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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-15645
FCNB Corp
(Exact name of registrant as specified in its charter)
MARYLAND 52-1479635
(State or other jurisdiction (I.R.S.Employer Identification
of incorporation or organization) Number)
7200 FCNB Court, Frederick, Maryland 21703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(301) 662-2191
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period of time that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock (based on $30.00 per share) held by
nonaffiliates on February 20, 1998 was approximately $159,027,240. As of March
2, 1998, there were 5,915,442 shares of Common Stock, par value $1.00 per share,
of FCNB Corp issued and outstanding.
Documents Incorporated by Reference
Portions of the 1997 Annual Report to Shareholders for theyear ended December
31, 1997 - PARTS I, II, & IV
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PART I
Item 1. Business.
General
FCNB Corp (the "Registrant" or "Company") is a bank holding company organized
under the laws of the State of Maryland and serves as the holding company for
its wholly-owned subsidiary FCNB Bank (the "Bank").
The information related to the Company's acquisitions during the year is
contained on page 12 of the Company's 1997 Annual Report to Shareholders. Such
information is incorporated herein by reference to the Annual Report.
The Bank
The Bank, a state-chartered commercial bank under the laws of the State of
Maryland was converted from a national bank in June 1993, and was originally
chartered in 1818. The Bank is engaged in a general commercial and retail
banking business serving individuals and businesses in Frederick, Anne Arundel,
Carroll, Howard, Montgomery, and Prince George's counties in Maryland. At
December 31, 1997, the Bank operated eight banking offices located in Frederick,
Maryland and one office each in Brunswick, Columbia, Damascus, Eldersburg,
Elkridge, Glen Burnie, Laurel, Middletown, Monrovia, Mount Airy, Odenton,
Walkersville, and Westminster, Maryland. At December 31, 1997, the Bank had
total loans, net of unearned income, of approximately $574.11 million, total
assets of approximately $907.10 million, total deposits of approximately $620.55
million, and a legal lending limit of approximately $9.33 million to any one
borrower. The deposits of the Bank are insured by the FDIC.
The Bank's primary market area consists of the following counties:
Frederick, Anne Arundel, Carroll, Howard, Montgomery, and Prince George's. This
trade area is northwest of Washington, D.C. and runs east and south of the City
of Baltimore.
In February 1998, the Bank entered into an agreement to assume approximately
$46.00 million of deposits relating to seven branches of subsidiaries of First
Virginia Bank located in Catonsville, Gaithersburg, Germantown, Pikesville,
Poolesville, Reisterstown and Silver Spring, Maryland.
Commercial Banking and Related Services. The Bank is engaged in the financing of
commerce and industry, providing credit facilities and related services
principally for businesses located in its market areas. The Bank offers all
forms of commercial lending, including lines of credit, revolving credits, term
loans, accounts receivable financing, real estate loans, and other forms of
secured financing.
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Personal Banking Services. A wide range of personal banking services are
provided to individuals at each of the Bank's offices. Among the services
provided at most locations are checking accounts, savings accounts, various
savings programs, installment and other personal loans, credit card lines
("VISA"), home improvement loans, personal lines of credit, automobile and other
consumer financing, safe deposit services, and mortgage loans. The Bank also
offers trust, asset management, and financial planning services. Additionally,
the Bank has a network of automated teller machines and is a member of the MOST
and CIRRUS networks.
Competition. The Bank faces strong competition in all areas of its operations.
This competition comes from entities principally operating in the Bank's
marketing area and includes branches of some of the largest banks in Maryland.
Its most direct competition for deposits historically has come from other
commercial banks, savings banks, savings and loan associations and credit unions
operating in Frederick, Carroll, Howard, Prince George's, Anne Arundel and
Montgomery counties, Maryland. The Bank also competes for deposits and
investment dollars with money market mutual funds and public debt and equity
markets. The Bank competes with banking entities, mortgage banking companies,
and other institutional lenders for loans. The competition for loans varies from
time to time depending on certain factors. These factors include, among others,
the general availability of lendable funds and credit, general and local
economic conditions, current interest rate levels, and conditions in the
mortgage market. As a result of recently enacted Federal and State legislation
allowing interstate banking, branching and mergers, additional competitors not
currently in the Bank's market may enter into the Bank's market.
Supervision and Regulation
Holding Company Regulation. The Company is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and as such
it is subject to regulation, supervision and examination by, and reporting to,
the Board of Governors of the Federal Reserve System (the "Federal Reserve"). A
discussion related to the capital adequacy of the Company is contained on pages
39 and 40 of the Company's 1997 Annual Report to Shareholders. Such information
is incorporated herein by reference to the Annual Report.
BHCA - Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than banking or managing or controlling
banks. Under the BHCA, the Federal Reserve is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve has determined to be so closely related to banking or
to managing or controlling banks as to be a proper incident thereto. In making
such determinations, the Federal Reserve is required to weigh the expected
benefit to the public, such
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as greater convenience, increased competition or gains in efficiency, against
the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices.
The Federal Reserve has by regulation determined that certain activities are
closely related to banking within the meaning of the BHCA. These activities
include: making or servicing loans such as would be made by a mortgage company,
consumer finance company, credit card company, or factoring company; performing
trust company functions; performing certain data processing operations;
providing limited securities brokerage services; acting as an investment or
financial advisor; ownership or operation of a savings association; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; providing tax planning and
preparation services; operating a collection agency; and providing certain
courier services. The Federal Reserve also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
Commitments to Subsidiary Bank. Under Federal Reserve policy, the Company is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances when it might not do so absent
such policy.
Limitations of Acquisitions of Common Stock. The federal Change in Bank Control
Act prohibits a person or group from acquiring "control" of a bank holding
company unless the Federal Reserve has been given 60 days' prior written notice
of such proposed acquisition and within that time period the Federal Reserve has
not issued a notice disapproving the proposed acquisition or extending for up to
another 30 days the period during which such a disapproval may be issued. An
acquisition may be made prior to expiration of the disapproval period if the
Federal Reserve issues written notice of its intent not to disapprove the
action. Under a rebuttable presumption established by the Federal Reserve, the
acquisition of 10% or more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act
would, under the circumstances set forth in the presumption, constitute the
acquisition of control.
In addition, with limited exceptions, any "company" would be required to obtain
the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in
the case of an acquiror that is a bank holding company) or more of the
outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquiror registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.
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Bank Regulation. The Bank is a commercial bank chartered by the State of
Maryland which is a member of the Federal Reserve System, and as such, is
subject to extensive regulation and examination by the Division of Financial
Regulation of the Department of Labor, Licensing and Regulation (the "Banking
Commissioner"), the FDIC, which insures its deposits to the maximum extent
permitted by law, and by the Federal Reserve. The federal laws and regulations,
which are applicable to banks, regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of collateral for
certain loans. The laws and regulations governing the Bank generally have been
promulgated to protect depositors and the deposit insurance funds and not for
the purpose of protecting shareholders.
FDIC Insurance Premiums. Institutions are assigned to one of three capital
groups based solely on the level of the institution's capital - "well
capitalized," "adequately capitalized" and "undercapitalized" - which would be
defined in the same manner as the regulations establishing the prompt corrective
action system under Section 38 of the FDIA, as discussed below. These three
groups are then divided into three subgroups, which reflect varying levels of
supervisory concern, from those, which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates ranging from
0.00% for well capitalized, healthy institutions, to 0.27% for undercapitalized
institutions with substantial supervisory concerns.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking
agency is required to implement a system of prompt corrective action for
institutions, which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt corrective
action established by Section 38 of the FDIA. Under the regulations, a bank
shall be deemed to be: (i) "well capitalized" if it has a Total Risk Based
Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or
more, a Leverage Capital Ratio of 5.0% or more and is not subject to any written
capital order or directive; (ii) "adequately capitalized" if it has a Total Risk
Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0%
or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
8.0%, a Tier 1 Risk Based Capital Ratio that is less than 4.0% or a Leverage
Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a Total Risk Based Capital Ratio that
is less than 6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a
Leverage Capital Ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
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An institution, which is required to submit a capital restoration plan, must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount equal
to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guarantee shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guarantee, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in conservatorship
or receivership within 90 days unless the FDIC formally determines that
forbearance from such action would better protect the deposit insurance fund.
Unless the FDIC or other appropriate federal banking regulatory agency makes
specific further findings and certifies that the institution is viable and is
not expected to fail, an institution that remains critically undercapitalized on
average during the fourth calendar quarter after the date it becomes critically
undercapitalized must be placed in receivership. The general rule is that the
FDIC will be appointed as receiver within 90 days after a bank becomes
critically undercapitalized unless extremely good cause is shown and an
extension is agreed to by the federal regulators.
Immediately upon becoming undercapitalized, an institution shall become subject
to the provisions of Section 38 of the FDIA (i) restricting payment of capital
distributions and management fees, (ii) requiring that the appropriate federal
banking agency monitor the condition of the institution and its efforts to
restore its capital, (iii) requiring submission of a capital restoration plan,
(iv) restricting the growth of the institution's assets and (v) requiring prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions are
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include: requiring
the institution to raise additional capital; restricting transactions with
affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
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Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver may
be appointed for an institution where: (i) an institution's obligations exceed
its assets; (ii) there is substantial dissipation of the institution's assets or
earnings as a result of any violation of law or any unsafe or unsound practice;
(iii) the institution is in an unsafe or unsound condition; (iv) there is a
willful violation of a cease and desist order; (v) the institution is unable to
pay its obligations in the ordinary course of business; (vi) losses or
threatened losses deplete all or substantially all of an institution's capital,
and there is no reasonable prospect of becoming "adequately capitalized" without
assistance; (vii) there is any violation of law or unsafe or unsound practice or
condition that is likely to cause insolvency or substantial dissipation of
assets or earnings, weaken the institution's condition, or otherwise seriously
prejudice the interests of depositors or the insurance fund; (viii) an
institution ceases to be insured; (ix) the institution is undercapitalized and
has no reasonable prospect that it will become adequately capitalized, fails to
become adequately capitalized when required to do so, or fails to submit or
materially implement a capital restoration plan; or (x) the institution is
critically undercapitalized or otherwise has substantially insufficient capital.
At December 31, 1997 the Bank would be deemed to be an "adequately capitalized"
institution for purposes of Section 38 of the FDIA. Also at December 31, 1997,
the Company and the Bank were in compliance with all minimum federal regulatory
capital requirements, which are generally applicable to banks.
Regulatory Enforcement Authority. The enforcement authority of federal banking
regulators includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
The foregoing references to laws and regulations which are applicable to the
Company and the Bank are brief summaries thereof which do not purport to be
complete and which are qualified in their entirety by reference to such laws and
regulations.
FCNB Investment Holdings, Inc.
FCNB Investment Holdings, Inc., a Delaware corporation, is a wholly-owned
subsidiary of the Bank that was organized on April 21, 1994. This subsidiary was
established to manage a portion of the investment portfolio of the Bank.
First Choice Insurance Agency, Inc.
First Choice Insurance Agency, Inc., a Maryland corporation, is a wholly-owned
subsidiary of the Bank that was organized on June 13, 1994. This subsidiary was
established to enable FCNB to sell insurance products.
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Monocacy Management Company
Monocacy Management Company, a Maryland corporation, is a wholly-owned
subsidiary of the Bank that was organized on January 6, 1992. This subsidiary
was established to purchase troubled assets from the Bank.
Governmental Monetary Policies and Economic Controls
The Bank is affected by monetary policies of regulatory authorities, including
the Federal Reserve Board, which regulates the national money supply in order to
mitigate recessionary and inflationary pressures. Among the techniques available
to the Federal Reserve Board are engaging in open market transactions in United
States Government securities, changing the discount rate on bank borrowings and
changing reserve requirements against bank deposits. These techniques are used
in varying combinations to influence the overall growth of bank loans,
investments and deposits. Their use may also affect interest rates charged on
loans or paid on deposits. The effect of governmental policies on the earnings
of the Bank or the Company for any future periods cannot be predicted.
Employees
At December 31, 1997, the Company had approximately 383 employees of whom 8 were
executive officers, 88 were other officers, 226 were full-time employees and 61
were part-time employees.
Item 2. Properties.
The Company owns the property on which the principal office of the Company and
the main office of the Bank are located at 7200 FCNB Court, Frederick, Maryland.
The Bank also owns the properties which house the Square Corner Branch at 1
North Market Street, the Rosemont Branch at 1602 Rosemont Avenue, the East
Frederick Branch at 1303 East Patrick Street, the Route 85 Branch at 5602
Buckeystown Pike, the Walkersville Branch at 100 Commerce Drive, Walkersville,
Maryland, the Eldersburg Branch at 6229 Sykesville Road, Eldersburg, Maryland,
the Elkridge Branch at 7290 Montgomery Road, Elkridge, Maryland, the Laurel
Branch at 380 Main Street, Laurel, Maryland, the Odenton Branch at 1219
Annapolis Boulevard, Odenton, Maryland and the Middletown Branch at 819 East
Main Street, Middletown, Maryland. The land upon which the Middletown Branch
office is located is leased pursuant to a twenty-year lease, with an expiration
date of November 2009 and contains provisions to extend the initial lease term
for three ten-year periods. The lease also contains an option to purchase the
land at fair market value at the end of the initial lease term or at the end of
any extension term.
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The Bank leases the following properties: the Antietam Branch at 1595
Opossumtown Pike, the 40 West Branch at 1100 West Patrick Street, the FSK Mall
Branch at 5500 Buckeystown Pike, the Brunswick Branch at 94 Souder Road,
Brunswick, Maryland, the Damascus Branch at 9815 Main Street, Damascus,
Maryland, the Green Valley Branch at 11801 Fingerboard Road, Monrovia, Maryland,
the Mount Airy Branch at 400 Ridgeville Boulevard, Mount Airy, Maryland, and the
Englar Road Branch at Route 140 and Englar Road, Westminster, Maryland, the
Columbia Branch at 5585 Twin Knolls Road, Columbia, Maryland, the Glen Burnie
Branch at 7381 Baltimore-Annapolis Blvd., Glen Burnie, Maryland and
Administrative Offices at 6810 Deerpath Road, Elkridge, Maryland. A facility is
leased at 15 East Main Street, Westminster, Maryland for a loan production
office.
Subsequent to December 31, 1997, the Company sold its Operations Center, which
was included in its Other Real Estate Owned portfolio.
Item 3. Legal Proceedings.
The Company and the Bank are subject to various legal proceedings which are
incidental to their business. In the opinion of management, the liabilities (if
any) resulting from such legal proceedings will not have a material effect on
the consolidated financial statements or consolidated ratios of the Company and
the Bank, although an adverse outcome on any particular proceeding could
negatively affect the company or bank earnings and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters that were submitted to a vote of the security holders
during the fourth quarter of 1997.
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information required by this item is contained on page 46 of the Company's
1997 Annual Report to Shareholders. Such information is incorporated herein by
reference to the Annual Report.
Dividend Limitations and Certain Other Restrictions
The payment of dividends by the Company depends largely upon the ability of the
Bank to declare and pay dividends to the Company because the principal source of
the Company's revenue is dividends paid by the Bank. Future dividends will
depend primarily upon the Bank's earnings, financial condition, and need for
funds, as well as governmental policies and regulations applicable to the
Company and the Bank.
A discussion related to dividend limitations is contained on page 39 of the
Company's 1997 Annual Report to Shareholders. Such information is incorporated
herein by reference to the Annual Report.
The Federal Reserve has established guidelines with respect to the maintenance
of appropriate levels of capital by registered bank holding companies.
Compliance with such standards, as presently in effect, or as they may be
amended from time to time, could possibly limit the amount of dividends that the
Company may pay in the future. In 1985, the Federal Reserve issued a policy
statement on the payment of cash dividends by bank holding companies. In the
statement, the Federal Reserve expressed its view that a holding company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income or which could only be funded in ways that weakened the holding company's
financial health, such as by borrowing.
As a depository institution, deposits of which are insured by The Federal
Deposit Insurance Corporation ("FDIC"), the Bank may not pay dividends or
distribute any of its capital assets while it remains in default on any
assessment due the FDIC. The Bank currently is not in default under any of their
obligations to the FDIC.
Item 6. Selected Financial Data.
The information required by this item is contained on page 24 of the Company's
1997 Annual Report to Shareholders. Such information is incorporated herein by
reference to the Annual Report.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is contained on pages 12 to 23 of the
Company's 1997 Annual Report to Shareholders. Such information is incorporated
herein by reference to the Annual Report.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is contained on pages 16 and 17 of the
Company's 1997 Annual Report to Shareholders. Such information is incorporated
herein by reference to the Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is contained in the Consolidated Financial
Statements and Notes to Consolidated Financial Statements appearing on pages 25
to 45 of the Company's 1997 Annual Report to Shareholders. Such information is
incorporated herein by reference to the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The Board of Directors has set the number of directors that constitute the Board
of Directors at fourteen. The Articles of Incorporation of the Company provide
that the directors shall be classified with respect to the time for which they
severally hold office into three classes. Each year all of the directors in one
class are elected to serve for a term of three years.
The following table sets forth as to each director of the Company his or her
name, age, the year he or she first became a director of the Company and the
number of shares of Common Stock beneficially owned at February 6, 1998. All
options held by non-employee directors are subject to the approval of the 1997
Directors Stock Option Plan at the 1998 Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
Year First Shares of Common
Name Age(1) Elected Year Term Stock Beneficially Percent of
Director Expires Owned(2) Class
DIRECTORS TO BE ELECTED AT 1998 ANNUAL MEETING
<S> <C> <C> <C> <C> <C>
Shirley D. Collier 44 1997 1999 938(3) .02
Miles M. Circo 51 1986 2001 6257(4) .11
James S. Grimes 58 1989 2001 7,773(5) .13
Gail T. Guyton 57 1986 2001 61,005(6) 1.03
A. Patrick Linton 48 1991 2001 97,818(7) 1.65
Jacob R. Ramsburg, Jr. 61 1986 2001 93,747(8) 1.58
DIRECTORS CONTINUING IN OFFICE
Bernard L. Grove, Jr. 64 1988 1999 9,034(9) .15
Ramona C. Remsberg 69 1987 1999 54,550(10) .92
Kenneth W. Rice 54 1988 1999 14,436(11) .24
Rand D. Weinberg 41 1996 1999 8,540(12) .14
George B. Callan, Jr. 66 1986 2000 12,924(13) .22
Clyde C. Crum 62 1986 2000 50,495(14) .85
Frank L. Hewitt, III 56 1996 2000 138,043(15) 2.33
DeWalt J. Willard, Jr. 66 1986 2000 50,450(16) .85
</TABLE>
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Footnote Explanations
(1) At February 6, 1998.
(2) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner, for purposes of this table, of any shares of
Common Stock with respect to which he or she has sole or shared voting
and/or investment. The table includes shares owned by spouses, other
immediate family members in trust, shares held in retirement accounts or
funds for the benefit of the named individuals, and other forms of
ownership, over which shares the persons named in the table possess
voting and investment power. Except as otherwise noted, each person has
sole voting and investment power with respect to all shares beneficially
owned.
