 656 1,552 1,351 2,235
- ---------------------------------------------------------------------- ---------- ---------- ---------- ----------
Comprehensive income $ 2,990 $ 3,919 $ 8,485 $ 8,659
====================================================================== ========== ========== ========== ==========
Net income - before merger-related expenses $ 2,374 $ 2,367 $ 7,208 $ 6,709
====================================================================== ========== ========== ========== ==========
Basic earnings per share (Note2) $ 0.30 $ 0.30 $ 0.90 $ 0.82
====================================================================== ========== ========== ========== ==========
Diluted earnings per share (Note2) $ 0.29 $ 0.30 $ 0.90 $ 0.81
====================================================================== ========== ========== ========== ==========
Basic earnings per share before merger-related expenses (Note2) $ 0.30 $ 0.30 $ 0.91 $ 0.85
====================================================================== ========== ========== ========== ==========
Diluted earnings per share before merger-related expenses (Note 2) $ 0.30 $ 0.30 $ 0.91 $ 0.85
====================================================================== ========== ========== ========== ==========
Basic weighted-average number of shares outstanding (Note2) 7,897,510 7,880,271 7,890,283 7,868,507
====================================================================== ========== ========== ========== ==========
Diluted weighted-average number of shares outstanding (Note2) 7,954,689 7,923,501 7,946,251 7,909,476
====================================================================== ========== ========== ========== ==========
</TABLE>
3
<PAGE>
FCNB CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 1998 and 1997
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<CAPTION>
- --------------------------------------------------------------------------------- -------------------- --------------
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------- -------------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,134 $ 6,424
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,646 1,192
Provision for credit losses 800 914
Provision for foreclosed properties 50 9
Deferred income taxes (benefits) (19) (91)
Net premium amortization (discount accretion) on investment securities (132) (63)
Accretion of net loan origination fees (828) (522)
Net securities gains (581) (358)
Net gain (loss) on sale of foreclosed properties 34 4
Net gain (loss) on dispositions of bank premises and equipment 29 --
Decrease (increase) in other assets (5,124) (4,291)
Decrease (increase) in loans held for sale (1) (2,718) 2,647
Increase (decrease) in accrued interest and other liabilities 1,762 487
- --------------------------------------------------------------------------------- --------- ---------
Net cash provided by operating activities 2,053 6,352
- --------------------------------------------------------------------------------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities - available for sale 15,882 54,032
Proceeds from maturities of investment securities - available for sale 94,031 42,984
Proceeds from maturities of investment securities - held to maturity 9,053 6,860
Purchases of investment securities - held to maturity (2,070) (21,031)
Purchases of investment securities - available for sale (214,179) (110,947)
Net decrease (increase) in loans (22,213) (63,781)
Purchases of bank premises and equipment (2,131) (1,413)
Proceeds from dispositions of bank premises and equipment 1 --
Purchase of foreclosed properties (27) (183)
Proceeds from dispositions of foreclosed properties 974 66
Purchase of investments in bank-owned life insurance (15,000) (13,500)
- --------------------------------------------------------------------------------- --------- ---------
Net cash (used in) investing activities (135,679) (106,913)
- --------------------------------------------------------------------------------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits, NOW accounts,
money market account and savings accounts 60,977 (10,956)
Net increase (decrease) in time deposits 25,361 27,306
Net increase (decrease) in short-term borrowings 21,804 92,027
Proceeds from long-term debt 40,250 --
Proceeds from sale of stock 163 226
Repurchase of common stock -- (213)
Dividend reinvestment plan (38) (8)
Dividends paid (3,195) (2,468)
- --------------------------------------------------------------------------------- --------- ---------
Net cash provided by financing activities 145,322 105,914
- --------------------------------------------------------------------------------- --------- ---------
Increase (decrease) in cash and cash equivalents 11,696 5,353
Cash and cash equivalents:
Beginning of period 42,315 44,526
================================================================================= ========= =========
End of period $ 54,011 $ 49,879
================================================================================= ========= =========
</TABLE>
(CONTINUED)
4
<PAGE>
FCNB CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited) continued For the nine months
ended September 30, 1998 and 1997
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<CAPTION>
(dollars in thousands) 1998 1997
==================================================================== ================= ================
<S> <C> <C>
Supplemental disclosures
Interest paid $25,925 $21,843
==================================================================== ================= ================
Income taxes paid $4,830 $2,980
==================================================================== ================= ================
Supplemental schedule of noncash investing and financing activities:
Foreclosed properties acquired in settlement of loans $176 $224
Seller financed disposition of property $725 --
==================================================================== ================= ================
</TABLE>
(1) Loans held for sale are generally held for periods of ninety days or less.
FCNB CORP AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - The accompanying unaudited consolidated financial statements for FCNB
Corp (the "Company") have been prepared in accordance with the instructions for
Form 10-Q and, therefore, do not include all information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial statements have been prepared utilizing the interim basis
of reporting and, as such, reflect all adjustments which are normal and
recurring in nature and are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented.
Note 2 - Stock dividend: The September 30, 1997 data has been adjusted for the
33% stock dividend effected in the form of a four-for-three stock split declared
in July 1998, and paid in August 1998 and for the 10% stock dividend declared
and paid in October 1997.
Note 3 - Acquisitions: In June 1998, the Company assumed $44.8 million of
deposit liabilities, and purchased $126,000 of loans, $849,000 of fixed assets,
and recorded $2.3 million of intangible assets, relating to four branches of
First Virginia Bank-Maryland located in Gaithersburg, Germantown, Poolesville
and Silver Spring, Maryland, and three branches of its sister bank, Farmers'
Bank of Maryland, located in Catonsville, Pikesville and Reisterstown, Maryland.
On June 23, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Agreement") with Capital Bank, National
Association, Rockville, Maryland ("Capital"), pursuant to which Capital would be
merged (the "Merger") with and into FCNB Bank, Frederick, Maryland, the
Company's wholly owned subsidiary bank (the "Bank"), with the Bank surviving the
Merger. The Merger is intended to be a tax-free exchange of shares, in
connection with which, each share of Capital common stock will be converted into
shares of FCNB Common Stock having a value, determined in accordance with the
Agreement, of $40.00, subject to adjustment in certain circumstances as set
forth in the Agreement. In connection with the Merger Agreement, Capital has
granted the Company an option to acquire up to 248,278, or up to 19.9 percent of
the outstanding shares of Capital common stock, under certain circumstances.