(3) Included in the total shares owned by Ms. Collier are options, currently
exercisable, to purchase 438 shares of the Company's Common Stock.
(4) Included in the total shares owned by Mr. Circo are options, currently
exercisable, to purchase 1,750 shares of the Company's Common Stock.
(5) Included in the total shares owned by Mr. Grimes are options, currently
exercisable, to purchase 1,750 shares of the Company's Common Stock.
(6) The shares attributed to Mr. Guyton include 2,772 shares owned by Mr.
Guyton's wife, as to which Mr. Guyton disclaims beneficial ownership.
Also, included in the total shares owned are options, currently
exercisable, to purchase 1,750 shares of the Company's Common Stock.
(7) The shares attributed to Mr. Linton include 33,337 shares as to
which he shares voting and investment power with his wife, 2,035 shares
owned by Mr. Linton's children, as to which he has voting and
investment power and 440 shares owned by Mr. Linton's wife. Also,
included in the total shares owned are options, currently exercisable,
to purchase 39,198 shares of the Company's Common Stock and 5,786
shares of restricted stock to be received when the underlying stock
options are exercised. Mr. Linton also has been granted the right to
receive Reload Options to purchase an additional10,271 shares of the
Company's Common Stock, if the 1997 stock options are exercised within
three years.
(8) The shares attributed to Mr. Ramsburg include 5,396 shares owned by
Mr. Ramsburg's wife, and 5,316 shares owned jointly by Mr. Ramsburg's
wife and son, as to which Mr. Ramsburg disclaims beneficial ownership,
and 17,292 shares owned by two corporations controlled by Mr. Ramsburg,
as to which he holds voting and investment power. Also, included in the
total shares owned are options, currently exercisable, to purchase
1,750 shares of the Company's Common Stock.
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(9) The shares attributed to Mr. Grove include 1,619 shares owned by Mr.
Grove's daughter, as to which Mr. Grove disclaims beneficial ownership.
Also, included in the total shares owned are options, currently
exercisable, to purchase 1,750 shares of the Company's Common Stock.
(10) The shares attributed to Ms. Remsberg include 2,310 shares held in a
trust as to which she has shared voting and investment power. Also,
included in the total shares owned are options, currently exercisable,
to purchase 1,750 shares of the Company's Common Stock.
(11) The shares attributed to Mr. Rice include 1,615 shares as to which Mr.
Rice shares voting and investment power with his wife and 22 shares
owned in custody for his goddaughter over which he has voting and
investment power. Also, included in the total shares owned are options,
currently exercisable, to purchase 1,750 shares of the Company's Common
Stock.
(12) The shares attributed to Mr. Weinberg include 2,225 shares as to
which Mr. Weinberg shares voting and investment power with his wife,
3,850 shares invested in a pension trust as to which he has voting and
investment power and 440 shares held in custody by Mr. Weinberg and his
wife for their children which he shares voting and investment powers.
Also, included in the total shares owned are options, currently
exercisable, to purchase 1,750 shares of the Company's Common Stock.
(13) Included in the total shares owned by Mr. Callan are options, currently
exercisable, to purchase 1,750 shares of the Company's Common Stock.
(14) The shares attributed to Mr. Crum include 8,836 shares owned by Mr.
Crum's wife, as to which Mr. Crum disclaims beneficial ownership. Also,
included in the total shares owned are options, currently exercisable,
to purchase 1,750 shares of the Company's Common Stock.
(15) The shares attributed to Mr. Hewitt include 24,368 shares as to
which he shares voting and investment power with his wife, 12,498
shares owned by Mr. Hewitt's children, as to which he has voting and
investment power, 1,684 shares held in trust as to which he has shared
voting and investment power and 2,966 shares owned by Mr. Hewitt's
wife. Also, included in the total shares owned are options, currently
exercisable, to purchase 1,750 shares of the Company's Common Stock.
(16) The shares attributed to Mr. Willard include 8,647 shares owned by a
corporation controlled by Mr. Willard, as to which he holds voting and
investment powers, and 340 shares held in trust over which he has voting
and investment power. Also, included in the total shares owned are
options, currently exercisable, to purchase 1,750 shares of the
Company's Common Stock.
14
<PAGE>
Set forth below is certain information with respect to the nominees for director
and the continuing directors of the Company. Unless otherwise indicated, the
principal occupation listed for each person below has been his or her occupation
for the past five years.
SHIRLEY D. COLLIER is president of Paragon Computer Services, Inc., a computer
consulting firm.
MILES M. CIRCO is general manager of Patapsco Designs, Inc., an electronic
design and manufacturing firm.
JAMES S. GRIMES has been Mayor of the City of Frederick, Maryland since
1994 and is president of James S. Grimes, Inc., a full service truck
transportation service operation.
GAIL T. GUYTON, vice chairman of the board of both the Bank and the Company
since January 1995, is chairman of the board of Morgan-Keller, Inc., a
commercial/industrial construction firm.
A. PATRICK LINTON is president and chief executive officer of the Bank and the
Company.
JACOB R. RAMSBURG, JR. is president of Frederick Underwriters, Inc., a general
insurance agency.
BERNARD L. GROVE, JR. is an advisor to Genstar Stone Products, Inc.
RAMONA C. REMSBERG is the former vice chairman of the board of both the Bank and
of the Company, having retired from the Bank and the Company in September 1993.
KENNETH W. RICE is president of Donald B. Rice Tire Co., Inc., a tire
distribution firm
RAND D. WEINBERG is a partner with Weinberg & Weinberg, a law firm in Frederick,
Maryland.
GEORGE B. CALLAN, JR. is president of Associates in Management, a company that
specializes in historic preservation, museum management and automotive parts
sales.
CLYDE C. CRUM, chairman of the board of the Bank and the Company since January
1995, is president of Clyde C. Crum and Son, Inc., a dairy farm operation.
FRANK L. HEWITT, III is president of the Frank L. Hewitt Company. Mr. Hewitt was
president of Laurel Bancorp, Inc. ("Laurel") and its subsidiary Laurel Federal
Savings Bank until the merger of Laurel with and into the Company in January
1996.
DEWALT J. WILLARD, JR. is president of Ideal Buick-GMC, an automobile
dealership.
15
<PAGE>
Board and Committee Meetings
The Board of Directors of the Company has standing audit and Human Resources
Committees, but does not have a standing nominating committee.
The Audit Committee, comprised of Directors Circo, Collier, Grimes, Ramsburg and
Willard, assists the Board of Directors of the Bank in exercising its fiduciary
responsibilities for oversight of audit and related matters, including corporate
accounting, internal controls and regulatory compliance. Its duties include:
monitoring the Bank's internal controls and procedures; meeting with the
internal auditors and reviewing their reports; recommending the selection of
independent auditors; reviewing the scope of audits conducted by the independent
auditors, as well as the results of their audits; and reviewing policies
relating to compliance with applicable banking and other laws.
The Human Resources Committee, comprised of Directors Callan, Grove, Rice and
Weinberg, reviews and recommends to the Board of Directors the overall
compensation policy for the Company. The Board of Directors of the Bank follows
this policy specifically related to the salaries and other benefits for senior
management thereof.
The Board of Directors of the Company held seventeen meetings, the Audit
Committee held eight meetings and the Human Resources Committees held nine
meetings during 1997. Each of the directors of the Company attended at least 75%
of the meetings of the Board of Directors and all committees on which they
served during 1997.
16
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission, and
to provide the Company with copies of all Forms 3, 4, and 5 they file.
Based solely upon the Company's review of the copies of the forms which it has
received in 1997 and written representations from the Company's directors and
executive officers, the Company is not aware of any failure to comply with the
requirements of Section 16(a) in 1997 or any prior year, except that Bernard L.
Grove, Jr. and Rand D. Weinberg each failed to file one report required by
Section 16(a) on a timely basis during 1997. Each late report related to one
transaction each.
Executive Officers of the Company. Information concerning non-director executive
officers of the Registrant is as follows:
Martin S. Lapera (age 45) is an Executive Vice President of the Company. Mr.
Lapera became the Executive Vice President, Chief Operating Officer and Chief
Lending Officer of FCNB in January 1995 after having been the Executive Vice
President and Chief Lending Officer of the Bank.
Charles E. Weller (age 49) became a Senior Vice President of the Company in
January 1996 after having been a Vice President of the Company since March 24,
1995. Mr. Weller was President of Elkridge Bank until it was merged with the
Bank on March 7, 1997.
Mark A. Severson (age 44) became a Senior Vice President and Treasurer of the
Company in January 1996 after having been the Vice President and Treasurer. Mr.
Severson is the Senior Vice President and Chief Financial Officer of the Bank.
Fern W. Mercer (age 60) is a Vice President of the Company and is a Senior Vice
President of the Bank.
Helen G. Hahn (age 61) is a Vice President and Secretary of the Company. Mrs.
Hahn is a Senior Vice President and Cashier of the Bank.
17
<PAGE>
VOTING SECURITIES
All voting rights are vested exclusively in the holders of the Common Stock of
the Company. Each shareholder is entitled to one vote for each share of Common
Stock owned on all matters brought to a vote of the shareholders. The Company
had 5,915,468 shares of Common Stock outstanding on the record date for the
Annual Meeting. The Company has no other class of equity securities outstanding.
Persons and groups beneficially owning in excess of 5% of the Common Stock are
required to file certain reports disclosing such ownership pursuant to the
Securities Exchange Act of 1934, as amended (hereinafter called the "Exchange
Act"). The following table sets forth, as of February 6, 1998, certain
information as to the shares of Common Stock beneficially owned by certain
officers of the Company who are not also directors of the Company, and all
officers and directors of the Company as a group. Management knows of no persons
who beneficially owned more than 5% of the outstanding shares of Common Stock at
February 6, 1998.
<TABLE>
<CAPTION>
Amount and Nature
-----------------
Name of Beneficial Percent of
---- ------------- ----------
Ownership(1)(2) Class
--------------- -----
<S> <C> <C>
Martin S. Lapera 35,285(3) .60%
Mark A. Severson 17,674(4) .30%
Charles E. Weller 10,319(5) .17%
All Officers and Directors
as a group (19 people) 731,338(6) 12.36%
</TABLE>
Footnote Explanations
(1) Unless otherwise indicated, all shares are owned directly by the named
individual or by the individual indirectly through a trust, corporation
or association, or by the individual or his/her spouse as custodian or
trustee for the shares of minor children. Except as otherwise
indicated, the named individual exercises sole voting and investment
power over such shares.
(2) Restricted stock to be received by officers of the Company or Bank
is based on the formula of one (1) restricted share for every five (5)
shares of Common Stock purchased pursuant to the exercise of stock
options. The restriction period is for three (3) years from the date of
receipt, and if the shares purchased pursuant to the exercise of stock
options are sold within this time period, a pro rata percentage of the
restricted shares are forfeited and must be returned to the Company.
18
<PAGE>
(3) Mr. Lapera is executive vice president of the Company and is
executive vice president, chief operating officer and chief lending
officer of the Bank. The shares attributed to Mr. Lapera include 16,782
shares as to which Mr. Lapera shares voting and investment power with
his wife. Also, included in the total shares owned are options,
currently exercisable, to purchase 15,768 shares of the Company's
Common Stock and 2,247 shares of restricted stock to be received when
the underlying stock options are exercised. Mr. Lapera also has been
granted the right to receive Reload Options to purchase an additional
4,541 shares of the Company's Common Stock, if the stock options
granted in 1997 are exercised within three years.
(4) Mr. Severson is senior vice president and treasurer of the Company
and is senior vice president and chief financial officer of the Bank.
The shares attributed to Mr. Severson include 4,701 shares held in
trust as to which Mr. Severson has voting and investment powers. Also,
included in the total shares owned are options, currently exercisable,
to purchase 9,631 shares of the Company's Common Stock and 1,378 shares
of restricted stock to be received when the underlying stock options
are exercised. Mr. Severson also has been granted the right to receive
Reload Options to purchase an additional 2,751 shares of the Company's
Common Stock, if the stock options granted in 1997 are exercised within
three years.
(5) Mr. Weller is senior vice president of the Company and senior vice
president of the Bank, having served as President of Elkridge Bank. The
shares attributed to Mr. Weller include 176 shares owned by Mr.
Weller's wife, as to which Mr. Weller disclaims beneficial ownership
and 319 shares held in joint ownership with Mr. Weller's daughter.
Also, included in the total shares owned are options, currently
exercisable, to purchase 8,097 shares of the Company's Common Stock and
1,067 shares of restricted stock to be received when the underlying
stock options are exercised. Mr. Weller also has been granted the right
to receive Reload Options to purchase additional 1,309 shares of the
Company's Common Stock, if the 1997 stock options are exercised within
three years.
(6) Includes an aggregate of 82,856 shares, which may currently be
acquired by certain of such executive officers upon the exercise of
stock options and entitling such officers to receive an aggregate of
12,510 shares of restricted stock to be received when the underlying
stock options are exercised. This group also has been granted the right
to receive Reload Options to purchase additional 42,189 shares of the
Company's Common Stock, if the 1997 stock options are exercised within
three years.
19
<PAGE>
Item 11. Executive Compensation.
Compensation of Directors
During 1997, the directors of the Company received an annual retainer of $2,000
for attending Board of Directors meetings of the Company. Members of the Board
of Directors of the Company who were members of the Board of Directors of the
Bank received an additional fee of $200 for each meeting attended. Members of
the Board of Directors of the Company who also served as members of the Board of
Directors of the Bank received an annual retainer of $5,000 and a fee of $200
for each bi-weekly Board of Directors and committee meeting of the Bank
attended.
Clyde C. Crum received a $35,000 annual fee for his services as Chairman of the
Board of both the Company and the Bank, along with the bi-weekly Board of
Directors meeting fees during 1997. However, he did not receive any committee
meeting fees. Mr. Crum also received a cash bonus of $25,000 in January 1998.
Effective in January 1998, the annual fee for the Chairman of the Board of the
Company and the Bank was increased to $50,000.
Directors who agree to defer receipt of at least four years of their annual
retainers may participate in an unfunded deferred compensation plan maintained
by the Bank. Under this plan, deferred amounts earn interest at the rate of 10%
per annum until the director attains age sixty-five, dies or becomes disabled.
Upon any such event, the deferred amount plus credited interest thereon will be
paid to the participant or his beneficiary over a period of up to ten years,
with interest continuing to accrue on the unpaid balance at the rate of 10% per
annum. The Company and the Bank paid a total of $127,000 in director and
committee fees for the fiscal year ended December 31, 1997.
EXECUTIVE OFFICERS' COMPENSATION AND CERTAIN TRANSACTIONS
Compensation - Overview
Set forth below are summarized tables of all compensation awarded to, earned by,
or paid to certain executive officers. It should be noted that no cash
compensation was paid to any executive officer of the Company in his or her
capacity as such. Each of the executive officers of the Company received
compensation from the Bank for services rendered in their capacities as
executive officers of the Bank.
The following table sets forth a comprehensive overview of the compensation for
the Company's Chief Executive Officer and the most highly compensated executive
officers for the year ended December 31, 1997. Comparative data is also provided
for the previous two fiscal years, in selected categories. Except as disclosed
below, no other executive officer of the Company or the Bank received salary and
bonus in excess of $100,000 during the year ended December 31, 1997.
20
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------- -------------------------------------
Restricted Securities All
Name and Principal Fiscal Stock Underlying Other
Position Year Salary(1) Bonus(2) Awards(3)(4) Options(4) Compensation(5)
-------- ---- --------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
A. Patrick Linton 1997 $220,787 $78,750 -- 10,271 $89,037
Director, President and 1996 198,222 46,930 1,529 7,646 10,442
CEO of the Company 1995 186,352 66,516 1,385 6,927 7,747
and the Bank
Martin S. Lapera 1997 $140,628 $39,000 -- 4,541 --
Executive Vice 1996 119,797 23,733 601 3,005 --
President of the 1995 112,091 30,513 547 2,734 --
Company and
Executive Vice
President, COO and
Chief Lending Officer
of the Bank
Charles E. Weller 1997 $114,296 $13,971 262 1,309 $55,204
Senior Vice President 1996 112,579 14,925(6) 398 1,991 1,427
of the Company and 1995 100,836 12,909 407 2,037
Senior Vice President
of the Bank(6)
Mark A. Severson 1997 $113,416 $23,625 -- 2,751 $20,912
Senior Vice President 1996 101,194 15,169 359 1,792 --
and Treasurer of the 1995 94,677 19,620 328 1,640 --
Company and Senior
Vice President and
Chief Fncial Officer
of the Bank
</TABLE>
Footnote Explanations
(1) Includes contributions made by the Bank under its 401(k) Profit Sharing
Plan. Contributions made by the Bank in 1997, 1996, and 1995,
respectively, amounted to $10,787, $8,222 and $8,977 for Mr. Linton,
$10,628, $7,797 and $7,091 for Mr. Lapera, and $8,416, $5,794, and
$4,677 for Mr. Severson. Mr. Weller's contributions for 1997 and 1996
were $7,236 and $6,579, respectively.
(2) Annual bonuses accrued as of December 31, 1997, 1996 and 1995 were paid
in January 1998, 1997 and 1996, respectively.
21
<PAGE>
(3) The awards of restricted stock received are based on the formula of
a grant of one (1) restricted share for every five (5) shares of Common
Stock purchased pursuant to the exercise of stock options. The
restriction period is for three (3) years from the date of receipt, and
if the shares purchased pursuant to the exercise of stock options are
sold within this time period, a pro rata percentage of the restricted
shares are forfeited and must be returned to the Company.
(4) The amounts for 1996 and 1995 have been restated to show the effect of
a 10% stock dividend declared and paid in October 1997.
(5) Includes payments for vacation pay taken in lieu of vacation for
Mr. Linton in 1997, 1996 and 1995 in the amounts of $2,423, $2,192 and
$2,047, respectively and $1,427 for Mr. Weller in 1996. Included in the
1997, 1996 and 1995 amounts for Mr. Linton are $850, $8,250 and $5,700,
respectively, of Elkridge Bank directors fees. Also included in 1997 is
the value realized from the exercise of stock options in the amounts of
$85,764 for Mr. Linton, $55,204 for Mr. Weller and $20,912 for Mr.
Severson, exclusive of the value of restricted stock received in the
case of Messrs. Linton and Severson.
(6) Mr. Weller became an executive officer of the Company on March 24,
1995, as a result of the merger of ENB Financial Corporation with and
into the Company. Until the merger of Elkridge Bank into the Bank on
March 7, 1997, Mr. Weller served as President at Elkridge Bank.