The Company anticipates that it will issue approximately 1,780,000 shares, as
adjusted for the stock split discussed above, in connection with the
transaction, subject to adjustment, for an aggregate deal value of approximately
$42 million. At September 30, 1998, Capital had total assets of approximately
$172.07 million, deposits of $139.94 million, and total shareholders' equity of
$12.28 million. It is anticipated that the merger will be accounted for as a
pooling of interests. The Company anticipates that it will incur pretax one-time
charges of approximately $1.75 million upon consummation of the merger. The
consummation of the merger remains subject to the satisfaction of a number of
other conditions. The Company currently anticipates that the merger would be
consummated in the fourth quarter of 1998. This transaction was approved by the
shareholders of Capital at its shareholders meeting on October 15, 1998. The
Company's shareholders approved this transaction at its shareholders meeting on
November 4, 1998.
5
<PAGE>
On September 2, 1998, the Company announced that it has signed a definitive
agreement to acquire Frederick Underwriters, Inc. headquartered in Frederick,
Maryland and its affiliated agencies - Phillips Insurance Agency, Inc. and
Carroll County Insurance Agency, Inc. The Company will exchange approximately
413,000 shares of its common stock for shares of the agencies in a tax-free
transaction, which is anticipated to be accounted for as a pooling of interest.
With 1997 revenues approaching $6 million, Frederick Underwriters, Inc. is one
of the largest independent insurance agencies in the state of Maryland. The
transaction is subject to shareholder and regulatory approvals and is expected
to close in the first quarter of 1999.
Note 4 - Investments: Using the criteria specified in Statement 115, the Company
classifies its investments in debt and equity securities at September 30, 1998
and December 31, 1997 into two categories: held-to-maturity and
available-for-sale.
Securities classified as held-to-maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed using the interest method over their contractual
lives.
Securities classified as available-for-sale are equity securities with readily
determinable fair values and those debt securities that the Company intends to
hold for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at fair value with any unrealized gains or losses included in
accumulated other comprehensive income, a component of shareholders' equity, net
of the related deferred tax effect.
As of September 30, 1998, the gross unrealized losses in the Company's
investment portfolio were $55,000 in the held-to-maturity investment portfolio
and $783,000 in the available-for-sale investment portfolio compared to $212,000
and $234,000, respectively, as of December 31, 1997. As of September 30, 1998,
the gross unrealized gains in the Company's investment portfolio were $569,000
in the held-to-maturity investment portfolio and $8.49 million in the
available-for-sale investment portfolio compared to $552,000 and $5.75 million,
respectively, as of December 31, 1997. Since the Company's held-to-maturity
investment portfolio includes fixed rate investment securities that have below
current market interest rates, the future operating results of the Company would
be negatively impacted in an increasing rate environment. This reduction in net
interest income would result because the cost of funding the Company's
operations increases, while the income earned on the held-to-maturity portfolio
remains constant.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at September 30, 1998 are as follows:
HELD-TO-MATURITY PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------ -------------- -------------- -------------- --------------
Gross Gross
September 30, 1998 Amortized Unrealized Unrealized Estimated
(dollars in thousands) Cost Gains Losses Fair Value
- ------------------------------------------------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U. S. Treasury and other U.S. government
agencies and corporations $16,010 $153 $ -- $16,163
State and political subdivisions 5,836 342 12 6,166
Mortgage-backed debt securities 9,140 74 43 9,171
- ------------------------------------------------------ -------------- -------------- -------------- --------------
$30,986 $569 $55 $31,500
- ------------------------------------------------------ -------------- -------------- -------------- --------------
</TABLE>
The amortized cost and estimated fair value of securities classified as
available-for-sale at September 30, 1998 are as follows:
AVAILABLE-FOR-SALE-PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------ -------------- -------------- -------------- --------------
Gross Gross
September 30, 1998 Amortized Unrealized Unrealized Estimated
(dollars in thousands) Cost Gains Losses Fair Value
- ------------------------------------------------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U. S. Treasury and other U.S. government agencies
and corporations $131,059 $ 1,618 $ 2 $ 132,675
Mortgage-backed debt securities 114,393 1,739 190 115,942
Corporate bonds 41,275 821 223 41,873
Equity securities 26,022 4,314 368 29,968
- ------------------------------------------------------ -------------- -------------- -------------- --------------
$312,749 $8,492 $783 $320,458
- ------------------------------------------------------ -------------- -------------- -------------- --------------
</TABLE>
6
<PAGE>
The gross realized gains on securities sold from the available-for-sale
portfolio for the first nine months of 1998 and 1997 are $621,000 and $545,000,
respectively. The gross realized losses on securities sold from the
available-for-sale portfolio for the same periods are $40,000 and $187,000
respectively.
The amortized cost and estimated fair value of securities classified as
held-to-maturity and available-for-sale at September 30, 1998 summarized by
contractual maturity are as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
- ---------------------------------------- ----------------- ---------------- ----------------- ----------------
September 30, 1998 Amortized Cost Estimated Fair Amortized Cost Estimated Fair
(dollars in thousands) Value Value
- ---------------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 10,904 $11,015 $5,006 $ 5,066
Due after one through five years 8,371 8,725 103,213 98,750
Due after five through ten years 1,286 1,314 52,782 59,310
Due after ten years 1,285 1,275 11,333 11,422
Mortgage-backed debt securities 9,140 9,171 114,393 115,942
Equity securities -- -- 26,022 29,968
- ---------------------------------------- ----------------- ---------------- ----------------- ----------------
$30,986 $31,500 $312,749 $320,458
======================================== ================= ================ ================= ================
</TABLE>
Actual maturities may differ from the contractual maturities reflected in the
preceding table because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Mortgage-backed securities
have no stated maturity and primarily reflect investments in various
Pass-through and Participation Certificates issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation,
respectively. Repayment of mortgage-backed securities is dependent on the
contractual repayment terms of the underlying mortgages collateralizing these
obligations and the current level of interest rates.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at December 31, 1997 are as follows:
HELD-TO-MATURITY PORTFOLIO
<TABLE>
<CAPTION>
- ---------------------------------------------- ------------- --------------- ---------------- -----------------
December 31, 1997
- ---------------------------------------------- ------------- --------------- ---------------- -----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $25,523 $15 $29 $25,509
State and political subdivisions 3,690 387 - 4,077
Mortgage-backed debt securities 19,176 150 183 19,143
- ---------------------------------------------- ------------- --------------- ---------------- -----------------
$48,389 $552 $212 $48,729
============================================== ============= =============== ================ =================
</TABLE>
The amortized cost and estimated fair value of securities available-for-sale at
December 31, 1997 are as follows:
AVAILABLE-FOR-SALE-PORTFOLIO
<TABLE>
<CAPTION>
- ---------------------------------------------- ------------- --------------- ---------------- -----------------
December 31, 1997
- ---------------------------------------------- ------------- --------------- ---------------- -----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
------------- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $ 69,713 $ 570 $ 10 $70,273
Mortgage-backed debt securities 93,063 1,532 216 94,379
Corporate bonds 15,074 238 3 15,309
Equity securities 19,482 3,412 5 22,889
============================================== ============= =============== ================ =================
$197,332 $5,752 $234 $202,850
============================================== ============= =============== ================ =================
</TABLE>
7
<PAGE>
Note 5 - Long-term debt: On July 20, 1998, FCNB Capital Trust, a newly-formed
subsidiary of the Company, issued 1,610,000 of its 8.25% Cumulative Trust
Preferred Securities (the "Preferred Securities") in an underwritten public
offering for an aggregate price of $40.25 million. Proceeds of the Preferred
Securities were invested in the 8.25% Subordinated Debentures (the "Subordinated
Debentures") of the Company. After deducting underwriter's compensation and
other expenses of the offering, the net proceeds were available to the Company
to increase capital and for general corporate purposes, including use in
investment activities and the Bank's lending activities.
The Preferred Securities and the Subordinated Debentures each mature on July 31,
2028. If certain conditions are met, the maturity dates of the Preferred
Securities and the subordinated Debentures may be shortened to a date not
earlier than July 31, 2003. The Preferred Securities and Subordinated Debentures
also may be redeemed prior to maturity if certain events occur. The Preferred
Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Subordinated Debentures at maturity or their Subordinated
Debentures, which would result in a deferral of dividend payments on the
Preferred Securities, at any time or from time to time for a period not to
exceed 20 consecutive quarters in a deferral period.
The Company and FCNB Capital Trust believe that, taken together, the obligations
of the Company under the Preferred Securities Guarantee Agreement, the Amended
and Restated Trust Agreement, the Subordinated Debentures, the Indenture and the
Agreement As To Expenses and Liabilities, entered into in connection with the
offering of the Preferred Securities and the Subordinated Debentures, in the
aggregate constitute a full and unconditional guarantee by the Company of the
obligations of FCNB Capital Trust under the Preferred Securities.
FCNB Capital Trust is a Delaware business trust created for the purpose of
issuing the Preferred Securities and purchasing the Subordinated Debentures,
which are its sole assets. The Company owns all of the 49,800 outstanding common
securities, liquidation value $25 per share, (the "Common Securities") of FCNB
Capital Trust.
The Preferred Securities meet the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Preferred
Securities and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital. At September 30, 1998, $24.26 million of the Preferred
Securities were included in Tier I Capital.
For accounting purposes, the Preferred Securities are presented on the
Consolidated Balance Sheets as a separate category of long-term debt entitled
"Guaranteed Preferred Beneficial Interests in the Company's Subordinated
Debentures".
Note 6 - Per share amounts: On December 31, 1997, the Company adopted FASB
Statement No. 128, "Earnings per Share." Statement 128 establishes standards for
computing and presenting earnings per share ("EPS") that simplify the standards
previously followed in Accounting Principals Board Opinion No. 15. It replaces
the former presentation of primary EPS with a presentation of basic EPS and,
where applicable, requires the dual presentation of basic and diluted EPS on the
face of the income statement. Basic EPS is generally computed by dividing net
income by the weighted-average number of common shares outstanding for the
period, whereas diluted EPS essentially reflects the potential dilution in basic
EPS that could occur if other contracts to issue common stock were exercised.
Per share amounts are based on the weighted-average number of shares outstanding
during each year as follows:
<TABLE>
<CAPTION>
For the 3 months ended For the 9 months ended
September 30 SEPTEMBER 30
- --------------------------------------------------------- ------------- ------------- ------------- -------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic EPS weighted-average shares outstanding 7,897,510 7,880,271 7,890,283 7,868,507
Effect of dilutive securities - stock options 57,179 43,230 55,968 40,969
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Diluted EPS weighted-average shares outstanding 7,954,689 7,923,501 7,946,251 7,909,476
========================================================= ============= ============= ============= ============-
</TABLE>
The September 30, 1997 data has been adjusted for the 33% stock dividend
effected in the form of a four-for-three stock split declared in July 1998 and
for the 10% stock dividend declared in October 1997.
Note 7 - Risk management instruments: Interest rate swaps used to achieve
interest rate risk management objectives are accounted for in a manner
consistent with the accounting basis of the related asset or liability. An
instrument designated to hedge an asset or liability carried at historical cost
is accounted for on an accrual basis, whereby the interest income or expense of
the related asset or liability is adjusted for the net amount of any interest
receivable or payable generated by the hedging instrument during the reporting
period. For such instruments, no amounts other than any accrued interest
receivable or payable are included in the accompanying consolidated balance
sheets.
8
<PAGE>
Interest rate swaps involve the exchange of payments between counterparties
based on the interest differential between a fixed and a variable interest rate
applied to a notional balance. Under accrual accounting, this interest
differential is recognized as an adjustment to the interest income or expense of
the related asset or liability in the accompanying statements of income.
Upon early termination of derivative instruments accounted for under the accrual
method, the net proceeds received or paid are deferred, if material, in the
accompanying consolidated balance sheets and amortized to the interest income or
expense of the related asset or liability over the lesser of the remaining
contractual life of the instrument or the maturity of the related asset or
liability. At September 30, 1998 and December 31, 1997, there were no deferred
gains or losses in the accompanying consolidated balance sheets arising from the
termination of instruments qualifying for accrual accounting prior to maturity.
Note 8 - Comprehensive income: On January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
Comprehensive income, as defined by Statement 130, is the change in equity of a
business enterprise during a reporting period from transactions and other events
and circumstances from non-owner sources. In addition to an enterprise's net
income, change in equity components under comprehensive income reporting would
also include such items as the net change in unrealized gain or loss on
available-for-sale securities and foreign currency translation adjustments.