Stock Option Plan. The following table sets forth as to the executive
officers whose compensation is reported in the SUMMARY COMPENSATION
TABLE certain information relating to options to purchase Common Stock
of the Company granted during fiscal 1997 under the 1992 Employee Stock
Option Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term(3)
--------------------------------------------------- ----------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#)(1) Fiscal Year ($/Share) Date 5% ($) 10% ($)
-------------- ------------ ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
A. Patrick Linton 10,271 33% $28.625 12/31/07 $184,900 $468,572
Martin S. Lapera 4,541 14% $28.625 12/31/07 $81,748 $207,164
Charles E. Weller 1,309(2) 4% $28.625 12/31/07 $23,565 $59,718
Mark A. Severson 2,751 9% $28.625 12/31/07 $49,524 $125,503
</TABLE>
22
<PAGE>
Footnote Explanations
(1) All options granted are immediately exercisable. Each of the above
named executives are entitled to Reload Options to purchase an equal
number of shares of the Company's Common Stock, if the original options
are exercised within three years from the date of grant.
(2) The options granted to Mr. Weller to purchase 1,309 shares entitle
Mr. Weller to receive an aggregate of 262 shares of restricted stock
when the underlying stock options are exercised. The awards of
restricted stock received are based on the formula of one (1)
restricted share for every five (5) shares of Common Stock purchased
pursuant to the exercise of stock options. The restriction period is
for three (3) years from the date of receipt, and if the shares
purchased pursuant to the exercise of stock options are sold within
this time period, a pro rata percentage of the restricted shares are
forfeited and must be returned to the Company.
(3) The assumed annual rates of appreciation in the table are shown for
illustrative purposes only pursuant to applicable SEC requirements.
Actual values realized on stock options are dependent on actual future
performance of the Company's stock, among other factors. Accordingly,
the amounts shown may not necessarily be realized. Does not include the
value of restricted stock awards in conjunction with the grant of
options to Mr. Weller.
The table set forth below presents the amount and potential value of options
held by each named executive at the end of fiscal 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options at Options at
Shares FY - End (#) FY - End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized(1) Unexercisable Unexercisable(1)
---- -------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
A. Patrick Linton 10,052 $85,764 39,198/-- $326,037/--
Martin S. Lapera -- -- 15,768/-- $126,151/--
Charles E. Weller 4,400 $55,204 11,121/-- $152,096/--
Mark A. Severson 2,451 $20,912 9,631/-- $77,623/--
</TABLE>
1. Does not include the value of restricted stock awards in conjunction with the
grant of options.
23
<PAGE>
Profit Sharing Plan. The Company has a Section 401 (k) profit sharing plan (the
"Plan") covering employees meeting certain eligibility requirements as to
minimum age and years of service. Employees may make voluntary contributions to
the Plan through payroll deductions on a pre-tax basis. The Company makes
contributions to the Plan at its discretion, based on the Company's performance.
The Company's contributions are subject to a periodic vesting schedule (20% per
year), requiring the completion of five years of service with the Company,
before these benefits are fully vested. A participant's account under the Plan,
together with investment earnings thereon, is normally distributable, following
retirement, death, disability or other termination of employment, in a single
lump-sum payment.
The Company's annual contribution to the Plan totaled $466,000 in 1997,
including an aggregate of $37,067 of contributions for the executive officers
named in the SUMMARY COMPENSATION TABLE.
Supplemental Executive Retirement Plan. The Bank maintains a Supplemental
Executive Retirement Plan in order to provide retirement benefits and long-term
compensation to a select group of executives, determined by the Board of
Directors. Each Participant may elect to make contributions from his or her
salary or bonus (if any), on a pre-tax basis. Each Participant shall be entitled
to have his or her Account receive the credit for a particular Plan Year only if
the Participant is both credited with a Year of Service during the Plan Year and
is employed on the last day of the Plan Year or terminates employment during the
Plan Year due to his or her (i) death, disability, retirement, or (ii)
acquisition or merger of the Bank. If the Participant satisfies the requirements
for a Plan Year, the Bank shall credit the Participant's Account, with an amount
equal to (i) sixty percent (60%) of the Eligible Executive's Final Average
Compensation commencing at age 65, or if later, actual retirement with 15 Years
of Service, reduced by (ii) the combined value of the following: (a) the
Participant's estimated primary insurance amount ("PIA") at age 65 from Social
Security, assuming the Participant is entitled to the maximum PIA; and (b) the
age 65 retirement income from the Executive Compensation Plan; and (c) the age
65 projected value of the Participant's accrued benefits under the Bank's
terminated defined benefit pension plan ; and (d) the age 65 projected value of
the Participant's profit-sharing contribution account under the Company's 401(k)
Retirement and Savings Plan; and (e) the age 65 projected value of the
Participant's matching contribution account under the Company's 401(k)
Retirement and Savings Plan. The benefits related to this plan will be paid out
of the general assets of the Bank.
Executive Compensation Plan. The Bank maintains an Executive Compensation Plan,
which is intended to provide supplemental retirement benefits to executive
officers designated by the Human Resources Committee of the Bank's Board of
Directors. Under this plan, an amount determined by the Committee will be paid
to a participant annually (in twelve monthly payments) for up to ten years
commencing upon the earliest of (a) his or her attaining sixty-five years of age
(or such later date as the participant and the Bank agree), (b) his or her death
or (c) his or her disability. The payments will be made to a participant or his
or her beneficiaries from the general funds of the Bank. Periodically, the Human
Resources Committee will approve a change to the amount of annual benefits
payable under the Executive Compensation Plan. Under
24
<PAGE>
the plan, the current annual benefits at normal retirement age established by
the Human Resources Committee for Messrs. Linton and Lapera are $20,000 and
$10,000, respectively. Messrs. Severson and Weller have no benefits under this
plan.
Human Resources Committee Report
The Human Resources Committee of the Company is composed of four outside
directors, Messrs. George B. Callan, Jr., Bernard L. Grove, Jr., Kenneth W. Rice
and Rand D. Weinberg. None of the committee members has ever been an employee of
the Company or its subsidiary. The Committee makes recommendations to the full
Board of Directors regarding the adoption, extension, amendment and termination
of the Company's compensation plans. In conjunction with the Company's Chairman
and President/Chief Executive Officer ("CEO"), it reviews the performance of
senior management, recommends annual salary revisions and administers the
Company's compensation plans.
The Committee is guided by the following executive compensation philosophy of
the Company:
1. Enable the Company to attract and retain superior management by
providing a very competitive total compensation package.
2. Align the interests of shareholders and management by providing stock
options as a portion of the executive's total compensation package.
3. Base a portion of the executive's total compensation package upon the
attainment of defined performance goals that support the growth and
appreciation of the Company's value over time.
4. Balance objectives of short-term performance and long-term growth and
appreciation of the Company through a combination of an annual
incentive compensation program using annual cash bonuses, and the stock
option plan that rewards the executives through long-term growth and
appreciation of the Company.
Executive compensation consists primarily of three components: Base Salary,
Annual Bonus, and Stock Options.
Base Salary
The Company's policy is to set base salaries for each executive officer
position, including that of the CEO, in a range commensurate for equivalent
banking jobs in the Mid-Atlantic region. The Company utilizes outside
consultants to monitor the Company's competitive compensation status. The Board
of Directors based upon the Human Resources Committee's recommendations sets the
base salaries of executive officers.
25
<PAGE>
Executive officers, other than the CEO, are reviewed annually by their
superiors. The CEO is reviewed by the Executive Committee of the Board of
Directors of the Company, which evaluation is forwarded to the Human Resources
Committee. The quality of their individual performances and the relationship of
their salary to their established salary range determine salary adjustments for
executive officers.
Adjustments to the base salary of the CEO are governed by the same factors as
other executive officers, but also specifically take into account the Company's
current financial performance as measured by earnings, asset growth, and overall
financial soundness. The Committee also considers the CEO's leadership in
setting high standards for financial performance, motivating his management
colleagues, and representing the Company and its values to internal and external
constituencies.
Annual Bonus
The Company has an Employee Performance Bonus Plan (the "Bonus Plan"). Annual
bonuses are accrued as of the end of the fiscal year and are paid in January.
The Company's Bonus Plan has several components related to the Company's
performance. For 1997, these components consisted of the Company achieving
pre-determined return on average shareholder's equity, asset growth, stock price
appreciation and earnings per share growth. The CEO's, Chief Operating Officer's
and the Chief Financial Officer's annual cash bonuses are strictly related to
the Company's performance goals while the other named executive officer's annual
cash bonus was related 50% to the Company's performance goals and 50% to the
Bank's performance goals. The Human Resources Committee approves goals for each
component of the Bonus Plan at the beginning of each year. Annual cash bonuses
tied to Bank performance goals and/or the Company's performance goals are
evaluated on a point system. Points are awarded for equaling or exceeding the
predetermined base for each component. Target goals are determined that exceed
the threshold level, as well as maximum goals. For each specific component, if
the threshold level is not achieved, no bonus is awarded for that component. The
maximum potential annual bonus award for the four named executive officers is
15.0% to 37.5% of base salary, depending on the executive's position.
In 1997, the Company exceeded its maximum performance goals. Based on these
results, the CEO was awarded a bonus of $78,750 which constituted 37.5% of his
1997 base salary. This annual bonus amount was accrued as of December 31, 1997
and paid in January 1998.
For the other named executive officers, Bank performance goals were exceeded in
addition to substantially meeting the Company's target performance goals.
As of December 31, 1997, the total accrued annual bonus for the four named
executive officers in the Bonus Plan was $155,346, which was paid in January
1998.
26
<PAGE>
Stock Options
The Company maintains a 1992 Stock Option Plan currently covering 454,782 shares
of the Company's Common Stock. This Stock Option Plan provides for grants by the
Human Resources Committee of non-qualified stock options, as well as incentive
stock options, thus tying a portion of the executive's compensation directly to
the performance of the Company's stock price. The exercise price of the option
to purchase stock under the plan may not be less than 100% of the fair market
value of the Company's stock on the date of grant. Stock options are immediately
exercisable from the date of grant and expire five and ten years from the date
of the grant. Stock options for the four named executive officers typically are
granted each year for a number of shares, the aggregate market value of which is
in a range of 35% to 140% of the executive officer's base salary as of the date
of grant. The Stock Option Plan also provides that the Company may grant one (1)
share of restricted stock for every five (5) shares of Common Stock purchased
pursuant to the exercise of options under the plan. The Common Stock purchased
pursuant to the exercise of such options must be held for a period of three
years before the restricted stock granted by the Company will fully vest to the
recipient thereof. Stock options must be exercised in the sequence in which they
were granted. This Plan also allows the Company to grant Reload Options, which
allows the recipient to receive an Option to purchase, at an exercise price per
share equal to the fair market value of the Common Stock as of that date, a
number of shares of Common Stock equal to the number of shares subject to the
exercised Option, if the original Option is exercised within three years of its
date of grant.
In 1997, the CEO received options to purchase 10,271 shares with an exercise
price of $28.625 per share. The CEO now owns 58,620 shares of the Company's
Common Stock and holds options to purchase an additional 39,198 shares, all of
which are presently exercisable. In 1997, the other named executive officers
received options to purchase an aggregate of 8,601 shares of the Company's
Common Stock with an exercise price of $28.625 per share. The Human Resources
Committee believes that significant equity interests in the Company held by the
Company's management align the interests of shareholders and management.
Stock options are designed to align the interests of executives with those of
the shareholders. This approach is designed to provide incentives for the
creation of shareholder value over the long term since the full benefit of the
compensation package cannot be realized unless stock price appreciation occurs
over a number of years.
27
<PAGE>
Conclusion
Through the programs described above, a moderate portion of the Company's
executive compensation is linked directly to individual and corporate
performance and stock price appreciation. In the case of the CEO, approximately
26% of his total 1997 compensation, including the accrued annual bonus as of
December 31, 1997, consisted of performance-based variable elements. The Human
Resources Committee intends to continue the policy of linking executive
compensation to corporate performance and returns to shareholders, recognizing
that ups and downs of the business cycle from time to time may result in an
imbalance for a particular period.
The Human Resources Committee of the Company has prepared this report.
George B. Callan, Jr., Bernard L. Grove, Jr., Kenneth W. Rice, Rand D. Weinberg.
Performance Graph
Set forth below is a line graph comparing the yearly percentage change in
cumulative total shareholder return on the Company's Common Stock from January
1, 1992 to December 31, 1997. The Company's yearly percentage change in
cumulative total shareholder return as shown below is compared to the NASDAQ
Market Index and the published Industry Peer Group Index consisting of 123
middle Atlantic banks published by Media General Financial Services.
28
<PAGE>
PLOT POINTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FCNB Peer Group NASDAQ
---- ---------- ------
<S> <C> <C> <C>
12/31/92 100.00 100.00 100.00
12/31/93 136.25 124.23 119.95
12/31/94 184.99 117.94 125.94
12/31/95 190.11 179.10 163.35
12/31/96 197.90 253.66 202.99
12/31/97 310.81 375.28 248.30
</TABLE>
Notes: 1. Total return assumes reinvestment of dividends.
2. Fiscal Year Ending December 31.
3. Return based on $100 dollars invested on January 1,
1993 in FCNB Corp Common Stock, an index for NASDAQ Stock Market
(U.S. Companies), and Bank peer group.
Item 13. Certain Relationships and Related Transactions.
During the past year the Bank has had, and the Bank expects to have in the
future, banking transactions in the ordinary course of business with its
directors and officers as well as with their associates. These transactions have
been made on substantially the same terms, including interest rates, collateral,
and repayment terms, as those prevailing at the same time for comparable
transactions with unaffiliated parties. The extensions of credit to these
persons have not and do not currently involve more than the normal risk of
collectability or present other unfavorable features. At December 31, 1997,
loans to directors and officers and their respective associates, including loans
guaranteed by such persons, aggregated $9.2 million, which represented
approximately 11.9% of consolidated shareholders' equity.
Gail T. Guyton, a director of the Company and the Bank, is chairman of the board
and a principal shareholder of Morgan-Keller, Inc., a construction firm. During
1997, the Company paid Morgan-Keller, Inc. a total of $160,000 in construction
payments, which related to various construction projects.
Jacob R. Ramsburg, Jr., a director of the Company and the Bank, is president and
a principal shareholder of Frederick Underwriters, Inc., a general insurance
agency which received $340,000 in premiums during 1997 in connection with the
Company's purchase of certain types of insurance coverage.
Rand D. Weinberg, a director of the Company and the Bank, is a partner with
Weinberg & Weinberg, a law firm in Frederick which received $15,000 in legal
fees during 1997 for legal representation of various legal matters.
29
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of the Report:
1. The following consolidated financial statements
included in the 1997 Annual Report to Shareholders
are incorporated herein by reference under Item 8 of
this Report:
<TABLE>
<CAPTION>
Page Number
in Annual Report
<S> <C>
Consolidated Balance Sheets 25
Consolidated Statements of Income 26
Consolidated Statements of Changes
in Shareholders' Equity 27
Consolidated Statements of Cash
Flows 28
Notes to Consolidated Financial
Statements 30-45
Report of Independent Auditors 45
</TABLE>
2. All schedules for which provision is made in the
accounting regulations of the Securities and Exchange
Commission are not applicable or are not required
under the related instruction and therefore have been
omitted.
3. Exhibits required by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit No. Item
----------- ----
<S> <C>
3-A A copy of the Articles of Restatement of the
Articles of Incorporation of FCNB Corp is
hereby incorporated by reference to Exhibit
3-A of the Annual Report on Form 10-K for
1994 of the Registrant.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Item
----------- ----
<S> <C>
3-B A copy of the amended By-Laws of FCNB
Corp is hereby incorporated by reference to
Exhibit 3-B of the Annual Report on Form
10-K for 1993 of the Registrant.
10.1 A copy of the Executive Compensation
Plan for Directors of FCNB Bank is hereby
incorporated by reference to Exhibit 10-D to
the Registration Statement on Form S-4 (File
No. 33-09406) of the Registrant.
10.2 A copy of the Executive Compensation
Plan for Management Personnel of FCNB Bank
is hereby incorporated by reference to
Exhibit 10-E to the Registration Statement
on Form S-4 (File No. 33- 09406) of the
Registrant.
10.3 A copy of the Supplemental Executive
Retirement Plan of FCNB Bank, filed
herewith.
10.4 A copy of the Severance Agreement
between FCNB Corp, FCNB Bank and A. Patrick
Linton, filed herewith.
10.5 A copy of the Severance Agreement
between FCNB Corp, FCNB Bank and Martin S.
Lapera, filed herewith.
10.6 A copy of the Severance Agreement
between FCNB Corp, FCNB Bank and Mark A.
Severson, filed herewith.
10.7 A copy of the Employee Incentive Bonus
Plan of FCNB Bank is hereby incorporated by
reference to Exhibit 10-F of the Annual
Report on Form 10-K for 1991 of the
Registrant.
10.8 A copy of the Compensation Agreement
with Clyde C. Crum, filed herewith.
11 Statement Regarding Computation of Basic
and Diluted Per Share Earnings, filed
herewith.
12 Statement Regarding Computation of
Ratios, filed herewith.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Item
<S> <C>
13 The Company's 1997 Annual Report to
Shareholders, filed herewith.
21 A list of the subsidiaries of FCNB Corp
is hereby incorporated by reference to the
1997 Annual Report to Shareholders at page
47.
23 Consent of Independent Auditor
27 Financial Data Schedule
99.1 A copy of the Dividend Reinvestment and
Stock Purchase Plan of FCNB Corp is hereby
incorporated by reference to Registration
Statement on Form S-3 (File No. 33-55040) of
Registrant.
99.2 A copy of the FCNB Corp 1992 Employee
Stock Option Plan, as amended, filed
herewith.
99.3 A copy of the FCNB Corp 1997 Stock
Option Plan for Directors, filed herewith.