Statement 130 requires disclosure of comprehensive income and its components
with the same prominence as the Company's other financial statements.
Note 9 - Recent accounting pronouncements: In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In management's opinion, the adoption of
this Statement will not have a material impact on the financial position or the
results of operations of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
This section of the report contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to the Company's beliefs, expectations, anticipations and
plans regarding, among other things, general economic trends, interest rates,
product expansions and other matters. Such statements are subject to numerous
uncertainties, such as federal monetary policy, inflation, employment,
profitability and consumer confidence levels, both nationally and in the
Company's market area, the health of the real estate and construction market in
the Company's market area, the Company's ability to develop and market new
products and to enter new markets, competitive challenges in the Company's
market, legislative changes and other factors, and as such, there can be no
assurance that future events will develop in accordance with the forward looking
statements contained herein. Additionally, the Company's future financial
performance may be adversely impacted by the inability of the Company 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 form current Y2K
compliance plans include increased costs of achieving Y2K Compliance, delayed
timeframes for implementing and testing Y2K compliance measures, and delays by
the Company's vendors in becoming Y2K Compliant, or the inability of such
vendors to become Y2K Compliant prior to January 1, 2000. Additionally, the
Company's performance may be adversely affected by the failure of its customers
or governmental authorities to become Y2K Compliant prior to January 1, 2000.
Because of these uncertainties and the assumptions on which statements in this
document are based, actual future results may differ materially from those
contemplated by such statements.
In June 1998, the Company assumed $44.8 million of deposit liabilities, and
purchased $126,000 of loans, $849,000 of fixed assets, and recorded $2.3 million
of intangible assets, relating to four branches of First Virginia Bank-Maryland
located in Gaithersburg, Germantown, Poolesville and Silver Spring, Maryland,
and three branches of its sister bank, Farmers' Bank of Maryland, located in
Catonsville, Pikesville and Reisterstown, Maryland.
On June 23, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Agreement") with Capital Bank, National
Association, Rockville, Maryland ("Capital"), pursuant to which Capital would be
merged (the "Merger") with and into FCNB Bank, Frederick, Maryland, the
Company's wholly owned subsidiary bank (the "Bank"), with the Bank surviving the
Merger. The Merger is intended to be a tax-free exchange of shares, in
connection with which, each
9
<PAGE>
share of Capital common stock will be converted into shares of FCNB Common Stock
having a value, determined in accordance with the Agreement, of $40.00, subject
to adjustment in certain circumstances as set forth in the Agreement. In
connection with the Merger Agreement, Capital has granted the Company an option
to acquire up to 248,278, or up to 19.9 percent of the outstanding shares of
Capital common stock, under certain circumstances.
The Company anticipates that it will issue approximately 1,780,000 shares, as
adjusted for the stock split discussed above, in connection with the
transaction, subject to adjustment, for an aggregate deal value of approximately
$42 million. At September 30, 1998, Capital had total assets of approximately
$172.07 million, deposits of $139.94 million, and total shareholders' equity of
$12.28 million. It is anticipated that the merger will be accounted for as a
pooling of interests. The Company anticipates that it will incur pretax one-time
charges of approximately $1.75 million upon consummation of the merger. The
consummation of the merger remains subject to the satisfaction of a number of
other conditions. The Company currently anticipates that the merger would be
consummated in the fourth quarter of 1998. This transaction was approved by the
shareholders of Capital at its shareholders meeting on October 15, 1998. The
Company's shareholders approved this transaction at its shareholders meeting on
November 4, 1998.
On July 20, 1998, the Company 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, the Company issued $40.25 million
of its 8.25% subordinated debentures, due July 31, 2028, to FCNB Capital Trust.
On September 2, 1998, the Company announced that it has signed a definitive
agreement to acquire Frederick Underwriters, Inc. headquartered in Frederick,
Maryland and its affiliated agencies - Phillips Insurance Agency, Inc. and
Carroll County Insurance Agency, Inc. The Company will exchange approximately
413,000 shares of its common stock for shares of the agencies in a tax-free
transaction, which is anticipated to be accounted for as a pooling of interest.
With 1997 revenues approaching $6 million, Frederick Underwriters, Inc. is one
of the largest independent insurance agencies in the state of Maryland. The
transaction is subject to shareholder and regulatory approvals and is expected
to close in the first quarter of 1999.
The following discussion and related financial data for the Company provides an
overview of the financial condition and results of operations of the Company and
its wholly-owned subsidiary, which is presented on a consolidated basis. The
principal subsidiary of the Company is FCNB Bank. For the first nine months, the
Company reported earnings of $7.13 million in 1998 and $6.42 million in 1997.
However, net income before specific one-time merger related costs ("core
earnings") was $7.21 million in 1998 compared to $6.71 million for the same
period in 1997. For the third quarter the Company had core earnings of $2.37
million and reported earnings of $2.33 million in 1998, and in 1997 had core and
reported earnings of $2.37 million.
Return on average assets and return on average equity are key measures of
earnings performance. Return on average assets measures the ability of a bank to
utilize its assets in generating income. Annualized return on average assets for
the nine months ended September 30, 1998 was 1.01% for reported earnings and
1.02% on earnings before specific one-time merger-related costs compared to
annualized rates of 1.05% and 1.10%, respectively, for the nine months ended
September 30, 1997. The annualized return on average shareholders' equity, which
measures the income earned on the capital invested, for the nine months ended
September 30, 1998 was 12.03% for reported earnings and 12.16% on earnings
before specific one-time merger-related costs compared to annualized rates of
12.12% and 12.66%, respectively, for the nine months ended September 30, 1997.
Annualized return on average assets for the quarter ended September 30, 1998 was
0.94% for reported earnings and 0.96% on earnings before specific one-time
merger-related costs compared to annualized rates of 1.11% and 1.11%,
respectively, for the same period in 1997. The annualized return on average
shareholders' equity for the nine months ended September 30, 1998 was 11.66% for
reported earnings and 11.86% on earnings before specific one-time merger-related
costs compared to annualized rates of 12.94% and 12.94%, respectively, for the
same period in 1997.
The Company 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 the Company will be
able to grow, or if it does that any such growth or expansion will result in an
increase in the Company's earnings, dividends, book value or market value of its
securities.
10
<PAGE>
NET INTEREST INCOME
Net interest income represents the Company's gross profit from lending and
investment activities, and is the most significant component of the Company's
earnings. Net interest income is the difference between interest and related fee
income on earning assets (primarily loans and investment securities) and the
cost of funds (primarily deposits and short-term borrowings) supporting them. To
facilitate the analysis of net interest income, the table on page 16 is
presented on a taxable equivalent basis to adjust for the tax-exempt status of
certain loans and investment securities. This adjustment, based on the statutory
federal income tax rate of 35%, increases the tax-exempt income to an amount
representing an estimate of what would have been earned if that income were
fully taxable.
Taxable equivalent net interest income for the first nine months of 1998 totaled
$25.44 million, increasing 5.32% from the $24.15 million recorded for the same
period in 1997. The Company's average interest-earning assets increased 15.3% to
$865.73 million from September 30, 1997. This increase was primarily funded with
a 16.5% increase in the Company's average interest-bearing liabilities.
For the third quarter, the taxable equivalent net interest income increased by
$334,000 (4.1%) to $8.54 million in 1998 from the same period in 1997.
The Company's net interest margin (taxable equivalent net interest income as a
percent of average interest-earning assets) was 3.92% and 4.29% for the first
nine months of 1998 and 1997, respectively. The net interest margin is impacted
by the change in the spread between yields on earning assets and rates paid on
interest-bearing liabilities. This spread decreased by 35 basis points in the
first nine months of 1998 when compared to the same period in the prior year.
The yield on earning assets dropped to 8.13% from 8.28%, while the rates paid on
interest-bearing liabilities increased by 20 basis points to 4.70%.
For the third quarter of 1998 the net interest margin was 3.74% compared to
4.17% in 1997. The spread during the period decreased by 43 basis points which
was primarily caused by an increase in rates paid on interest-bearing
liabilities and a decrease in the yields earned on the loan and investment
portfolios. The yield on earning assets dropped by 25 basis points to 8.07%,
while the rates paid on interest-bearing liabilities increased by 18 basis
points to 4.84%.
The rate of interest earned on interest-earning assets and the rate paid on
interest-bearing liabilities, while significantly affected by the actions taken
by the Federal Reserve to control economic growth, are influenced by competitive
factors within the Company's market. Competitive pressures during early 1998 and
late 1997 for both loans and the funding sources needed to satisfy loan demand
within the Company's market area caused its net interest spread to narrow. The
management of the Company feels that the competitive pressures in this market
will cause the net interest spread to continue to be under pressure during 1998.
Therefore, the Company is currently pursuing operating efficiencies through
improved technology and is evaluating new products and services in an effort to
enhance its level of noninterest income. There can be no assurance that these
benefits will be realized.
11
<PAGE>
MARKET RISK
The Company employs computer model simulations to monitor its interest rate
sensitivity. Interest rate risk ("IRR") management has various sources and it is
not simply the risk from rates rising and falling. In fact, there are four
sources of IRR: repricing risk, basis risk, yield curve risk and option risk.
Gap modeling only focuses on repricing risk. Income simulations that incorporate
cash flow analyses: (1) measure the size and direction of interest rate exposure
under a variety of interest rate and yield curve shape scenarios; (2) provide
the opportunity to capture all critical elements such as volume, maturity dates,
repricing dates, prepayment volumes and hidden options such as caps, floors,
puts and calls; (3) utilize data to clearly focus attention on critical
variables; (4) are dynamic; and (5) reflect changes in prevailing interest rates
which affect different assets and liabilities in different ways. These
simulations are run on a monthly basis using a ramped technique to determine the
effects on the Company's net income and the Market Value of Portfolio Equity
("MVPE"), assuming an immediate increase or decrease in interest rates. The MVPE
simulation is the process of generating multiple forecasts for future interest
rate scenarios and then discounting the estimated cash flows anticipated under
those scenarios. The MVPE is the estimated economic value of the Company based
on the net difference between the value of the interest-earning assets ("IEA")
and the value of the interest bearing liability ("IBL"), using the current
characteristics of each. Some factors that influence the value of the IEA and
the IBL are the rate, maturity, repricing frequency and prepayment options. The
Company has an interest rate risk management policy that limits the amount of
deterioration in net interest income, associated with an assumed interest rate
shock of +/-100, +/-200 and +/-300 basis points change in interest rates, to no
more than 7.5% (+/-100), 10.0% (+/-200) and 12.5% (+/-300) of net interest
income, respectively. The model results as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Change in Interest Rate Assumption
- --------------------------------------------- -------------------------------------------------------------------------
(dollars in thousands) +100 bp +200 bp +300 bp -100 bp -200 bp -300 bp
- --------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income - increase (decrease) $(869) $ (2,043) $ (2,755) $ 763 $1,452 $1,733
- --------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
Net interest income - % change -2.52% -5.93% -7.99% 2.21% 4.21% 5.03%
- --------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
MVPE - increase (decrease) $(7,031) $(19,740) $(29,676) $ 2,826 $ 5,766 $8,775
- --------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
MVPE - % change -7.19% -20.19% -30.35% 2.89% 5.90% 8.97%
- --------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
</TABLE>
NONINTEREST INCOME
Noninterest income increased $1.92 million (43.5%) for the nine months ended
September 30, 1998, when compared to the same period in 1997. This increase was
partially attributable to the increase in service fee income of $438,000, which
was due to an increase in the volume of deposit accounts maintained. Security
gains increased in 1998 to $581,000 from the $358,000 realized in 1997. The
increase in other operating income of $1.01 million includes approximately
$824,000 attributable to the Company's bank-owned life insurance program that
generates tax-exempt income to partially offset the cost of employee benefit
programs.
For the third quarter of 1998, noninterest income increased $859,000. This
increase was primarily caused by the $311,000 increase in income generated from
the bank-owned life insurance program, $54,000 of additional securities gains
and $146,000 of additional gains on the sale of loans.
The Company is adding new products and services to strengthen the ratio of
noninterest income to total revenue to mitigate the effect of its decreasing net
interest spread. Some of these products are fee-based and, accordingly, the
income from these products is less sensitive to fluctuations in the level of
interest rates. The Company offers asset management and trust services and in
December, 1997, the Company began to offer Financial Planning and Investment
Services. This new division will offer customers comprehensive financial
planning as well as investment and insurance products. The Company has also
negotiated the purchase of Frederick Underwriters Inc., discussed in the
"Overview" section above, to increase its noninterest income and to expand its
revenue sources.