</TABLE>
(b) There were no Reports on Form 8-K filed during the quarter ended
December 31, 1997.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FCNB CORP
(Registrant)
Date: March 10, 1998 By: -------------------------------------
A. Patrick Linton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons in the capacities and on the dates
indicated:
PRINCIPAL EXECUTIVE OFFICER:
Date: March 10, 1998 /s/ A. PATRICK LINTON
------------------------------------
A. Patrick Linton
President,
Chief Executive Officer and Director
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
Date: March 10, 1998 /s/ MARK A. SEVERSON
-----------------------------------
Mark A. Severson
Senior Vice President and Treasurer
Date: March 10, 1998 /s/ GEORGE B. CALLAN
-----------------------------------
George B. Callan, Jr., Director
Date: March 10, 1998 /s/ SHIRLEY D. COLLIER
-----------------------------------
Shirley D. Collier, Director
Date: March 10, 1998 /s/ MILES M. CIRCO
-----------------------------------
Miles M. Circo, Director
Date: March 10, 1998 /s/ CLYDE C. CRUM
-----------------------------------
Clyde C. Crum, Director
<PAGE>
Signatures (continued)
Date: March 10, 1998 /s/ JAMES S. GRIMES
-------------------------------
James S. Grimes, Director
Date: March 10, 1998 /s/ BERNARD L. GROVE
-----------------------------------
Bernard L. Grove, Jr., Director
Date: March 10, 1998 /s/ GAIL T. GUYTON
-----------------------------------
Gail T. Guyton, Director
Date: March 10, 1998 /s/ FRANK L. HEWITT
-----------------------------------
Frank L. Hewitt, III, Director
Date: March 10, 1998 /s/ RAMONA C. REMSBERG
-----------------------------------
Ramona C. Remsberg, Director
Date: March 10, 1998 /s/ JACOB R. RAMSBURG
-----------------------------------
Jacob R. Ramsburg, Jr., Director
Date: March 10, 1998 /s/ KENNETH W. RICE
-----------------------------------
Kenneth W. Rice, Director
Date March 10, 1998 /s/ RAND D. WEINBERG
-----------------------------------
Rand D. Weinberg, Director
Date: March 10, 1998 /s/ DEWALT J. WILLARD
-----------------------------------
DeWalt J. Willard, Jr., Director
<PAGE>
Exhibit 10.3
FCNB BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Board of Directors of FCNB Bank, ("Bank") has adopted this
Supplemental Executive Retirement Plan, effective January 1, 1997, in order to
provide retirement benefits and long-term compensation to a select group of
executives, to attract and retain competent executives, as well as to encourage
the long-term financial success of the Bank through a formula taking into
account the Bank's long-term financial performance.
ARTICLE I
Definitions
The following words and phrases, when used in the Plan with an initial
capital letter, shall have the meanings set forth below unless the context
clearly indicates otherwise.
1.1 "Account" shall mean a bookkeeping account maintained by the
Bank in the name of the Participant.
1.2 "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Bank, as the terms are defined in Section 424(e) and (f),
respectively, of the Code.
1.3 "Average Base Salary" shall mean the average base salary
projected to be paid to a Participant during the three complete calendar years
prior to his or her attainment of age 65. This projection shall be made by
assuming that the Participant's base salary in effect on the last day of a
particular Plan Year increases five percent per annum.
1.4 "Bank" shall mean FCNB Bank, and any successor to its
interest.
1.5 "Bank Credits" shall mean any credits that the Bank makes to
Accounts pursuant to Section 2.3 hereof.
1.6 "Beneficiary" shall mean the person or persons whom a
Participant may designate as the beneficiary of the Participant's Benefits under
Articles II and III, and shall mean the Participant's estate in the absence of a
valid designation. A Participant's election of a Beneficiary shall be made on
the Distribution Election Form, shall be revocable by the Participant during his
or her lifetime, and shall be effective only upon its delivery to an executive
officer of the Bank and acceptance by the Committee (which acceptance shall be
presumed unless, within ten business days of delivery of the Participant's
election, the Committee provides the Participant with a written notice detailing
the reasons for its rejection).
1.7 "Benefits" shall mean benefits accrued under Article II of the
Plan.
1.8 "Board" shall mean the Board of Directors of the Bank.
1.9 "Change in Control" shall mean any one of the following
events: (1) Any corporation, person or entity becomes the "beneficial owner" (as
such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly
or indirectly, of securities of the Bank or the Company representing 20% or more
<PAGE>
of the combined voting power of its then outstanding securities, other than
beneficial ownership by a Participant, the Company, the Bank, any employee
benefit plan of the Bank or the Company, or any person or entity organized,
appointed or established pursuant to the terms of any such benefit plan; (2) the
Bank's or the Company's stockholders approve an agreement to merge or
consolidate with another corporation, or an agreement providing for the sale of
substantially all of the assets of the Company to one or more corporations, in
any case other than with or to a corporation 50% or more of which is controlled
by, or is under common control with, the Bank or the Company; or (3) during any
two-year period, individuals who at the date on which the period commences
constitute a majority of the Board of Directors of the Bank or the Company cease
to constitute a majority thereof for any reason; provided, however, that the
preceding clause shall not apply as to any director who was not a director at
the beginning of such period if such director was elected by, or on the
recommendation of, at least two-thirds of the directors who were directors at
the beginning of such period (either actually or by prior operation of this
provision), other than any director who is so approved in connection with any
actual or threatened contest for election to positions on the Board of
Directors. The decision of the Committee as to whether a change in control has
occurred shall be conclusive and binding.
1.10 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.11. "Committee" shall mean any committee the Board may appoint to
administer and effectuate the Plan. The Committee may act only by a majority of
it members and may act through meetings or written consents. Notwithstanding the
foregoing, the Board may act at any time in lieu of the Committee with respect
to any action that the Committee may take pursuant to the Plan.
1.12 "Company" shall mean FCNB Corp.
1.13 "Deferrals" shall mean any Participant-directed deferrals of
salary or cash bonuses that occur pursuant to Section 2.1 hereof.
1.14 "Deferral Election Form" shall mean the form attached hereto
as Exhibit "A".
1.15 "Disability" shall mean any condition that results in a
Participant's entitlement to collect long-term disability benefits from the
Bank. In the absence of a plan by which the Bank provides such benefits,
"Disability" shall have the meaning set forth in Section 22(e)(3) of the Code.
1.16 "Distribution Election Form" shall mean the form attached
hereto as Exhibit "B".
1.17 "Effective Date" shall mean January 1, 1997.
1.18 "Eligible Executives" shall mean the select group of
management or highly compensated employees whom the Board names in Exhibit "C".
1.19 "Employee" shall mean any person who is employed by the Bank.
1.20 "Employer" shall mean the Bank and its Affiliates (if any).
1.21 "Final Average Compensation" shall mean a Participant's
Average Base Salary plus an amount equal to the product of (i) the Participant's
Average Base Salary, and (ii) the Participant's average bonus percentage for the
last three complete calendar years immediately preceding the particular year in
<PAGE>
which a Bank Credit is being calculated pursuant to Section 2.3 of the Plan.
1.22 "Investment Election Form" shall mean the form attached hereto
as Exhibit "D".
1.23 "Hour of Service" shall have the same meaning as defined in
the Bank's 401(k) Plan.
1.24 "Just Cause" shall include, without limitation: dishonesty;
theft; conviction of a crime, which is either a (1) felony or (2) misdemeanor
involving moral turpitude or financial impropriety; unethical business conduct;
activity which is contrary to Employer's interests; gross or repeated negligence
in carrying out Participant's duties; or material violation of Participant's
obligations.
(i) Should Employer deem specific activities contrary to
Employer's interest or that negligence by Participant in
carrying out his duties or any violation of Participant's
obligations hereunder has occurred, written notice of said
activity, negligence or violation shall be provided by
Employer to Participant along with a reasonable period of time
in which to correct. Provided that such activity, negligence
or violation is neither dishonest nor criminal, 90 days shall
be deemed to be a reasonable time in which to correct such
deficiencies,
(ii) Discharge for "cause" will require a two-thirds majority
vote of the Board, exclusive of Participant. Termination of
Participant's employment for Just Cause shall include
termination as an employee, officer and director of Employer.
1.25 "Participant" shall mean an Eligible Employee who has an
Account under the Plan.
1.26 "Plan" shall mean this FCNB Supplemental Executive Retirement
Plan.
1.27 "Plan Year" shall mean January 1 through and including
December 31.
1.28 "Trust Agreement" shall mean that agreement entered into
pursuant to the terms hereof between the Bank and the Trustee.
1.29 "Trust" shall mean the trust created under the terms of the
Trust Agreement.
1.30 "Trustee" shall mean that person(s) or entity appointed by the
Committee pursuant to the Trust Agreement to hold legal title to the Plan Assets
for the purposes set forth herein.
1.31 "Year of Service" shall mean a calendar year during which a
Participant is credited with at least 1,000 hours of service.
ARTICLE II
Credits to Accounts
2.1 Participant Deferrals. Each Participant may elect, on the Deferral
Election Form, to make contributions from his or her salary or bonus (if any),
on a pre-tax basis. Such elections shall (i) be irrevocable until the end of the
calendar year in which they are made (except a Participant may prospectively
suspend deferrals once per calendar year), and (ii) be effective on the January
1st following their acceptance by the Administrator, provided that a Participant
may elect to have an election take effect as soon as
<PAGE>
administratively practicable with respect to salary and cash bonuses that the
Participant may receive in the future and as to which the Participant currently
has no legal right or claim. As soon as practicable after the end of each pay
period, the Bank shall credit each Participant's Account with any Deferrals that
occurred during the pay period.
2.2 Eligibility for Contribution. Each Participant shall be
entitled to have his or her Account receive the Bank Credit for a particular
Plan Year only if the Participant is both credited with a Year of Service during
the Plan Year and is employed on the last day of the Plan Year or terminates
employment during the Plan Year due to his or her (i) death, disability,
retirement, or (ii) acquisition or merger of the Bank. ---- ---
2.3 Bank Credits. If a Participant satisfies the requirements of
Section 2.2 for a Plan Year, the Bank shall credit the Participant's Account, as
of December 31 of such Plan Year, with an amount equal to (i) sixty percent
(60%) of the Eligible Executive's Final Average Compensation commencing at age
65, or if later, actual retirement with 15 Years of Service, reduced by (ii) the
combined value of the following:
(a) The Participant's estimated primary insurance amount
("PIA") at age 65 from Social Security, assuming the
Participant is entitled to the maximum PIA; and
(b) The illustrated age 65 retirement income identified in
Exhibit "E" hereof; and
(c) The age 65 projected value of the Participant's accrued
benefits under the Bank's terminated defined benefit pension
plan identified in Exhibit "G"; and
(d) The age 65 projected value of the Participant's
profit-sharing contribution account under the Company's 401(k)
Retirement and Savings Plan; and
(e) The age 65 projected value of the Participant's matching
contribution account under the Company's 401(k) Retirement and
Savings Plan.
The assumptions used to calculate the amounts under (a), (b), (c), (d),
and (e) are contained in attached Exhibit "F".
2.4 Investment Return on Accounts. As of the last day of each
calendar quarter of each Plan Year, the Bank shall credit each Participant's
Account with any gains or losses that the Trustee attributes to Trust assets
that the Bank has, in turn, attributed to credits made under Sections 2.1 and
2.3 hereof.
Each Participant may request, on the Investment Election Form, to have
future appreciation or depreciation credited to his or her Account based on the
Participant's selection of one or more of the investment options available under
the Company's 401(k) Retirement and Savings Plan. The Bank has complete
discretion to honor or not to honor a Participant's requested investment
direction with respect to his or her Participant Account. Further, the Bank has
complete discretion to honor or not honor any subsequent changes to investment
directions periodically made by a Participant as agreed to by the Bank.
2.5 Plan Expenses. The Bank will pay all expenses associated with
the Plan.
ARTICLE III
Vesting; Distributions from Accounts
<PAGE>
3.1 Vesting. Subject to Section 3.3 hereof, Participants shall at
all times be fully vested in the portion of their Accounts that are attributable
to Deferrals. With respect to the portion of a Participant's Account that is
attributable to Bank Credits, the Participant's vested interest shall be
determined according to the following schedule:
<TABLE>
<CAPTION>
Full Years of Service Vested Percent
- ----------------------------------------------
<S> <C>
Less than 2 0%
2 20%
3 40%
4 60%
5 or more 100%
</TABLE>
Notwithstanding this vesting schedule, vesting shall accelerate to 100%
upon a Change in Control or a Participant's termination of employment due to his
or her death or disability. Participants will receive credit for full Years of
Service with the Bank prior to the Plan's Effective Date.
3.2 Distributions and Forfeitures. The Bank shall pay the vested
balance of a Participant's Account, in cash, in substantially equal monthly
payments for a period of ten years, beginning on the first day of the second
month following the Participant's termination of employment for any reason other
than Just Cause or death; provided that a Participant may elect on the
Distribution Election Form to have his or her Account paid in an immediate lump
sum distribution in lieu of monthly payments.
3.3 Forfeiture for Just Cause. In the event that a Participant's
employment with the Bank is terminated due to Just Cause, the Participant's
Account shall be automatically forfeited, and the Bank shall not have any
obligation to pay Benefits to the Participant or the Participant's Beneficiary.
3.4 Death Benefits. If a Participant dies before receiving all
Benefits payable pursuant to Section 3.2, then the remaining vested balance of
the Participant's Account shall be distributed in a lump sum to the
Participant's Beneficiary not later than the first day of the second month
following the date of the Participant's death; provided that a Participant may
specify on the Distribution Election Form a distribution period of up to 10
years (with payments to be made in substantially equal annual installments).
3.5 Distribution Elections. In order to be effective, a
Participant's Distribution Election Form must be received and accepted by the
Committee either (i) more than one year before the date on which the
Participant's service as an Employee terminates for any reason or (ii) within
30 days of the Participant's initial commencement of Plan participation, or
(iii) more than 90 days before the closing of a Change in Control. In the
event a Participant files more than one valid Distribution Election Form, the
most recent valid election shall supersede any and all prior elections.
Nevertheless, Beneficiary designations made pursuant to executed Election
Forms shall be revocable during the Participant's lifetime and a Participant
may, by submitting an effective superseding Election Form at any time and
from time to time, prospectively change the designated Beneficiary and the
manner of payment to a Beneficiary.
3.6 Change in Control. In the event of a Change in Control, the
Bank and the Participant have the right to mutually agree to limit payments that
they might consider excess "golden parachute payments" as defined
underss.ss.280G and 4999 of the Code.
3.7 Hardship. If the Participant or a member of the Participant's
immediate family (or a
<PAGE>
dependent of the Participant) should suffer one or more of the following
unforeseen hardships, the Participant may apply to the Committee for a
withdrawal of all or part of the vested portion of his or her Account:
(i) extraordinary medical expenses, or
(ii) other unforeseeable and severe financial hardships that the Bank's
Committee may generally recognize.
The Committee shall have sole and complete discretion over whether or
not to grant a Participant's request for a hardship withdrawal, provided that
(i) the Committee shall make its decisions in a uniform and nondiscriminatory
manner, and (ii) the Participant who requests a withdrawal shall abstain from
participation in, and voting on, such request. If the Committee approves a
withdrawal, the Bank shall pay the approved amount to the Participant as soon as
practicable, and shall treat said amount as first reducing Participant deferrals
(plus earnings thereon) to the extent credited to his or her Account, and
thereafter reducing the vested portion of the Bank's contributions (plus
earnings thereon) to the Participant's Account.
ARTICLE IV
Source of Benefits
4.1 General Rule. Benefits accumulated under the Plan shall constitute
an unfunded, unsecured promise by the Bank to provide such payments in the
future, as and to the extent such Benefits become payable. Benefits shall be
paid from the general assets of the Bank, and no person shall, by virtue of this
Plan, have any interest in such assets (other than as an unsecured creditor of
the Bank). For any Plan Year during which a Trust is maintained, (i) the Trustee
shall inform the Committee annually prior to the commencement of each fiscal
year as to the manner in which such Trust assets shall be invested, and (ii) the
Committee shall, as soon as practicable after the end of each calendar quarter,
provide the Trustee with a schedule specifying the amount of any Trust
contribution that is attributable to the Participant's Account for purposes only
of Section 2.4 of this Plan. The Bank shall also, at least annually, provide the
Trustee with a schedule specifying the amounts payable to each Participant, and
the time for making such payments. All interest, dividends, and realized
gain/losses on Trust assets will be taxed to the Bank.
4.2 Trust Funding on Change in Control. In the event of a Change in
Control, the Bank shall contribute to the Trust an amount sufficient to provide
the Trust with assets having an overall value equivalent to the value of the
aggregate Account balances under the Plan.
ARTICLE V
Recordkeeping
The Committee shall be responsible for maintaining all Accounts, with
particular reference to contribution sources and allocating gains and losses (at
least quarterly), and shall prepare account reports for the Participants and the
Bank. The Committee may in its discretion appoint or remove a third-party
recordkeeper.
ARTICLE VI
Assignment
Except as otherwise expressly provided by this Plan, it is agreed that
neither the Participant nor his or her Beneficiary, to include the Participant's
executors and administrators, heirs, legatees, distributees, and
<PAGE>
any other person or persons claiming any benefits under him or her under this
Plan shall have any right to assign, transfer, pledge, hypothecate, sell,
transfer, alienate and encumber or otherwise convey the right to receive any
Benefits hereunder, which Benefits and the rights thereto are expressly declared
to be nontransferable. The right to receive Benefits under this Plan shall
likewise not be subject to execution, attachment, garnishment sequestration or
similar legal, equitable or other process to the benefit of the Participant's
creditors. Any attempted assignment, transfer, pledge hypothecation or other
disposition of the Participant's rights to receive Benefits under this Plan or
the levy of any attachment, garnishment or similar process thereupon, shall be
null and void and without effect. Notwithstanding the foregoing, or any other
provision of this Plan, a Participant may transfer all or any part of his or her
Account, and the rights associated therewith, to his or her spouse, lineal
ascendants, lineal descendants, or to a duly established trust for the benefit
of one or more of these individuals. Plan Benefits so transferred may thereafter
be transferred only to the Participant who was originally entitled to receive
said Benefits or to an individual or trust to whom the Participant could have
initially transferred the Benefits pursuant to this Article VI. The Benefits,
and the rights thereto, which are transferred pursuant to this Article VI shall
be exercisable by the transferee according to the same terms and conditions as
applied to the Participant.
ARTICLE VII
No Retention of Services
The Benefits payable under this Plan shall be independent of, and in
addition to, any other compensation payable by the Bank to a Participant,
whether in the form of fees, bonus, retirement income under employee benefit
plans sponsored or maintained by the Bank or otherwise. This Plan shall not be
deemed to constitute a contract of employment between the Bank and any
Participant.
ARTICLE VIII
Rights of Participants and Beneficiaries
The rights (if any) of the Participants and their Beneficiaries under
this Plan shall be solely those rights of unsecured creditors of the Bank.
ARTICLE IX
Reorganization
The Bank agrees that it will not merge or consolidate with any other
corporation or organization, or permit its business activities to be taken over
by any other organization, unless and until the succeeding or continuing
corporation or other organization shall expressly assume the rights and
obligations of the Bank herein set forth. The Bank further agrees that it will
not cease its business activities or terminate its existence, other than as
heretofore set forth in this Paragraph, without having made adequate provision
for the fulfillment of its obligation hereunder.
ARTICLE X
Amendment and Termination
The Committee may amend or terminate the Plan at any time, provided
that no such amendment or termination shall, without the written consent of an
affected Participant, alter or impair any vested rights of the Participant under
the Plan.
ARTICLE XI
<PAGE>
State Law
This Plan shall be construed and governed in all respects under and by
the laws of the State of Maryland except to the extent preempted by Federal law.
If any provision of this Plan shall be held by a court of competent jurisdiction
to be invalid or unenforceable, the remaining provisions hereof shall continue
to be fully effective.
ARTICLE XII
Headings; Gender
Headings and subheadings in this Plan are inserted for convenience and
reference only and constitute no part of this Plan. This Plan shall be
construed, where required, so that the masculine gender includes the feminine.
ARTICLE XIII
Interpretation of the Plan
The Committee shall have sole and absolute discretion to administer,
construe, and interpret the Plan, and the decisions of the Committee shall be
conclusive and binding on all affected parties, unless such decisions are
arbitrary and capricious.
ARTICLE XIV
Disputes; Legal Fees
14.1 Generally. Any controversy or claim that arises under
this Plan and cannot be settled by the parties shall be addressed solely in the
federal or state courts located in Frederick, Maryland, or in the closest
jurisdiction thereto if no state or federal court exists in Frederick at the
time of such review.
14.2 Reimbursement of Legal Fees. In the event that any
dispute arises between the Participant and the Bank as to the terms or
interpretation of this Plan, whether instituted by formal legal proceedings or
otherwise, including any action that the Participant takes to enforce the terms
of this Plan or to defend against any action taken by the Bank or an Affiliate,
the Participant shall be reimbursed for all costs and expenses, including
reasonable attorneys' fees, arising from such dispute, proceedings or actions,
provided that the Participant shall obtain a final judgement or settlement
substantially in favor of the Participant either in a court of competent
jurisdiction or in a written settlement of the dispute. Such reimbursement shall
be paid within ten (10) days of Participant's furnishing to the Bank written
evidence, which may be in the form, among other things, of a canceled check or
receipt, of any costs or expenses incurred by the Participant.
ARTICLE XV
Duration of Plan
Unless terminated earlier in accordance with Article X, this Plan shall
remain in effect during the term of service of the Participants and until all
Benefits payable hereunder have been made.
<PAGE>
Exhibit 10.4
SEVERANCE AGREEMENT
This agreement is made this 13th day of May, 1997 by and
between FCNB Corp and FCNB Bank (hereinafter collectively referred to as the
"Bank"), and A. Patrick Linton (hereinafter referred to as "Executive").
BACKGROUND
Executive is the President and Chief Executive
Officer of the Bank. The current economic and regulatory
climate of the banking industry has resulted in numerous
mergers and acquisitions in the banking community in Maryland.
Executive has expressed concern about the possibilities of a
change in control at the Bank that would result in his loss of
employment. To address these concerns and to secure
Executive's continued commitment to the Bank, the Board of
Directors of the Bank have decided to offer this Severance
Agreement to the Executive.
NOW THEREAFTER, in consideration of the premises and covenants
contained herein, the Bank and Executive agree as follows:
1. Definitions.
A. Change in Control of the Bank.
For purposes of this Agreement, a Change in Control
of the Bank shall be deemed to have occurred if:
(i) twenty percent (20%) or more of the
voting power of the Bank is acquired, directly or indirectly, by a person (or
group of persons acting in concert) who do not presently possess such voting
power;
<PAGE>
(ii) the composition of the Board of
Directors of the Bank changes over a period of time of two consecutive years
such that the members of the Board at the beginning of the two year period no
longer constitute a majority of the Board at the end of the two year period;
however, if a new director is nominated and elected after advance approval by
not less than two-thirds of the directors in office at that time of election,
that new director shall be considered, for purposes of this Agreement, to have
been a director at the beginning of that consecutive two year period; or
(iii)the Bank approves an agreement to merge
or consolidate with or to allow substantially all of its assets to be purchased
by another corporation and as a result of such merger, consolidation or sale of
assets, less than a majority of the outstanding voting stock of the surviving,
resulting or purchasing corporation is owned, immediately after the transaction,
by the holders of the outstanding voting stock of the Bank immediately before
the transaction.
B. Discharge for Cause.
--------------------
For purposes of this Agreement, discharge
for "Cause" as used herein shall include, without limitation: dishonesty; theft;
conviction of a crime, which is either a (1) felony or (2) misdemeanor involving
moral turpitude or financial impropriety; unethical business conduct; activity
which is contrary to Employer's interests; gross or repeated negligence in
carrying out Executive's duties; or material violation of Executive's
obligations.
i. Should Employer deem specific activities
contrary to Employer's interest or that negligence by Executive in carrying out
his duties or any violation of Executive's obligations hereunder has occurred,
written notice of said activity, negligence or violation shall be provided by
Employer to Executive along with a reasonable period of time in which to
correct. Provided that such activity, negligence or violation is neither
dishonest nor criminal,
<PAGE>
90 days shall be deemed to be a reasonable time in which to correct such
deficiencies.
(ii) Discharge for "cause" will require a
two-thirds majority vote of the Board, exclusive of Executive. Termination of
Executive's employment for cause shall include termination as an employee,
officer and director of Employer.
C. Resignation for Good Reason.
For purposes of this Agreement, Executive
will be deemed to have resigned for good reason from his employment with the
Bank if the Bank changes, in a manner detrimental to Executive, the compensation
or benefits provided to Executive within one year of a Change in Control of the
Bank or within one year of the detrimental action. A detrimental action will
also include relocation of Executive's principal place of employment by more
than 35 miles from its location immediately prior to the change in Control.
2. Continuation of Executive's Employment. Executive
hereby agrees that he remains an at-will employee of the Bank unless and until
there is a Change in Control of the Bank, at which time the terms of this
Agreement take effect.
3. Severance Benefit. In the event that Executive's
employment with the Bank terminates as a result of a Change in Control of the
Bank and based upon Executive's Resignation for Good Reason (as defined in
Paragraph 1(C) of this Agreement) or for reasons other than Discharge for Cause
(as defined in Paragraph 1(B) of this Agreement), the Bank shall provide the
following severance benefits to Executive:
(i) The Bank shall pay to Executive each month during
the Severance Benefit Period an amount equal to one-twelfth of his annual
salary. Executive's annual salary shall be deemed to be the annual base salary
in effect on January 30 of the year in which the Change in Control
<PAGE>
occurred, plus a cash bonus which shall be determined by calculating the average
cash bonus earned for the previous 3 years. The payment shall be paid to the
Executive beginning on the fifteenth (15th) day of the first month following his
termination. The Bank shall withhold such amounts from Executive's severance pay
as required under any applicable federal, state or local law.
(ii) The Bank shall, at its expense, provide to
Executive throughout the Severance Benefit Period, life, medical, health
(including dental and vision), accident and disability insurance and a
survivor's income benefit in form, substance and amount equal to that provided
to him before the commencement of the Severance Benefit Period.
(iii) If Executive's employment terminates at any
time following a Change in Control of the Bank, but such termination is the
result of a Discharge for Cause (as defined in Paragraph 1(B) of this Agreement)
or the result of Executive's voluntary retirement, the Bank shall have no
obligation to pay any severance benefits to Executive.
4. Severance Benefit Period. The Severance Benefit Period
shall begin upon the effective date of Executive's termination from employment
as a result of a Change in Control of the Bank and based upon Executive's
Resignation for Good Reason (as defined in paragraph 1(C) of this Agreement) or
for reasons other than Discharge for Cause (as defined in paragraph 1 (B) of
this Agreement) and shall continue for a period of twenty four (24) months. The
Executive, at his sole discretion, may elect to receive the Severance Benefit in
a single lump sum payment, however benefits (as defined in Section 3, ii) will
continue for the full Benefit Period.
5. Notice Period . Executive agrees that should he resign for
Good Reason from his employment with the Bank, he will provide at least one (1)
month advance notice of his intention to resign. The Bank retains discretion,
however, as to whether Executive's employment shall terminate
<PAGE>
immediately upon notification of his intention to resign or at the conclusion of
the one (1) month notice period.
6. Successors and Parties in Interest. This Agreement shall
be binding upon the Bank, its successors and assigns, including without
limitation any entity that acquires, directly or indirectly, by purchase,
merger, consolidation or otherwise, all or substantially all of the business or
assets of the Bank.
7. Rights Under Other Plans. This Agreement is not intended
to reduce, restrict or eliminate any benefit to which Executive may otherwise be
entitled at the time of his termination from employment under any benefit plan
of the Bank then in effect.
8. Conditions Precedent.
(i) Delivery of Signed Agreement. The performance by the
Bank of the obligations imposed upon it by this Agreement is expressly
conditioned upon Executive delivering a signed copy of this Agreement to the
Bank no later than May 30, 1997.
(c) Confidential Information. Executive covenants that,
upon termination, he will return to the Bank, in good order and condition, any
and all books, records, lists and other written, typed, printed, or
electronically stored material, or any other information of any kind deemed by
the Bank to be confidential and/or proprietary, whether furnished by the Bank,
or prepared by Executive, which contains any information relating to the
business of the Bank, and Executive covenants that he has not and will not
retain copies of those materials.
(d) Injunctive Relief. In the event of a breach or
threatened breach by Executive of any of the provisions of this Agreement, and
notwithstanding any other provision in this agreement, Employer, in addition to
any other available rights or remedies, shall be entitled to such
<PAGE>
temporary restraining orders and permanent injunctions, as are allowable and
authorized by the laws of the State of Maryland based on the facts of the case,
to restrain such breach by Employee and/or any persons directly or indirectly
acting for or with him. Employee's obligations under this agreement shall remain
binding and enforceable according to its terms notwithstanding expiration or
termination of Employee's employment relationship with the Bank, whether such
termination be voluntary or involuntary.
9. Notices. All notices and other communications required to
be given under this Agreement shall be deemed to have been given or made when
such notice is hand-delivered or when mailed, certified mail, return receipt
requested, to the Bank or Executive, as appropriate, at the following address:
FCNB Bank Mr. A. Patrick Linton
7200 FCNB Court 5032 Ballenger Creek Pike
Frederick, MD 21703 Frederick, MD 21701
10. Fully-Inclusive Agreement. Executive represents that he
has not relied on any other oral or written representations of any kind made by
any person in reaching this agreement or in signing this document. This document
includes all terms and conditions regarding the severance package being offered
Executive in the event of a Change in Control.
11. Severability. If any provision or any portion of any
provision of this Agreement is held unlawful or unenforceable, the balance of
this Agreement shall nonetheless in all respects remain binding and effective
and shall be construed to be in full force and effect to the extent lawfully
permissible.
12. Miscellaneous. This Agreement embodies the entire
Agreement and understanding between the parties hereto with respect to the
subject matters hereof, and may not be
<PAGE>
changed, waived, discharged or terminated unless agreed to by the parties and
only by an instrument in writing signed by both parties. This Agreement will
remain in effect until the earlier of a Change in Control, the Executive's
termination of employment, or until this Agreement is terminated with the
written consent of the parties. The use of any gender, tense or conjugation
includes all gender, tenses and conjugations. This Agreement shall be construed
in accordance with and governed by the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties have executed this
Agreement on the day and year first above written with the intention of
making this a document under seal. WITNESS:
/s/A. Patrick Linton May 13, 1997
- ---------------------- A. Patrick Linton ------------
President & CEO Date
FCNB Bank
- ---------------------- By:/s/ Clyde Crum May 13, 1997
Clyde Crum ------------
Chairman of the Board Date
FCNB Corp
<PAGE>
Exhibit 10.5
SEVERANCE AGREEMENT
This agreement is made this 13th day of May, 1997 by and between FCNB Corp
and FCNB Bank (hereinafter collectively referred to as the "Bank"), and Martin
S. Lapera (hereinafter referred to as "Executive").
BACKGROUND
Executive is the Executive Vice President, Chief
Operating Officer of the Bank. The current economic and regulatory
climate of the banking industry has resulted in numerous mergers and
acquisitions in the banking community in Maryland. Executive has
expressed concern about the possibilities of a change in control at the
Bank that would result in his loss of employment. To address these
concerns and to secure Executive's continued commitment to the Bank,
the Board of Directors of the Bank have decided to offer this Severance
Agreement to the Executive.
NOW THEREAFTER, in consideration of the premises and covenants
contained herein, the Bank and Executive agree as follows:
1. Definitions.
A. Change in Control of the Bank.
For purposes of this Agreement, a Change in Control of
the Bank shall be deemed to have occurred if:
(i) twenty percent (20%) or more of the voting power
of the Bank is acquired, directly or indirectly, by a person (or group of
persons acting in concert) who do not presently possess such voting power;
<PAGE>
(ii) the composition of the Board of Directors of the
Bank changes over a period of time of two consecutive years such that the
members of the Board at the beginning of the two year period no longer
constitute a majority of the Board at the end of the two year period; however,
if a new director is nominated and elected after advance approval by not less
than two-thirds of the directors in office at that time of election, that new
director shall be considered, for purposes of this Agreement, to have been a
director at the beginning of that consecutive two year period; or
(iii) the Bank approves an agreement to merge or
consolidate with or to allow substantially all of its assets to be purchased by
another corporation and as a result of such merger, consolidation or sale of
assets, less than a majority of the outstanding voting stock of the surviving,
resulting or purchasing corporation is owned, immediately after the transaction,
by the holders of the outstanding voting stock of the Bank immediately before
the transaction.
B. Discharge for Cause.
For purposes of this Agreement, discharge for "Cause"
as used herein shall include, without limitation: dishonesty; theft; conviction
of a crime, which is either a (1) felony or (2) misdemeanor involving moral
turpitude or financial impropriety; unethical business conduct; activity which
is contrary to Employer's interests; gross or repeated negligence in carrying
out Executive's duties; or material violation of Executive's obligations.
i. Should Employer deem specific activities contrary
to Employer's interest or that negligence by Executive in carrying out his
duties or any violation of Executive's obligations hereunder has occurred,
written notice of said activity, negligence or violation shall be provided by
Employer to Executive along with a reasonable period of time in which to
correct. Provided that such activity, negligence or violation is neither
dishonest nor criminal,
<PAGE>
90 days shall be deemed to be a reasonable time in which to correct such
deficiencies.
(ii) Discharge for "cause" will require a two-thirds
majority vote of the Board, exclusive of Executive. Termination of Executive's
employment for cause shall include termination as an employee, officer and
director of Employer.
C. Resignation for Good Reason.
For purposes of this Agreement, Executive will be deemed
to have resigned for good reason from his employment with the Bank if the
Bank changes, in a manner detrimental to Executive, the compensation or
benefits provided to Executive within one year of a Change in Control of the
Bank or within one year of the detrimental action. A detrimental action will
also include relocation of Executive's principal place of employment by more
than 35 miles from its location immediately prior to the change in Control.
2. Continuation of Executive's Employment. Executive hereby
agrees that he remains an at-will employee of the Bank unless and until there is
a Change in Control of the Bank, at which time the terms of this Agreement take
effect.
3. Severance Benefit. In the event that Executive's employment
with the Bank terminates as a result of a Change in Control of the Bank and
based upon Executive's Resignation for Good Reason (as defined in Paragraph 1(C)
of this Agreement) or for reasons other than Discharge for Cause (as defined in
Paragraph 1(B) of this Agreement), the Bank shall provide the following
severance benefits to Executive:
(i) The Bank shall pay to Executive each month during the
Severance Benefit Period an amount equal to one-twelfth of his annual salary.
Executive's annual salary shall be deemed to be the annual base salary in effect
on January 30 of the year in which the Change in Control
<PAGE>
occurred, plus a cash bonus which shall be determined by calculating the average
cash bonus earned for the previous 3 years. The payment shall be paid to the
Executive beginning on the fifteenth (15th) day of the first month following his
termination. The Bank shall withhold such amounts from Executive's severance pay
as required under any applicable federal, state or local law.
(ii) The Bank shall, at its expense, provide to Executive
throughout the Severance Benefit Period, life, medical, health (including dental
and vision), accident and disability insurance and a survivor's income benefit
in form, substance and amount equal to that provided to him before the
commencement of the Severance Benefit Period.
(iii) If Executive's employment terminates at any time
following a Change in Control of the Bank, but such termination is the result of
a Discharge for Cause (as defined in Paragraph 1(B) of this Agreement) or the
result of Executive's voluntary retirement, the Bank shall have no obligation to
pay any severance benefits to Executive.
4. Severance Benefit Period. The Severance Benefit Period shall
begin upon the effective date of Executive's termination from employment as a
result of a Change in Control of the Bank and based upon Executive's Resignation
for Good Reason (as defined in paragraph 1(C) of this Agreement) or for reasons
other than Discharge for Cause (as defined in paragraph 1 (B) of this Agreement)
and shall continue for a period of eighteen (18) months. The Executive, at his
sole discretion, may elect to receive the Severance Benefit in a single lump sum
payment, however benefits (as defined in Section 3, ii) will continue for the
full Benefit Period.
5. Notice Period . Executive agrees that should he resign for
Good Reason from his employment with the Bank, he will provide at least one (1)
month advance notice of his intention to resign. The Bank retains discretion,
however, as to whether Executive's employment shall terminate
<PAGE>
immediately upon notification of his intention to resign or at the conclusion of
the one (1) month notice period.
6. Successors and Parties in Interest. This Agreement shall be
binding upon the Bank, its successors and assigns, including without limitation
any entity that acquires, directly or indirectly, by purchase, merger,
consolidation or otherwise, all or substantially all of the business or assets
of the Bank.
7. Rights Under Other Plans. This Agreement is not intended to
reduce, restrict or eliminate any benefit to which Executive may otherwise be
entitled at the time of his termination from employment under any benefit plan
of the Bank then in effect.
8. Conditions Precedent.
(i) Delivery of Signed Agreement. The performance by the
Bank of the obligations imposed upon it by this Agreement is expressly
conditioned upon Executive delivering a signed copy of this Agreement to the
Bank no later than May 30, 1997.
(c) Confidential Information. Executive covenants that, upon
termination, he will return to the Bank, in good order and condition, any and
all books, records, lists and other written, typed, printed, or electronically
stored material, or any other information of any kind deemed by the Bank to be
confidential and/or proprietary, whether furnished by the Bank, or prepared by
Executive, which contains any information relating to the business of the Bank,
and Executive covenants that he has not and will not retain copies of those
materials.
(d) Injunctive Relief. In the event of a breach or
threatened breach by Executive of any of the provisions of this Agreement, and
notwithstanding any other provision in this agreement, Employer, in addition to
any other available rights or remedies, shall be entitled to such
<PAGE>
temporary restraining orders and permanent injunctions, as are allowable and
authorized by the laws of the State of Maryland based on the facts of the case,
to restrain such breach by Employee and/or any persons directly or indirectly
acting for or with him. Employee's obligations under this agreement shall remain
binding and enforceable according to its terms notwithstanding expiration or
termination of Employee's employment relationship with the Bank, whether such
termination be voluntary or involuntary.
9. Notices. All notices and other communications required to
be given under this Agreement shall be deemed to have been given or made when
such notice is hand-delivered or when mailed, certified mail, return receipt
requested, to the Bank or Executive, as appropriate, at the following address:
FCNB Bank Mr. Martin S. Lapera
7200 FCNB Court 228 Braeburn Drive
Frederick, MD 21703 Walkersville, MD 21793
10. Fully-Inclusive Agreement. Executive represents that he
has not relied on any other oral or written representations of any kind made by
any person in reaching this agreement or in signing this document. This document
includes all terms and conditions regarding the severance package being offered
Executive in the event of a Change in Control.