The Company's management is committed to developing and offering innovative,
market-driven products and services that will generate additional sources of
noninterest income. However, the future results of any of these products or
services cannot be predicted at this time.
12
<PAGE>
NONINTEREST EXPENSES
Noninterest expenses, excluding merger-related expenses, increased $2.89 million
(16.6%) for the first nine months of 1998, when compared to the first nine
months of 1997.
Total salaries and employee benefits increased $1.63 million (17.2%) over the
first nine months of 1997. The increase in salaries and employee benefits
reflects general merit and cost-of-living adjustments, plus the additional
staffing of the Financial Planning and Investment Services Division in December,
1997, and the acquisition of seven branches from First Virginia Bank in June
1998. Additional increased health care costs and pension expenses are the
primary causes for the remaining portion of this increase.
Occupancy expenses increased $333,000 (18.5%) and equipment expenses increased
$388,000 (25.5%) over the first nine months of 1997. The increase in occupancy
expenses is primarily related to additional depreciation expense on the
facilities and increased utility costs. The increase in equipment expenses is
primarily associated with the additional depreciation expense incurred as a
result of implementing new technology.
Other operating expenses increased $541,000 (11.6%) compared to the same period
for 1997.
For the third quarter of 1998, salaries and benefits increased $679,000 (21.0%),
occupancy expenses increased $185,000 (28.2%), equipment expenses increased
$174,000 (33.6%), and other operating expenses increased $416,000 (29.5%). The
increase in salaries and benefits costs is primarily related to the increased
number of employees, which increased to 416 from 357 as of September 30, 1997.
The increase in the number of employees includes approximately 33 employees
related to the acquisition of the seven branches from First Virginia as
discussed in the "Overview Section."
INCOME TAXES
The Company's effective tax rates for the first nine months of 1998 and 1997
were 31.5% and 32.9%, respectively, and were 31.3% and 32.9%, for the third
quarter of 1998 and 1997, respectively. The Company's income tax expense differs
from the amount computed at statutory rates primarily due to the tax-exempt
earnings from certain loans, investment securities and the bank-owned life
insurance program. Additionally, the Company derives income tax benefits from a
subsidiary located in the state of Delaware that holds and manages a portion of
its investment portfolio.
ALLOWANCE FOR CREDIT LOSSES AND PROBLEM ASSETS
The Company follows the guidance of Statement of Financial Accounting Standards
No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan" as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." It requires that impaired loans within
its scope be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable market
price, or the fair value of the collateral if the loan is collateral dependent.
SFAS 114 excludes smaller balance and homogeneous loans from impairment
reporting. Therefore, the Company has designated consumer, credit card and
residential mortgage loans to be excluded for this purpose. From the remaining
loan portfolio, loans rated as doubtful or worse, classified as nonaccrual, and
troubled debt restructurings are considered to be impaired. Loans are placed on
nonaccrual when a loan is specifically determined to be impaired or when
principal or interest is delinquent for 90 days or more. Any unpaid interest
previously accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received. Up to this
point, the Company considers slow payment on a loan, to only be a minimum delay.
The Company has identified commercial real estate and commercial and industrial
type loans as the major risk classifications to be used in the application of
SFAS 114.
13
<PAGE>
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
September 30, 1998 1997
- -------------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Impaired loans with specific allocation of allowance for credit losses $2,778 $925
Specific allocation of allowance for credit losses 1,088 242
Other impaired loans 1,963 695
Average recorded investment in impaired loans 4,783 1,682
Interest income recognized on impaired loans based on cash payments received 78 24
====================================================================================== ========= ==========
</TABLE>
Additional information concerning the Company's recorded investment in
nonaccrual loans, for which impairment had not been recognized are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
September 30, 1998 1997
- -------------------------------------------------------------------------------------- -------- -------
<S> <C> <C>
Nonaccrual loans 452 971
Interest income not recognized due to loans in nonaccrual status 6 20
====================================================================================== ======== =======
</TABLE>
The Company maintains its allowance for credit losses at a level deemed
sufficient to provide for estimated potential losses in the credit extension
process. Management reviews the adequacy of the allowance each quarter,
considering factors such as current and future economic conditions and their
anticipated impact on specific borrowers and industry groups, the growth and
composition of the loan portfolio, the level of classified and problem assets,
historical loss experience, and the collectability of specific loans. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows.
The provision for credit losses is charged to income in an amount necessary to
maintain the allowance at the level management believes is appropriate.
<TABLE>
<CAPTION>
- ------------------------------------------------------ ------------------------ ----------------
SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------------ ------------ ----------- ----------------
1998 1997 1997
- ------------------------------------------------------ ------------ ----------- ----------------
<S> <C> <C> <C>
Allowance for credit losses $5,977 $5,360 $5,713
====================================================== ============ =========== ================
% of total loans net of unearned income 1.00% .95% 1.00%
====================================================== ============ =========== ================
Nonaccrual loans 5,235 $2,590 $3,637
Past due loans 4,759 1,040 982
- ------------------------------------------------------ ------------ ----------- ----------------
Nonperforming loans 9,994 3,630 4,619
Foreclosed properties 1,951 3,160 3,496
- ------------------------------------------------------ ------------ ----------- ----------------
Nonperforming assets $11,945 $6,790 $8,115
====================================================== ============ =========== ================
Allowance for credit losses to nonperforming loans 59.8% 147.6% 123.7%
====================================================== ============ =========== ================
Nonperforming assets to total assets 1.11% .76% .88%
====================================================== ============ =========== ================
</TABLE>
14
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------- --------------------- ----------------------
Nine months
ended Year ended
September 30, 1998 December 31, 1997
- ---------------------------------------------------------------- --------------------- ----------------------
Average total loans outstanding during period $582,539 $535,921
- ---------------------------------------------------------------- --------------------- ----------------------
Allowance at beginning of year $5,713 $5,123
- ---------------------------------------------------------------- --------------------- ----------------------
Charge-offs:
Real estate - construction 82 588
Real estate - mortgage 58 12
Commercial and agricultural 98 306
Consumer 540 288
- ---------------------------------------------------------------- --------------------- ----------------------
Total charge-offs 778 1,194
- ---------------------------------------------------------------- --------------------- ----------------------
Recoveries:
Real estate - construction 33 24
Real estate - mortgage 11 4
Commercial and agricultural 33 369
Consumer 165 58
- ---------------------------------------------------------------- --------------------- ----------------------
Total recoveries 242 455
- ---------------------------------------------------------------- --------------------- ----------------------
Net charge-offs (recoveries) 536 739
- ---------------------------------------------------------------- --------------------- ----------------------
Additions to allowance charged to operating expenses 800 1,329
- ---------------------------------------------------------------- --------------------- ----------------------
Allowance at end of period $5,977 $5,713
================================================================ ===================== ======================
Ratio of net charge-offs to average total loans 0.09% 0.14%
================================================================ ===================== ======================
</TABLE>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
- --------------------------------------------------- -------------- -------- ------------- --------------
September December
30, 31,
1998 %(1) 1997 %(1)
- --------------------------------------------------- -------------- -------- ------------- --------------
<S> <C> <C> <C> <C>
Real estate - construction $ 777 18% $ 557 14%
Real estate - mortgage 3,097 61% 2,703 65%
Commercial and agricultural 1,157 11% 993 11%
Consumer 242 10% 380 10%
Unallocated 704 - 1,080 -
- --------------------------------------------------- -------------- -------- ------------- --------------
Total Allowance $5,977 100% $5,713 100%
=================================================== -------------- -------- ------------- ==============
</TABLE>
(1) Percent of loans in each category to total loans, net of unearned income.