11. Severability. If any provision or any portion of any
provision of this Agreement is held unlawful or unenforceable, the balance of
this Agreement shall nonetheless in all respects remain binding and effective
and shall be construed to be in full force and effect to the extent lawfully
permissible.
12. Miscellaneous. This Agreement embodies the entire Agreement and
understanding between the parties hereto with respect to the subject matters
hereof, and may not be
<PAGE>
changed, waived, discharged or terminated unless agreed to by the parties and
only by an instrument in writing signed by both parties. This Agreement will
remain in effect until the earlier of a Change in Control, the Executive's
termination of employment, or until this Agreement is terminated with the
written consent of the parties. The use of any gender, tense or conjugation
includes all gender, tenses and conjugations. This Agreement shall be construed
in accordance with and governed by the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written with the intention of making this a document under
seal.
WITNESS:
/s/ MARTIN S. LAPERA May 13, 1997
- ---------------------- ------------------------ ---------------
Martin S. Lapera Date
EVP & Chief Operating Officer
FCNB Bank
By:/s/ CLYDE CRUM May 13, 1997
- ---------------------- ----------------------------- ----------------
Clyde Crum Date
Chairman of the Board
FCNB Corp
<PAGE>
Exhibit 10.6
SEVERANCE AGREEMENT
This agreement is made this 13th day of May, 1997 by and
between FCNB Corp and FCNB Bank (hereinafter collectively referred to as the
"Bank"), and Mark A. Severson (hereinafter referred to as "Executive").
BACKGROUND
Executive is the Senior Vice President and Chief
Financial Officer of the Bank. The current economic and
regulatory climate of the banking industry has resulted in
numerous mergers and acquisitions in the banking community in
Maryland. Executive has expressed concern about the
possibilities of a change in control at the Bank that would
result in his loss of employment. To address these concerns
and to secure Executive's continued commitment to the Bank,
the Board of Directors of the Bank have decided to offer this
Severance Agreement to the Executive.
NOW THEREAFTER, in consideration of the premises and covenants
contained herein, the Bank and Executive agree as follows:
1. Definitions.
A. Change in Control of the Bank.
For purposes of this Agreement, a Change in Control of
the Bank shall be deemed to have occurred if:
(i) twenty percent (20%) or more of the voting power
of the Bank is acquired, directly or indirectly, by a person (or group of
persons acting in concert) who do not presently possess such voting power;
<PAGE>
(ii) the composition of the Board of Directors of the
Bank changes over a period of time of two consecutive years such that the
members of the Board at the beginning of the two year period no longer
constitute a majority of the Board at the end of the two year period; however,
if a new director is nominated and elected after advance approval by not less
than two-thirds of the directors in office at that time of election, that new
director shall be considered, for purposes of this Agreement, to have been a
director at the beginning of that consecutive two year period; or
(iii) the Bank approves an agreement to merge or
consolidate with or to allow substantially all of its assets to be purchased by
another corporation and as a result of such merger, consolidation or sale of
assets, less than a majority of the outstanding voting stock of the surviving,
resulting or purchasing corporation is owned, immediately after the transaction,
by the holders of the outstanding voting stock of the Bank immediately before
the transaction.
B. Discharge for Cause.
For purposes of this Agreement, discharge for "Cause"
as used herein shall include, without limitation: dishonesty; theft; conviction
of a crime, which is either a (1) felony or (2) misdemeanor involving moral
turpitude or financial impropriety; unethical business conduct; activity which
is contrary to Employer's interests; gross or repeated negligence in carrying
out Executive's duties; or material violation of Executive's obligations.
i. Should Employer deem specific activities contrary
to Employer's interest or that negligence by Executive in carrying out his
duties or any violation of Executive's obligations hereunder has occurred,
written notice of said activity, negligence or violation shall be provided by
Employer to Executive along with a reasonable period of time in which to
correct. Provided that such activity, negligence or violation is neither
dishonest nor criminal,
<PAGE>
90 days shall be deemed to be a reasonable time in which to correct such
deficiencies.
(ii) Discharge for "cause" will require a two-thirds
majority vote of the Board, exclusive of Executive. Termination of Executive's
employment for cause shall include termination as an employee, officer and
director of Employer.
C. Resignation for Good Reason.
For purposes of this Agreement, Executive will be
deemed to have resigned for good reason from his employment with the Bank if the
Bank changes, in a manner detrimental to Executive, the compensation or benefits
provided to Executive within one year of a Change in Control of the Bank or
within one year of the detrimental action. A detrimental action will also
include relocation of Executive's principal place of employment by more than 35
miles from its location immediately prior to the change in Control.
2. Continuation of Executive's Employment. Executive hereby
agrees that he remains an at-will employee of the Bank unless and until there is
a Change in Control of the Bank, at which time the terms of this Agreement take
effect.
3. Severance Benefit. In the event that Executive's employment
with the Bank terminates as a result of a Change in Control of the Bank and
based upon Executive's Resignation for Good Reason (as defined in Paragraph 1(C)
of this Agreement) or for reasons other than Discharge for Cause (as defined in
Paragraph 1(B) of this Agreement), the Bank shall provide the following
severance benefits to Executive:
(i) The Bank shall pay to Executive each month during
the Severance Benefit Period an amount equal to one-twelfth of his annual
salary. Executive's annual salary shall be deemed to be the annual base salary
in effect on January 30 of the year in which the Change in Control
<PAGE>
occurred, plus a cash bonus which shall be determined by calculating the average
cash bonus earned for the previous 3 years. The payment shall be paid to the
Executive beginning on the fifteenth (15th) day of the first month following his
termination. The Bank shall withhold such amounts from Executive's severance pay
as required under any applicable federal, state or local law.
(ii) The Bank shall, at its expense, provide to Executive
throughout the Severance Benefit Period, life, medical, health (including dental
and vision), accident and disability insurance and a survivor's income benefit
in form, substance and amount equal to that provided to him before the
commencement of the Severance Benefit Period.
(iii) If Executive's employment terminates at any time
following a Change in Control of the Bank, but such
termination is the result of a Discharge for Cause (as defined in Paragraph 1(B)
of this Agreement) or the result of Executive's voluntary retirement, the Bank
shall have no obligation to pay any severance benefits to Executive.
4. Severance Benefit Period. The Severance Benefit
Period shall begin upon the effective date of Executive's termination from
employment as a result of a Change in Control of the Bank and based upon
Executive's Resignation for Good Reason (as defined in paragraph 1(C) of this
Agreement) or for reasons other than Discharge for Cause (as defined in
paragraph 1 (B) of this Agreement) and shall continue for a period of twelve
(12) months. The Executive, at his sole discretion, may elect to receive the
Severance Benefit in a single lump sum payment, however benefits (as defined in
Section 3, ii) will continue for the full Benefit Period.
5. Notice Period . Executive agrees that should he resign for
Good Reason from his employment with the Bank, he will provide at least one (1)
month advance notice of his intention to resign. The Bank retains discretion,
however, as to whether Executive's employment shall terminate
<PAGE>
immediately upon notification of his intention to resign or at the conclusion of
the one (1) month notice period.
6. Successors and Parties in Interest. This Agreement shall
be binding upon the Bank, its successors and assigns, including without
limitation any entity that acquires, directly or indirectly, by purchase,
merger, consolidation or otherwise, all or substantially all of the business or
assets of the Bank.
7. Rights Under Other Plans. This Agreement is not intended
to reduce, restrict or eliminate any benefit to which Executive may otherwise be
entitled at the time of his termination from employment under any benefit plan
of the Bank then in effect.
8. Conditions Precedent.
(i) Delivery of Signed Agreement. The performance by the
Bank of the obligations imposed upon it by this Agreement is expressly
conditioned upon Executive delivering a signed copy of this Agreement to the
Bank no later than May 30, 1997.
(c) Confidential Information. Executive covenants that,
upon termination, he will return to the Bank, in good order and condition, any
and all books, records, lists and other written, typed, printed, or
electronically stored material, or any other information of any kind deemed by
the Bank to be confidential and/or proprietary, whether furnished by the Bank,
or prepared by Executive, which contains any information relating to the
business of the Bank, and Executive covenants that he has not and will not
retain copies of those materials.
(d) Injunctive Relief. In the event of a breach or
threatened breach by Executive of any of the provisions of this Agreement, and
notwithstanding any other provision in this agreement, Employer, in addition to
any other available rights or remedies, shall be entitled to such
<PAGE>
temporary restraining orders and permanent injunctions, as are allowable and
authorized by the laws of the State of Maryland based on the facts of the case,
to restrain such breach by Employee and/or any persons directly or indirectly
acting for or with him. Employee's obligations under this agreement shall remain
binding and enforceable according to its terms notwithstanding expiration or
termination of Employee's employment relationship with the Bank, whether such
termination be voluntary or involuntary. 9. Notices. All notices and other
communications required to be given under this Agreement shall be deemed to have
been given or made when such notice is hand-delivered or when mailed, certified
mail, return receipt requested, to the Bank or Executive, as appropriate, at the
following address:
FCNB Bank Mr. Mark A. Severson
7200 FCNB Court 11564 Meeting House Road
Frederick, MD 21703 Myersville, MD 21773
10. Fully-Inclusive Agreement. Executive represents that he
has not relied on any other oral or written representations of any kind made by
any person in reaching this agreement or in signing this document. This document
includes all terms and conditions regarding the severance package being offered
Executive in the event of a Change in Control.
11. Severability. If any provision or any portion of any
provision of this Agreement is held unlawful or unenforceable, the balance of
this Agreement shall nonetheless in all respects remain binding and effective
and shall be construed to be in full force and effect to the extent lawfully
permissible.
12. Miscellaneous. This Agreement embodies the entire
Agreement and understanding between the parties hereto with respect to the
subject matters hereof, and may not be
<PAGE>
changed, waived, discharged or terminated unless agreed to by the parties and
only by an instrument in writing signed by both parties. This Agreement will
remain in effect until the earlier of a Change in Control, the Executive's
termination of employment, or until this Agreement is terminated with the
written consent of the parties. The use of any gender, tense or conjugation
includes all gender, tenses and conjugations. This Agreement shall be construed
in accordance with and governed by the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first above written with the intention of making this a
document under seal.
WITNESS:
/s/ MARK A. SEVERSON May 13, 1997
- ------------------------ ------------------------------ ----------------
Mark A. Severson Date
SVP & Chief Financial Officer
FCNB Bank
By:/s/ CLYDE CRUM May 13, 1997
- ------------------------ ------------------------------ ----------------
Clyde Crum Date
Chairman of the Board
FCNB Corp
<PAGE>
Exhibit 10.8
Compensation agreement for Clyde C. Crum
This Agreement, effective December 30, 1996, between FCNB Bank (the
"Bank") and Clyde C. Crum ("Mr. Crum") constitutes the terms under which Mr.
Crum will serve as Chairman of the Board for FCNB Bank and FCNB Corp and
expresses the compensation which Mr. Crum will receive for his work. This
Agreement will be in effect on a month to month basis beginning December 30,
1996, and can be terminated by a 30 day written advance notice from either
party.
As Chairman of the Board, Mr. Crum will be available to consult with
the Bank at such times which are mutually convenient to both parties. For this
work as Chairman of the Board, Mr. Crum will receive a $35,000 annual fee,
payable biweekly through the Bank's payroll until termination of this Agreement.
The Bank agrees to withhold taxes as directed by Mr. Crum and to pay the
employer's share of FICA. In addition, Mr. Crum will receive a $7,000 annual
retainer for serving as an outside Director of FCNB Bank & FCNB Corp and will be
paid an attendance fee for each regular Board meeting he attends. However, Mr.
Crum will not receive any fees for attending Board Committee meetings.
Mr. Crum will be available from time to time for Bank functions at
which clients and potential clients are present, and he will be reimbursed for
his reasonable expenses incurred for these functions.
It is also agreed between the parties that Mr. Crum will not be
classified as an employee of the Bank for any purpose other than payroll tax
withholding and payments. Consequently, Mr. Crum will not be eligible for
benefits provided to employees of the Bank.
By: /s/ KENNETH W. RICE By:/s/A. PATRICK LINTON
----------------------------------- --------------------------------
Kenneth W. Rice A. Patrick Linton
Chairman, Human Resources Committee President & CEO
Date: May 13, 1997 Date: May13,1997
-------------------------------- ---------------------------------
By: /s/ CLYDE C. CRUM
-----------------------------
Clyde C. Crum
Chairman of the Board
Date: May 13, 1997
-----------------------------
<PAGE>
Exhibit 11
Statement Regarding the Computation of Basic and Diluted Per Share Earnings
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Basic earnings per common share $1.49 $0.99 $1.19
Basic average shares outstanding 5,903,868 5,919,977 5,881,129
Diluted earnings per common share $1.49 $0.99 $1.19
Diluted average share outstanding 5,918,571 5,933,411 5,895,803
</TABLE>
<PAGE>
Exhibit 12
Statement Regarding the Computation of Ratios
a. The percentage ratio of net income to average total assets is
calculated by dividing the 1997 and 1996 net income of $8,803,000 and
$5,867,000, respectively, by the average total assets for 1997 and 1996
of $830,924,000 and $700,921,000, respectively.
b. The percentage ratio of net income to average shareholders' equity is
calculated by dividing the 1997 and 1996 net income of $8,803,000 and
$5,867,000, respectively, by the average shareholders' equity for 1997
and 1996 of $71,867,000 and $65,785,000, respectively.
c. The percentage ratio of average shareholders' equity to average total
assets is calculated by dividing the 1997 and 1996 average
shareholders' equity of $71,867,000 and $65,785,000, respectively, by
the average total assets for 1997 and 1996 of $830,924,000 and
$700,921,000, respectively.
d. The percentage ratio of cash dividends declared to net income is
calculated by dividing the 1997 and 1996 cash dividends declared of
$3,412,000 and $2,925,000, respectively, by the net income for 1997 and
1996 of $8,803,000 and $5,867,000, respectively.
<PAGE>
Exhibit 13
THE YEAR IN SUMMARY
FCNB CORP
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Net income $8,803 $5,867 $6,998
Net income before merger-related expenses 9,088 7,778 7,301
Per share data(1):
Basic and diluted earnings 1.49 0.99 1.19
Basic and diluted earnings before merger-related expenses 1.54 1.31 1.24
Cash dividends declared .57 .49 .50
Book value at period-end 13.11 11.71 11.36
Shares outstanding at period-end 5,912,284 5,901,016 5,828,197
Weighted average shares outstanding:
Basic 5,903,868 5,919,977 5,881,129
Diluted 5,918,571 5,933,411 5,895,803
Return on average assets 1.07% 0.84% 1.09%
Return on average assets before merger-related expenses 1.09 1.11 1.14
Return on average shareholders' equity 12.25 8.92 11.21
Return on average shareholders' equity before
merger-related expenses 12.65 11.82 11.70
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Total Assets $918,084 $779,169 $660,984
Loans, net of unearned income 574,105 497,995 439,794
Deposits 616,512 587,074 529,988
Federal funds purchased and securities sold
under agreements to repurchase 65,163 40,739 21,043
Other short-term borrowings 152,138 76,516 32,426
Long-term debt -- -- 5,680
Shareholders' equity 77,518 69,110 66,219
Banking facilities 21 21 19
</TABLE>
(1) Per share data for 1996 and 1995 has been restated for the effects of a 10%
stock dividend declared and paid in October 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This section of the report contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to FCNB Corp and its wholly-owned subsidiary FCNB Bank's
(collectively, the "Company") 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
On March 7, 1997, the Company merged its subsidiary banks, Elkridge Bank and
FCNB Bank, with FCNB Bank surviving the merger. The following paragraphs provide
an overview of the financial condition and results of operations of the Company.
This discussion is intended to assist the readers in their analysis of the
accompanying consolidated financial statements and notes thereto.
Throughout the discussion on the financial performance of the Company, the yield
on interest-earning assets, the net interest spread, the net interest margin,
the risk-based capital ratios, and the leverage ratio, exclude the effects of
the adoption of Financial Accounting Standards Board ("FASB") Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." However, the
return on average assets, the return on average equity, and the book value per
share at period-end include the effects of adopting this pronouncement.
The following analysis of the Company's operating results is presented on a
consolidated basis. Net income was $8.80 million in 1997 compared to $5.87
million in 1996. Basic and diluted earnings per share were $1.49 in 1997
compared to $0.99 in 1996. In connection with the Elkridge Bank merger in 1997,
the Company incurred $460,000 of merger related expenses. Net income before the
one-time merger-related costs was $9.01 million, or $1.54 per share. In
connection with the acquisition of Laurel Bancorp, Inc. ("Laurel") in 1996,
accounted for as a pooling of interests, certain costs incurred to effect the
combination were expenses of the combined enterprise and, accordingly, were
charged to expense and deducted in determining the results of operations of the
combined entity. The specific one-time costs associated with this merger that
were charged to the Company's results of operations following consummation of
the merger, principally included: (1) salaries and employee benefits associated
with change-in control payments to certain executive officers of Laurel,
totaling approximately $1.36 million; (2) legal, accounting, financial advisor
fees, and other conversion costs of approximately $697,000 and (3) assessments
to recapitalize the Savings Association Insurance Fund of approximately
$813,000. Net income before these specific one-time merger-related costs was
$7.78 million in 1996, while earnings per share were $1.31 for 1996.
Return on average assets and return on average shareholders' equity are key
measures of earnings performance. Return on average assets measures the ability
of a bank to utilize its assets in generating income. Return on average assets
was 1.07%in 1997 and 0.84% in 1996. Return on average shareholders' equity,
which measures the income earned on the capital invested, was 12.25% in 1997
compared to 8.92% in 1996. However, before specific one-time merger-related
costs the return on average assets was 1.09% in 1997 and 1.11% in 1996, and the
return on average shareholders' equity was 12.65% in 1997 and 11.82% in 1996.
During 1997, the Company experienced strong loan demand that resulted in a
$76.11 million increase in loans, net of unearned income, or 15.3% over the
level at the end of 1996.
Noninterest income increased $1.86 million (43.6%) from the level in 1996 while
noninterest expenses decreased $521,000 (2.1%) during the same period. Included
in the noninterest expenses are merger-related costs of $460,000 in 1997 and
$2.87 million in 1996. If these amounts were excluded, noninterest expenses
would have risen in 1997 by $1.88 million (8.7%).
<PAGE>
In the ordinary course of business, the Company routinely explores opportunities
for additional growth and expansion of its core banking business and related
activities. However, there can be no assurance that this growth or expansion
will have a positive impact on the Company's earnings, dividends, book value or
market value.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential
Table 1, "Comparative Statement Analysis," shows average balances of asset and
liability categories, interest income and interest paid, and average yields and
rates for the periods indicated.
Net Interest Income
Net interest income is generated from the Company's lending and investment
activities, and is the most significant component of the Company's earnings. Net
interest income is the difference between interest and rate-related fee income
on earning assets (primarily loans and investment securities) and the cost of
the funds (primarily deposits and short-term borrowings) supporting them. To
facilitate analysis, net interest income is presented on a taxable-equivalent
basis to adjust for the tax-exempt status of certain loans and investment
securities. This adjustment, based on the statutory federal income tax rate of
35% in 1997 and 1996, increases the tax-exempt income to an amount representing
an estimate of what would have been earned if that income were fully taxable.
Changes in net interest income between periods is affected primarily by the
volume of interest-earning assets and the yield on those assets, and by the
volume of interest-bearing deposits and other liabilities and the rates paid on
those deposits and liabilities. Table 2, "Rate/Volume Analysis," reconciles the
impact of changes in average balances and average rates with the change in the
Company's net interest income for the periods indicated.
Taxable-equivalent net interest income totaled $32.42 million in 1997,
increasing 10.3% from the $29.39 million in 1996. The Company's average
interest-earning assets increased 17.7% to $764.85 million during 1997. This
increase was primarily funded by a 20.6% increase in the Company's average
interest-bearing liabilities and by an 11.5% increase in the Company's average
noninterest-bearing deposits during the year.
The Company's net interest margin (taxable-equivalent net interest income as a
percent of average interest-earning assets) was 4.24% in 1997, as compared to
4.52% in 1996. This decrease in net interest margin primarily reflects the
impact of the change in the spread between yields on average interest-earning
assets and rates paid on average interest-bearing liabilities realized during
1997. This spread decreased by 21 basis points in 1997. During the year, the
rate paid on average interest-bearing liabilities increased 17 basis points,
while the yield on average interest earning assets decreased 4 basis points.
The yield on the average investment portfolio fell 11 basis points during 1997
compared to 1996, as investments in high yielding tax-exempt securities matured
in 1997. The yield on the average loan portfolio remained relatively constant,
reflecting the impact of competitive pressures. The rates paid on federal funds
purchased and securities sold under agreements to repurchase increased by 15
basis points, while the rates paid on other short-term borrowings decreased by
37 basis points. 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
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
Company's management feels that the competitive pressures in this market will
cause the net interest spread to continue to be under pressure. Therefore, the
Company is currently pursuing operating efficiencies through improved technology
and is adding new products and services to enhance its level of noninterest
income. There can be no assurance that these benefits will be realized.
<PAGE>
Table 1: Comparative Statement Analysis
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
daily income(2) yield/ daily income(2) yield/ daily income(2) yield/
balance(1) /paid(2) rate balance(1) /paid(2)(4) rate balance(1) /paid(2)(4) rate
---------- --------- ------- ----------- ---------- ------- ---------- ----------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Interest-bearing
deposits in
other banks $ 1,960 $ 100 5.10% $ 2,763 $ 174 6.30 $ 5,966 $ 411 6.89%
------- ------ ---- ------- ------ ---- ------- ------ ----
Federal funds sold 7,072 389 5.50 14,710 739 5.02 7,460 457 6.13
------- ------ ---- ------- ------ ---- ------- ------ ----
Loans held for sale 1,105 72 6.52 3,287 237 7.21 1,252 82 6.55
------- ------ ---- ------- ------ ---- ------- ------ ----
Investment securities:
Taxable 214,089 13,799 6.45 158,055 10,193 6.45 147,597 9,706 6.58
Nontaxable 4,698 517 11.00 6,664 765 11.48 14,435 1,835 12.71
------- ------ ---- ------- ------ ---- ------- ------ ----
Total invest-
ment securities 218,787 14,316 6.54 164,719 10,958 6.65 162,032 11,541 7.12
------- ------ ---- ------- ------ ---- ------- ------ ----
Loans(3), net of
unearned income 535,921 48,557 9.06 464,440 42,050 9.05 423,722 39,261 9.27
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning
assets 764,845 63,434 8.29 649,919 54,158 8.33 600,432 51,752 8.62
------- ------ ---- ------- ------ ---- ------- ------ ----
Noninterest-earning
assets 64,791 50,975 41,616
Net effect of unrealized
gain (loss) on securities
available for sale 1,288 27 (529)
------- ------ ---- ------- ------ ---- ------- ------ ----
Total assets $830,924 $700,921 $641,519
------- ------ ---- ------- ------ ---- ------- ------ ----
------- ------ ---- ------- ------ ---- ------- ------ ----
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities
NOW/SuperNOW accounts $ 52,607 $ 952 1.81% $ 55,626 $ 1,153 2.07% $51,370 $ 1,195 2.33%
Savings accounts 80,812 2,082 2.58 84,294 2,596 3.08 81,128 2,497 3.08
Money market accounts 77,780 2,357 3.03 80,654 2,589 3.21 84,904 2,852 3.36
Certificates of deposit
and other time deposits
less than $100,000 257,589 13,966 5.42 221,471 11,704 5.28 188,243 10,135 5.38
Certificates of deposit
and other time deposits
of $100,000 or more 49,893 2,786 5.58 43,709 2,232 5.11 50,377 2,846 5.65
Federal funds purchased
and securities sold
under agreements to
repurchase 50,141 2,819 5.62 24,815 1,357 5.47 18,928 1,122 5.93
Other short-term
borrowings 110,462 6,050 5.48 46,626 2,727 5.85 32,246 1,882 5.84
Long-term debt -- -- -- 5,901 406 6.88 7,087 530 7.48
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities 679,284 31,012 4.57 563,096 24,764 4.40 514,283 23,059 4.48
------- ------ ---- ------- ------ ---- ------- ------ ----
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
daily income(2) yield/ daily income(2) yield/ daily income(2) yield/
balance(1) /paid(2) rate balance(1) /paid(2)(4) rate balance(1) /paid(2)(4) rate
---------- --------- ------- ----------- ---------- ------- ---------- ----------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
deposits 73,710 66,111 58,789
Noninterest-bearing
liabilities 6,063 5,929 6,034
-------- -------- --------
Total liabilities 759,057 635,136 579,106
-------- -------- --------
Shareholders' equity 70,579 65,758 62,942
Net effect of unrealized
gain (loss) on
securities available
for sale 1,288 27 (529)
-------- -------- --------
Total shareholders'
equity 71,867 65,785 62,413
-------- -------- --------
Total liabilities
and shareholders'
equity $830,924 $700,921 $641,519
-------- -------- --------
Net interest income $32,422 $29,394 $28,693
-------- ------- ---- -------- ------- ---- -------- ------- ----
-------- ------- ---- -------- ------- ---- -------- ------- ----
Net interest spread 3.72% 3.93% 4.14%
Net interest margin 4.24% 4.52% 4.78%
-------- ------- ---- -------- ------- ---- -------- ------- ----
-------- ------- ---- -------- ------- ---- -------- ------- ----
</TABLE>
(1) The average daily balances for investment securities exclude the
effects of the fair value adjustments under FASB Statement No.115,
"Accounting for Certain Investments in Debt and Equity Securities."
(2) Presented on a taxable-equivalent basis using the statutory federal
income tax rate of 35%. The statement of income for 1996 includes the
results of operations for Laurel for the thirteen month period from
December 1, 1995 to December 31, 1996. To facilitate the analysis in
this table for 1996, Laurel's interest income and interest expense,
totaling $755,000 and $358,000, respectively, for the month of December
1995 have been eliminated.
(3) Nonaccruing loans, which include impaired loans, are included in the
average balances. Net loan fees included in interest income totaled
$1,437,000, $1,149,000 and $1,051,000 for 1997, 1996 and 1995,
respectively.
(4) The interest paid in 1996 and 1995 includes $108,000 and $300,000,
respectively, of capitalized construction period interest.
<PAGE>
Table 2: Rate/Volume Analysis
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1997 compared to 1996 1996 compared to 1995 1995 compared to 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Increase Increase Increase
(decrease) Net (decrease) Net (decrease) Net
due to increase due to increase due to increase
Volume Rate(1) (decrease) Volume Rate(1) (decrease) Volume Rate(1) (decrease)
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Interest-earning assets:
Interest-bearing
deposits in
other banks $ (51) $ (23) $ (74) $ (221) $ (16) $ (237) $ 161 $ 56 $ 217
Federal funds sold (384) 34 (350) 444 (162) 282 (136) 154 18
Loans held for sale (157) (8) (165) 133 22 155 (159) (10) (169)
Investment securities:
Taxable 3,612 (6) 3,606 689 (202) 487 (1,051) 404 (647)
Nontaxable(2) (226) (22) (248) (988) (82) (1,070) (891) (26) (917)
Loans(3) 6,472 35 6,507 3,773 (984) 2,789 5,658 2,755 8,413
-------- ------ --------- ------- ------- -------- -------- ------- ------
Total interest
income(6) 9,266 10 9,276 3,830 (1,424) 2,406 3,582 3,333 6,915
-------- ------ --------- ------- ------- -------- -------- ------- ------
-------- ------ --------- ------- ------- -------- -------- ------- ------
Interest Paid
Interest-bearing
liabilities:
Savings deposits(4) (269) (675) (944) 95 (301) (206) (339) 454 115
Time deposits 2,223 593 2,816 1,445 (490) 955 1,831 2,953 4,784
Federal funds purchased
and securities sold
under agreements
to repurchase 1,385 77 1,462 349 (114) 235 (449 324 (125)
Other short-term
borrowings 3,734 (411) 3,323 839 6 845 585 451 1,036
Long-term debt (406) -- (406) (89) (35) (124) -- 239 239
-------- ------ --------- ------- ------- -------- -------- ------- ------
Total interest
paid(5) (6) 6,667 (416) 6,251 2,639 (934) 1,705 1,628 4,421 6,049
-------- ------ --------- ------- ------- -------- -------- ------- ------
Net interest income $2,599 $ 426 $3,025 $1,191 $(490) $ 701 $1,954 $(1,088) $ 866
-------- ------ --------- ------- ------- -------- -------- ------- ------
-------- ------ --------- ------- ------- -------- -------- ------- ------
</TABLE>
(1) The volume/rate variance is allocated entirely to changes in rates.
(2) Taxable-equivalent adjustments of $176,000 for 1997, $260,000 for 1996,
and $624,000 for 1995 are included in the calculation of nontaxable
investment securities rate variances.
(3) Taxable-equivalent adjustments of $67,000 for 1997 and $2,000 for 1995
are included in the calculation of loan rate variances.
(4) Savings deposits include NOW/SuperNOW, savings and money market
accounts.
(5) Total interest paid includes capitalized construction period interest
of $108,000 for 1996 and $300,000 for 1995.
(6) The statement of income for 1996 includes the results of operations for
Laurel for the thirteen month period from December 1, 1995 to December
31, 1996. To facilitate the analysis in this table for 1996, Laurel's
interest income and interest expense, totaling $755,000 and $358,000,
respectively, for the month of December 1995, have been eliminated.
<PAGE>
Noninterest Income
Noninterest income increased by $1.86 million or 43.6% in 1997. Gains realized
from loan sales in the secondary market were $407,000 in 1997 and $305,000 in
1996. Noninterest income from gains realized on the sale of mortgage loans is
directly affected by the volume of mortgage loans settled, which is
significantly influenced by increases and decreases in the level of interest
rates. In periods of rising interest rates, mortgage loan production typically
declines, whereas in periods of declining interest rates mortgage loan
production increases. As a result, this source of noninterest income is highly
influenced by the level and direction of future interest rate changes. In 1997
and 1996, servicing fee income totaled $374,000 and $490,000, respectively.
Servicing income on mortgage loans originated and sold however, is expected to
make a smaller contribution to noninterest income since the Company is currently
not retaining servicing rights on mortgages sold. The increase in other
operating income includes approximately $600,000 attributable to the
implementation of a bank-owned life insurance program that generated tax-exempt
income to partially offset the cost of employee benefit programs.
The increase in service fees on deposit accounts is attributable to some price
increases but primarily to increases in account volume and activity.
The Company is adding new products and services to 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, are less
sensitive to fluctuations in the level of interest rates. In January 1997, the
Company began operation of an Asset Management and Trust Division to meet the
needs of its affluent market place. This division will enable the Company to
earn fees through various levels of asset management, trust and custody
services. The Company is actively promoting new commercial cash management
services to increase noninterest income. Additionally, revenue from service
charges on deposit accounts will continue to increase as the volume of accounts
maintained expands.
The Company's management is committed to developing and offering innovative,
market-driven products and services that will generate additional sources of
noninterest income. However, the future results of any of these products or
services cannot be predicted at this time.
Noninterest Expenses
Noninterest expenses decreased $521,000. However if the merger related costs of
$460,000 in 1997 and $2.87 million in 1996 are excluded from this comparison,
noninterest expenses for 1997 increased $1.88 million. Total salaries and
employee benefits increased $1.12 million or 9.7% in 1997. The increase in
salaries and benefits reflects general merit and cost-of-living adjustments,
plus the cost of additional staffing for the Odenton branch acquired in April
1996, the opening of the Headquarters branch in March 1996 and the opening of
the Asset Management and Trust Division in January 1997. The average number of
full-time equivalent employees increased by 21 to 354 in 1997.
Net occupancy and equipment expenses increased $44,000 (1.8%) and $428,000
(26.8%), respectively, compared to those incurred during 1996. The increase in
equipment expenses is primarily associated with increased depreciation and
higher ATM and communication expenses.
Other operating expenses increased $288,000 (4.8%) compared to the prior year.
See Note 12 to the consolidated financial statements for a schedule showing a
detailed breakdown of the Company's more significant other operating expenses.
The increase in other operating expenses is primarily attributable to the new
data processing outsourcing arrangement, which was put into place in November
1996. The Company's arrangement with this service provider allows substantial
growth over the next four years with little increase in data processing costs.
Income Taxes
Income tax expense increased to $4.22 million in 1997, compared to $3.25 million
in 1996, reflecting the higher level of pre-tax income in 1997. The Company's
effective tax rate was 32.4% in 1997, compared to 35.6% in 1996. The Company's
income tax expense differs from the amount computed at statutory rates primarily
due to tax-exempt income 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. Note 11 to the consolidated
financial statements reconciles expected income taxes at statutory rates for the
past three years with income tax expense included in the consolidated statements
of income.
Market Risk, Liquidity and Interest Rate Sensitivity
<PAGE>
Asset/liability management involves the funding and investment strategies
necessary to maintain an appropriate balance between interest sensitive assets
and liabilities. It also involves providing adequate liquidity while sustaining
stable growth in net interest income. Regular review and analysis of deposit and
loan trends, cash flows in various categories of loans and monitoring of
interest spread relationships are vital to this process.
<PAGE>
The conduct of our banking business requires that we maintain adequate
liquidity to meet changes in composition and volume of assets and liabilities
due to seasonal, cyclical or other reasons. Liquidity describes the ability
of the Company to meet financial obligations that arise during the normal
course of business. Liquidity is primarily needed to meet the borrowing and
deposit withdrawal requirements of the customers of the Company, as well as
for meeting current and future planned expenditures. This liquidity is
typically provided by the funds received through customer deposits,
investment maturities, loan repayments, borrowings, and income. Management
considers the current liquidity position to be adequate to meet the needs of
the Company's customers.
The Company seeks to contain the risks associated with interest rate
fluctuations by managing the balance between interest sensitive assets and
liabilities. Managing to mitigate interest rate risk is, however, not an
exact science. Not only does the interval until repricing of interest rates
on assets and liabilities change from day to day as the assets and
liabilities change, but for some assets and liabilities, contractual maturity
and the actual maturity experienced are not the same. For example,
mortgage-backed securities may have contractual maturities well in excess of
five years but, depending upon the interest rate carried by the specific
underlying mortgages and the current prevailing rate of interest, these
securities may be prepaid in a shorter time period. Accordingly, the
mortgage-backed securities and collateralized mortgage obligations that have
average stated maturities in excess of five years, are evaluated as part of
the asset/liability management process using their expected average lives due
to anticipated prepayments on the underlying loans. Loans held for sale which
have a contracted maturity of five to thirty years are included in the one
year or less time frame since they are available to be sold at any time and
are carried at the lower of cost or fair value. Similarly, NOW/SuperNOW
accounts, by contract, may be withdrawn in their entirety upon demand and
savings deposits may be withdrawn on seven days notice. While these contracts
are extremely short, it has been the Company's experience that these accounts
turn over at the rate of five percent (5%) per year. If all of the Company's
NOW/SuperNOW and savings accounts were treated as repricing in one year or
less, the cumulative negative gap at one year or less would be $(321.47)
million or 35.02% of total assets. Due to their very liquid nature, the
entire balance of money market accounts is assumed to be repriced within one
year.
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of the Company's earning assets and
funding sources. An Asset/Liability Committee manages the interest rate
sensitivity position in order to maintain an appropriate balance between the
maturity and repricing characteristics of assets and liabilities that is
consistent with the Company's liquidity analysis, growth, and capital
adequacy goals. The Company sells fixed-rate real estate loans in the
secondary mortgage market. The Company believes that by selling certain loans
rather than retaining them in its portfolio, it is better able to match the
maturities or repricing of interest sensitive assets to interest sensitive
liabilities. It is the objective of the Asset/Liability Committee to maximize
net interest margins during periods of both volatile and stable interest
rates, to attain earnings growth, and to maintain sufficient liquidity to
satisfy depositors' requirements and meet credit needs of customers.
As noted, the Company assumes a degree of interest rate risk as a provider
of banking services to its customers. This risk can be reduced through
derivative interest rate contracts, such as interest rate swaps. The
Company's outstanding interest rate swap instrument at December 31, 1997 is
utilized to convert certain fixed rate assets to variable rates as part of
its interest rate risk management strategy. Because financial derivatives
typically do not have actual principal dollars transferred between the
parties, notional principal amounts are used to express the volume of such
transactions. However, the notional amount of derivative contracts does not
represent direct credit exposure, which the Company believes is a combination
of current replacement cost of those instruments with a positive market value
plus an amount for prospective market movement. The Company has established
policies governing derivative activities, and the counterparties used by the
Company are considered high quality credit risks. There were no past due
amounts or reserves for possible derivative credit losses at December 31,
1997, nor has the Company experienced any charge-offs related to the credit
risk of derivative transactions.
The notional amount of the Company's interest rate swap was $10.0 million
at December 31, 1997. This instrument matures in November 2004.
The following table, "Interest Rate Sensitivity Analysis," summarizes, as
of December 31, 1997, the anticipated maturities or repricing of the
Company's interest-earning assets and interest-bearing liabilities, the
Company's interest rate sensitivity gap (interest-earning assets less
interest-bearing liabilities), the Company's cumulative interest rate
sensitivity gap, and the Company's cumulative interest sensitivity gap ratio
(cumulative interest rate sensitivity gap divided by total assets). A
negative gap for any time period means that more interest-bearing liabilities
will re-price or mature during that time period than interest-earning assets.