The Company makes real estate-construction, real estate-mortgage, commercial and
agricultural, and consumer loans. The real estate-construction loans are
generally secured by the construction project financed, and have a term of one
year or less. The real estate-mortgage loans are generally secured by the
property with a maximum loan to value ratio of 75% and generally a term of one
to five years. The commercial and agricultural loans consist of secured and
unsecured loans. The unsecured commercial loans are made based on the financial
strength of the borrower and usually require personal guarantees from the
principals of the business. The collateral for the secured commercial loans may
be equipment, accounts receivable, marketable securities or deposits in the
subsidiary bank of the Company. These loans have a maximum loan to value ratio
of 75% and a term of one to five years. The consumer loan category consists of
secured and unsecured loans. The unsecured consumer loans are made on the
financial strength of the individual borrower. The collateral for the secured
consumer loans may be marketable securities, automobiles, recreational vehicles
or deposits in the Company's subsidiary bank. The usual term for these loans is
three to five years.
15
<PAGE>
As of September 30, 1998, the Company had loans totaling $15.44 million that
were current but as to which there are concerns as to the ability of the
borrowers to comply with present loan repayment terms. While management of the
Company does not anticipate any loss not previously provided for on these loans,
changes in the financial condition of these borrowers may necessitate future
modifications in their loan repayment terms.
At September 30, 1998, the Company had no concentrations of loans in any one
industry exceeding 10% of its total loan portfolio. An industry for this purpose
is defined as a group of counterparties that are engaged in similar activities
and have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.
There were no other interest-bearing assets at September 30, 1998, classifiable
as nonaccrual, past due, restructured or problem assets.
16
<PAGE>
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differentials
The following table shows average balances of asset and liability categories,
interest income and paid, and average yields and rates for the periods
indicated:
<TABLE>
<CAPTION>
- --------------------------------------------- -------------------------------------- --------------------------------------
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
-------------------------------------- --------------------------------------
Average Interest Average Average Interest Average
Daily Income(1)/ Yield/ Daily Income(1)/ Yield/
(dollars in thousands) Balance Paid Rate Balance Paid Rate
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 866 $ 42 6.47% $ 2,248 $ 79 4.68%
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Federal funds sold 10,383 455 5.84 7,870 319 5.40
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Loans held for sale 2,841 112 5.26 1,031 58 7.50
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Investment securities:
Taxable 264,554 12,735 6.42 209,729 10,133 6.44
Tax exempt 4,548 358 10.51 4,950 415 11.18
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Total investment securities 269,102 13,093 6.49 214,679 10,548 6.55
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Loans(2) 582,539 39,084 8.95 525,177 35,642 9.05
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Total interest-earning assets 865,731 52,786 8.13 751,005 46,646 8.28
Noninterest-earning assets 76,698 -- -- 63,012 -- --
Net Effect of SFAS 115 3,826 -- -- 744 -- --
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Total assets $946,255 $814,761
============================================= ============= ============ =========== ============= ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Interest-bearing liabilities:
Interest-bearing deposits $553,355 18,113 4.36% $516,910 16,334 4.21%
Other short-term borrowings 211,850 8,555 5.38 148,850 6,158 5.52
Long-term debt 10,676 679 8.48 -- -- --
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Total interest bearing liabilities 775,881 27,347 4.70 665,760 22,492 4.50
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Noninterest-bearing deposits 84,178 72,250
Noninterest-bearing liabilities 7,152 6,096
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Total liabilities 867,211 744,106
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Shareholders' equity 75,218 69,911
Accumulated other comprehensive income 3,826 744
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Total shareholders' equity 79,044 70,655
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Total liabilities and shareholders'
equity $946,255 $814,761
- --------------------------------------------- ------------- ------------ ----------- ------------- ------------ -----------
Net interest income $25,439 $24,154
============================================= ============= ============ =========== ============= ============ ===========
Net interest spread 3.43% 3.78%
============================================= ============= ============ =========== ============= ============ ===========
Net interest margin 3.92% 4.29%
============================================= ============= ============ =========== ============= ============ ===========
</TABLE>
1 Taxable equivalent adjustments of $115,000 for 1998 and $183,000 for 1997
are included in the interest income for total interest-earning assets.
2 Nonaccruing loans, which include impaired loans, are included in the average
balances. Net loan fees included in interest income totaled $1.34 million in
1998 and $1.02 million in 1997.
17
<PAGE>
CAPITAL RESOURCES
The following table shows the risk-based capital and the leverage ratios for the
Company as of September 30, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------- --------------------------- --------------------------- ---------------------------
To Be Well
Capitalized Under Prompt
For Capital Corrective Action
(dollars in thousands) Actual Adequacy Purposes Provisions:
- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
AS OF SEPTEMBER 30, 1998 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $120,796 16.33% $59,160 8.00% N/A N/A
FCNB Bank $ 88,577 12.20% $58,100 8.00% $72,625 10.00%
- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Tier I Capital
(to Risk-Weighted Assets):
FCNB Corp $97,040 13.12% $25,580 4.00% N/A N/A
FCNB Bank $82,448 11.35% $29,050 4.00% $43,575 6.00%
- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Tier I Capital
(to Average Assets):
FCNB Corp $97,040 9.81% $29,664 3.00% N/A N/A
FCNB Bank $82,448 8.45% $29,281 3.00% $48,802 5.00%
- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required for this section can be located in the Notes to
Consolidated Financial Statements, Note 7 - Risk management instruments on page
8 and Market Risk on page 12.
INFLATION
The effect of changing prices on financial institutions is typically different
than on non-banking companies since virtually all of a bank's assets and
liabilities are monetary in nature. In particular, interest rates are
significantly affected by inflation, but neither the timing nor magnitude of the
changes are directly related to price level indices; therefore, the Company can
best counter inflation over the long term by managing net interest income and
controlling net increases in noninterest income and expenses.
YEAR 2000
The Company is currently addressing the many areas affected by the Year 2000
computer issue. A Year 2000 plan has been prepared which includes contacting all
of the software vendors that maintain the computer programs that the Company
relies upon. By September 30, 1998, the Company had performed risk assessments,
had assessed theY2K preparedness of suppliers of data processing services to the
Company and of large customers, had implemented its customer awareness program,
had begun development of the Y2K contingency plan, and was in the process of
testing and implementing necessary changes in hardware and software. The plan
also includes contacting large commercial loan and deposit customers to
determine their readiness for this issue. At this time, it is anticipated that
many, if not all of these changes, should be ready for testing by December 31,
1998. Significant additional steps must be taken to achieve Y2K compliance,
including some steps that may not yet be identified. The Company's primary
supplier of data processing services also has adopted a Y2K plan and timetable
to make the changes necessary for it to provide services in the year 2000, and
has provided written assurances to the Company of its progress. That supplier
has been examined for Y2K readiness by federal bank examiners. The Company is
also monitoring the progress of its other suppliers of data processing services.
The Company is in the banking industry, which is heavily regulated and is
regulated by the Federal Reserve Bank. The Company is on track to be in
compliance with all Federal Reserve regulations related to the Year 2000 issue.
Since many of the programs used by the Company are "off-the-shelf" as compared
to "highly customized," the cost to address these matters will not be as high as
the costs for other companies that rely more on "highly customized" software.
The Company has a budget for software, hardware and consulting costs of
approximately $500,000. As of September 30, 1998, the Company has expended
$84,000 for these costs. This area is changing very rapidly and the actual
results may differ from what has been anticipated.
18
<PAGE>
The failure of the Company, its principal data processing provider, its
customers, or of other service providers, including utilities and government
agencies, to be year 2000 compliant in a timely manner could have a negative
impact on the Company's business, including but not limited to an inability to
provide accurate processing of customer transactions, and delays in loan
collection practices. The Company's belief that it, and its primary suppliers of
data processing services, will achieve Y2K compliance, are based on a number of
assumptions and on statements made by third parties, involve events and actions
which may be beyond the control of the Company, and are subject to uncertainty.
The Company also is not able to predict the effects, if any, on the Company,
financial markets or society in general of the public's reaction to Y2K.
WEB SITE
The Securities and Exchange Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the Company;
that address is: http:\\www.sec.gov.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
No. 11 Statement Regarding Computation of Per Share Earnings
No. 27 Financial Data Schedule
(b) Report on Form 8-K
On July 14, 1998, the Company released its second quarter earnings report and
announced the $0.15 cash dividend and the 4-for-3 stock split.
On September 2, 1998, the Company announced that it has signed a definitive
agreement to acquire Frederick Underwriters, Inc. headquartered in Frederick,
Maryland and its affiliated agencies - Phillips Insurance Agency, Inc. and
Carroll County Insurance Agency, Inc. The Company will exchange approximately
413,000 shares of its common stock for shares of the agencies in a tax-free
transaction, which is anticipated to be accounted for as a pooling of interest.
With 1997 revenues approaching $6 million, Frederick Underwriters, Inc. is one
of the largest independent insurance agencies in the state of Maryland. The
transaction is subject to shareholder and regulatory approvals.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FCNB CORP
(Registrant)
November 12, 1998 By: /s/ A. Patrick Linton
------------------------------------------------
A. Patrick Linton
President Chief Executive Officer and Director
November 12, 1998 By: /s/ Mark A. Severson
------------------------------------------------
Mark A. Severson
Senior Vice President and Treasurer
20
EXHIBIT NO. 11
STATEMENT REGARDING THE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
============================================================= ================= ================
September 30, September 30,
1998 1997
- ------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Basic earnings per common share $0.90 $0.82
- ------------------------------------------------------------- ----------------- ----------------
Basic earnings per common share before merger-related
expenses $0.91 $0.85
- ------------------------------------------------------------- ----------------- ----------------
Basic weighted average number of share outstanding 7,890,283 7,868,507
- ------------------------------------------------------------- ----------------- ----------------
Diluted earnings per common share $0.90 $0.81
- ------------------------------------------------------------- ----------------- ----------------
Diluted earnings per common share before merger-related
expenses $0.91 $0.85
- ------------------------------------------------------------- ----------------- ----------------
Diluted weighted average number of shares outstanding 7,946,251 7,909,476
============================================================= ================= ================
</TABLE>
The September 30, 1997 data has been adjusted for the 33% stock dividend
effected in the form of a four-for-three stock split declared in July 1998 and
for the 10% stock dividend declared in October 1997.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 28,051
<INT-BEARING-DEPOSITS> 559
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<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 320,458
<INVESTMENTS-CARRYING> 30,986
<INVESTMENTS-MARKET> 31,500
<LOANS> 596,434
<ALLOWANCE> 5,977
<TOTAL-ASSETS> 1,073,692
<DEPOSITS> 702,850
<SHORT-TERM> 239,105
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<LONG-TERM> 40,250
0
0
<COMMON> 7,901
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<INTEREST-TOTAL> 52,671
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<LOAN-LOSSES> 800
<SECURITIES-GAINS> 581
<EXPENSE-OTHER> 20,436
<INCOME-PRETAX> 10,413
<INCOME-PRE-EXTRAORDINARY> 10,413
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,134
<EPS-PRIMARY> 0.90
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<LOANS-NON> 5,235
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</TABLE>