During periods of rising interest rates, a negative gap position would
generally decrease earnings, and during periods of declining interest rates,
a negative gap position would generally increase
<PAGE>
earnings. The converse would be true for a positive gap position. Therefore,
a positive gap for any time period means that more interest-earning assets
will reprice or mature during that time period than interest-bearing
liabilities. During periods of rising interest rates, a positive gap position
would generally increase earnings, and during periods of declining interest
rates, a positive gap position would generally decrease earnings.
Interest Rate Sensitivity Analysis - December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Interest sensitivity period
- --------------------------------------------------------------------------------------------------------
After 1
3 or less 4 to 12 through After 5
months months 5 years years Total
- --------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-bearing deposits
in other banks ...................... $ 755 $ -- $ -- $ -- $ 755
Federal funds sold ................... 14,231 -- -- -- 14,231
Loans held for sale:
Fixed rate ........................ 909 -- -- -- 909
Investment securities:(1)
Fixed rate ........................ 1,565 4,136 94,569 79,466 179,736
Variable rate ..................... 48,614 -- -- -- 48,614
Loans:(2)
Fixed rate ........................ 36,074 73,580 210,903 84,506 405,063
Variable rate ..................... 165,405 -- -- -- 165,405
--------- --------- --------- --------- ---------
Total interest-earning
assets ........................ $ 267,553 $ 77,716 $ 305,472 $ 163,972 $ 814,713
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES
Deposits:
NOW/SuperNOW accounts
and savings ...................... $ 1,663 $ 4,989 $ 26,610 $ 99,786 $ 133,048
Money market accounts ............. 75,493 -- -- -- 75,493
Certificates of deposit and
other time deposits:
Fixed rate ...................... 86,444 135,382 81,137 31 302,994
Variable rate ................... 19,075 -- -- -- 19,075
Federal funds purchased and securities
sold under agreements to repurchase . 65,163 -- -- -- 65,163
Other short-term borrowings:
Fixed rate ...................... 104,138 48,000 -- -- 152,138
--------- --------- --------- --------- ---------
Total interest-bearing
liabilities ............. $ 351,976 $ 188,371 $ 107,747 $ 99,817 $ 747,911
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Interest-earning assets less
interest-bearing liabilities ("Gap") $ (84,423) $(110,655) $ 197,725 $ 64,155 $ 66,802
Cumulative Gap ....................... $ (84,423) $(195,078) $ 2,647 $ 66,802 $ 66,802
Cumulative Gap as a percentage of
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
total assets ........................ (9.20)% (21.25)% .29% 7.28% 7.28%
</TABLE>
- ------------------------------------
(1) Excludes non-rate sensitive equity securities. Reflects fair value
adjustments for securities available for sale.
(2) Includes consumer loans net of unearned income, and excludes nonaccrual
and impaired loans.
In addition to the gap method of monitoring interest rate sensitivity, the
Company also employs computer model simulations. 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) provides 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) utilizes the 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 an interest rate shock 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 MPVE 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 liabilities ("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 income, associated with an assumed interest rate shock
of +/-100 and +/-200 basis points change in interest rates, to no more than
10% and 20% of net income, respectively. The model results as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Change in Interest Rate Assumption +100bp +200bp -100bp -200bp
- --------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income--increase (decrease) ......... $ (846) $ (1,775) $ 375 $ 665
MVPE--increase (decrease) ............... $ (4,309) $ (13,794) $ 1,551 $ 2,663
Net income--% change .................... (8.14) (17.09) 3.61 6.41
MVPE--% change .......................... (5.70) (18.20) 2.05 3.52
</TABLE>
Investment Portfolio
Investment securities represent the second largest component of earning
assets, at 29% of average earning assets in 1997 and 25% in 1996. The
investment portfolio is used as a source of interest income, credit risk
diversification and liquidity, as well as to manage rate sensitivity and
provide collateral for secured public funds, repurchase agreements and other
short-term borrowings. The investment portfolio averaged $218.79 million in
1997, compared to $164.72 million in 1996. The average taxequivalent yield on
the portfolio decreased 11 basis points to 6.54% in 1997.
As of December 31, 1997, the gross unrealized losses in the Company's
investment portfolio were $212,000 in the held-to-maturity investment
portfolio and $234,000 in the available-for-sale investment portfolio
compared to $472,000 and $714,000, respectively, as of December 31, 1996. As
of December 31, 1997, the gross unrealized gains in the Company's investment
portfolio were $552,000 in the held-to-maturity investment portfolio and
$5.75 million in the available-for-sale investment portfolio compared to
$687,000 and $1.53 million, respectively, as of December 31, 1996. The
investment portfolio had an average life of less than five years, with an
estimated average tax-equivalent yield of 6.45%, at December 31, 1997. Since
the Company's held-to-maturity investment portfolio includes fixed rate
investment securities that have below market interest rates, the future
operating results of the Company would be negatively impacted in an
increasing rate environment. This reduction in net interest income would
result because the cost of funding the Company's operations increases, while
the income earned on the held-to-maturity portfolio remains constant.
Investment Portfolio Distribution-Book Value (Amortized cost)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31, 1997(1) 1996(1) 1995(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
<PAGE>
<TABLE>
(dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury and other U.S. government
agencies and corporations ............ $207,475 $166,801 $125,596
State and political subdivisions ...... 3,690 5,138 8,929
Other securities ...................... 34,556 23,632 7,135
-------- -------- --------
Total ............................ $245,721 $195,571 $141,660
-------- -------- --------
-------- -------- --------
</TABLE>
(1) Reflects the cost of securities purchased, adjusted for premium amortization
and discount accretion, which differs from the amounts reflected in the
consolidated balance sheets due to fair value adjustments.
Analysis of Investment Portfolio (Held-to-Maturity) - December 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
After 1 After 5
1 year through through After 10
Maturing in: or less 5 years 10 years years
- -------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies
and corporations ....... $ 3,455 3.87 $41,244 6.44% $ -- -- % -- -- %
State and political
subdivisions (1) ....... 29 14.65 2,640 11.52 669 11.16 $ 352 7.93
------- ---- ------- ---- ------ ----- ------- ----
Total .............. $ 3,484 3.96 $43,884 6.74% $ 669 11.16% $ 352 7.93%
------- ---- ------- ---- ------ ----- ------- ----
------- ---- ------- ---- ------ ----- ------- ----
</TABLE>
(1) Yields, calculated using amortized cost book values, are presented on a
fully taxable equivalent basis using the federal statutory rate of 35%. All
of the obligations of states and political subdivisions are rated A or
higher by either Moody's Investors Service, Inc. or Standard & Poor's
Corporation.
<PAGE>
Analysis of Investment Portfolio (Available-for-Sale) - December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
After 1 After 5
1 year through through After 10
Maturing in: or less 5 years 10 years years
- ---------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Amount(1) Yield Amount(1) Yield Amount(1) Yield Amount(1) Yield
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies
and corporations ....... $ -- --% $115,842 6.56% $ 25,472 6.75% $ 21,213 6.99%
Other securities ........ -- -- 6,500 6.83 8,823 6.89 19,482 4.09
---- -------- ---- -------- ---- -------- ----
Total .............. $ -- --% $122,342 6.58% $ 34,295 6.79% $ 40,695 5.59%
---- ---- -------- ---- -------- ---- -------- ----
---- ---- -------- ---- -------- ---- -------- ----
</TABLE>
(1) Reflects the cost of securities purchased, adjusted for premium amortization
and discount accretion, which differs from the amounts reflected in the
consolidated balance sheets due to fair value adjustments.
The Company had no investments that were obligations of the issuer, or
payable from or secured by a source of revenue or taxing authority of the
issuer, whose aggregate book value exceeded 10% of shareholders' equity at
December 31, 1997.
Loan Portfolio
During 1997, the Company sold $15.10 million of conforming residential
mortgage loans to Countrywide Mortgage (Countrywide) and other private
investors, and held additional loans totaling $909,000 at December 31, 1997,
whereas in 1996, the Company sold loans totaling $28.99 million and held
additional loans for sale totaling $3.16 million at December 31, 1996. The
average balance of loans held for sale for 1997 was $1.10 million, and in
1996 was $3.29 million, which generated average yields of 6.52% and 7.21%,
respectively.
The Company makes real estate construction, real estate mortgage,
commercial and agricultural, and consumer loans. The real estate construction
loans are generally secured by the construction project financed, and have a
term of one year or less. The real estate mortgage loans are generally
secured by the property and have a maximum loan to value ratio of 75% and
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 based on the financial strength
of the individual borrower. The collateral for secured consumer loans may be
marketable securities, automobiles, recreational vehicles or deposits in the
Company's subsidiary bank. The usual term for these loans is three to five
years.
Loan Distribution
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 % 1996 % 1995 % 1994 % 1993 %
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction ....... $ 77,701 14% $ 55,614 11% $ 38,043 9% $ 25,988 7% $ 18,678 6%
Real estate-mortgage ........... 373,060 65 335,784 67 299,114 68 273,485 70 245,209 73
Commercial and agricultural .... 64,111 11 52,515 11 49,667 11 44,164 11 38,843 11
Consumer ....................... 59,233 10 54,082 11 52,970 12 46,540 12 34,186 10
--------- ------ --------- ------ --------- ---- -------- ----- --------- -----
Total loans, net of
unearned income ............ 574,105 100% 497,995 100% 439,794 100% 390,177 100% 336,916 100%
Less: Allowance for
credit losses ............... (5,713) (5,123) (5,242) (4,691) (4,219)
--------- ------ --------- ------ --------- ---- -------- ----- --------- -----
Net loans ...................... $ 568,392 $ 492,872 $ 434,552 $385,486 $ 332,697
--------- ------ --------- ------ --------- ---- -------- ----- ---------- -----
--------- ------ --------- ------ --------- ---- -------- ----- ---------- -----
</TABLE>
<PAGE>
Maturity and Interest Rate Sensitivity of Loans-December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
After 1
Maturing in: 1 year through After 5
or less 5 years years
- ------------------------------------------------------------------------------------------------------------------
Fixed Variable Fixed Variable Fixed Variable
interest interest interest interest interest interest
rates rates rates rates rates rates Total
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate--construction ................... $ 35,054 $ 24,354 $ 16,328 $ 585 $ 1,380 $ -- $ 77,701
Real estate--mortgage(1) .................... 62,116 54,586 116,708 62,861 75,799 990 373,060
Commercial and agricultural ................. 7,868 23,098 27,663 366 5,052 64 64,111
Consumer .................................... 2,750 4,300 49,908 -- 2,275 -- 59,233
-------- -------- -------- ------- ------- ------ --------
Total loans, net of unearned income ......... $107,788 $106,338 $210,607 $63,812 $84,506 $1,054 $574,105
-------- -------- -------- ------- ------- ------ --------
-------- -------- -------- ------- ------- ------ --------
</TABLE>
(1) The Company's customary business practice is to write real estate mortgage
loans, which will be retained in its loan portfolio, with repayment terms
normally not exceeding five years. Most loans mature in one year with the
balance due at maturity. Assuming that credit standards are met at each
maturity, the Company customarily extends its loans for successive one year
periods. In recent years, the Company began to write some real estate
mortgage loans with terms up to 15 years, of which the volume was minimal as
of December 31, 1997.
Allowance for Credit Losses
The Company follows the guidance of FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by Statement No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." It requires that impaired loans, within its scope, be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. Since
the Company's allowance for credit losses was considered adequate when this
Statement was adopted, the impact on the Company's financial condition and
results of operations was not material.
Statement 114 excludes smaller balance and homogeneous loans from
impairment reporting. Therefore, the Company has designated consumer, credit
card and residential mortgage loans to be excluded for this purpose. From the
remaining loan portfolio, loans rated as doubtful, or worse, classified as
nonaccrual, and troubled debt restructurings may be evaluated to be impaired.
Loans are evaluated for nonaccrual status when principal or interest is
delinquent for 90 days or more and are placed on nonaccrual status when a
loan is specifically determined to be impaired. Any unpaid interest
previously accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the likelihood
of further loss is remote. Interest payments received on such loans are
applied as a reduction of the loan principal balance. Interest income on
other nonaccrual loans is recognized only to the extent of interest payments
received. Up to this point, slow payment on a loan is considered, by the
Company, to only be a minimum delay. See Note 5 to the consolidated financial
statements for selected information concerning the Company?s recorded
investment in impaired loans.
The Company maintains its allowance for credit losses at a level deemed
sufficient to provide for estimated potential losses inherent in the credit
extension process. Management reviews the adequacy of the allowance each
quarter, considering factors such as current and future economic conditions
and their anticipated impact on specific borrowers and industry groups, the
growth and composition of the loan portfolio, the level of classified and
problem assets, historical loss experience, and the collectability of
specific loans. Allowances for impaired loans are generally determined based
on collateral values or the present value of estimated cash flows.
The provision for credit losses is charged to income in an amount
necessary to maintain the allowance at the level management believes is
appropriate.
<PAGE>
The allowance for credit losses was $5.71 million, or 1.00% of total
loans, net of unearned income, at December 31, 1997, compared to $5.12
million, or 1.03% as of December 31, 1996. The allowance for credit losses to
nonperforming loans was 123.7% and 71.5% as of December 31, 1997 and 1996,
respectively.
The Company's provision for credit losses in 1997 was $1.33 million
compared to $318,000 in 1996. Net credit losses in 1997 were less than the
provision for credit losses by $590,000. Net credit losses in 1996 exceeded
the provision for credit losses by $581,000.
Total nonperforming assets as of December 31, 1997 totaled $8.12 million,
reflecting a $2.18 million decrease from the $10.29 million in nonperforming
assets as of December 31, 1996. During 1997, the Company created a "Special
Assets" department whose primary responsibility is to enhance recovery of
nonperforming assets. The decrease in the level of nonperforming assets at
1997's year-end reflects the efforts of this department. Total nonperforming
assets, including properties acquired through foreclosure, represent .88% and
1.32% of total assets as of December 31, 1997 and 1996 respectively.
Nonperforming assets at December 31, 1997, include $3.64 million of
nonaccrual loans, $982,000 of loans past due 90 days or more, $2.31 million
of foreclosed properties, consisting principally of commercial properties,
and $1.19 million for the Company's vacated Operations Center transferred to
other real estate owned.
It is the Company's practice to continue the recognition of earnings on
delinquent consumer loans until the loans are charged-off after being 90 days
past due.
Problem Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans(1) ............... $3,637 $ 4,631 $2,532 $3,445 $3,282
Restructured loans(2) ............. -- -- -- -- --
Past due loans(3) ................. 982 2,531 122 153 89
------ ------- ------ ------ ------
Total nonperforming loans ....... 4,619 7,162 2,654 3,598 3,371
Foreclosed properties(4) ............ 3,496 3,131 2,262 2,212 2,665
------ ------- ------ ------ ------
Total nonperforming
assets .......................... $8,115 $10,293 $4,916 $5,810 $6,036
------ ------- ------ ------ ------
------ ------- ------ ------ ------
Nonperforming assets to
total loans (net of
unearned income) and foreclosed
properties at period-end ........... 1.40% 2.05% 1.11% 1.48% 1.78%
Nonperforming assets to total
assets at period-end ............... .88% 1.32% .74% .93% 1.00%
Allowance for credit losses
to nonperforming loans at
period-end ......................... 123.7% 71.5% 197.5% 130.4% 125.2%
</TABLE>
- ------------------------------------
(1) See discussion at "Allowance for Credit Losses" for nonaccrual and impaired
loans.
(2) Restructured loans are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15. Nonaccrual loans are not
included in these totals.
<PAGE>
(3) Past due loans are loans that were contractually past due 90 days or more as
to principal or interest payments at the dates indicated. Nonaccrual and
restructured loans are not included in these totals.
(4) Foreclosed properties include facilities no longer used for banking purposes
and properties that have been acquired in complete or partial satisfaction
of debt. These properties, which are held for resale, are carried at the
lower of fair value (net of estimated selling expenses) or cost.
The Company has loans totaling $15.35 million that are now current for
which there are concerns as to the ability of the borrowers to comply with
present loan repayment terms. While management does not anticipate any loss
not previously provided for on these loans, changes in the financial
condition of these borrowers may necessitate future modifications in their
loan repayment terms.
At December 31, 1997, the Company had no concentrations of loans in any
one industry exceeding 10% of its total loan portfolio. An industry for this
purpose is defined as a group of counterparties that are engaged in similar
activities and have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes
in economic or other conditions.
There were no other interest-bearing assets at December 31, 1997,
classifiable as nonaccrual, past due, restructured or problem assets.
Allowance for Credit Losses
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average total loans out-
standing during year ................ $535,921 $464,440 $423,72 $358,051 $321,539
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
Allowance at beginning
of year ............................. $ 5,123 $ 5,242 $4,691 $ 4,219 $ 3,694
-------- -------- ------- -------- --------
Charge-offs:
Real estate-construction ........... 588 -- -- -- --
Real estate-mortgage ............... 12 136 22 32 --
Commercial and agricultural ........ 306 570 19 -- 140
Consumer ........................... 288 293 168 129 127
-------- -------- ------- -------- --------
Total charge-offs ............... 1,194 999 209 161 267
-------- -------- ------- -------- --------
Recoveries:
Real estate-construction .......... 24 -- -- -- --
Real estate-mortgage .............. 4 -- 1 -- 2
Commercial and agricultural ....... 369 20 -- 38 8
Consumer .......................... 58 80 49 70 17
-------- -------- ------- -------- --------
Total recoveries ................ 455 100 50 108 27
-------- -------- ------- -------- --------
Net charge-offs ...................... 739 899 159 53 240
-------- -------- ------- -------- --------
Additions to allowance charged
to operating expenses ............... 1,329 318 710 525 765
-------- -------- ------- -------- --------
Other transfers and allowance on loans
acquired with purchased entity ..... -- 462 -- -- --
-------- -------- ------- -------- --------
Allowance at end of year ............. $ 5,713 $ 5,123 $5,242 $ 4,691 $ 4,219
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
Ratio of net charge-offs
to average total loans .............. .14% .19% .04% .01% .07%
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
</TABLE>
<PAGE>
The allocation of the Allowance, presented in the following table, is
based primarily on the factors discussed above in evaluating the adequacy of
the Allowance as a whole. Since all of those factors are subject to change,
the allocation is not necessarily indicative of the category of future loan
losses.
Allocation of Allowance for Credit Losses
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 %(1) 1996 %(1) 1995 %(1) 1994 %(1) 1993 %(1)
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction $ 557 14% $1,059 11% $ 806 9% $ 743 7% $ 693 6%
Real estate-mortgage 2,703 65 2,300 67 2,406 68 2,370 70 2,247 73
Commercial and agricultural 993 11 855 11 1,129 11 749 11 991 11
Consumer 380 10 534 11 476 12 344 12 288 10
Unallocated 1,080 -- 375 -- 425 -- 485 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Allowance $5,713 100% $5,123 100% $5,242 100% $4,691 100% $4,219 100%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Percent of loans in each category to total loans, net of unearned income.
Deposits
Average Deposits and Average Rates
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------
Average Average Average
daily Average daily Average daily Average
balance Rate balance Rate balance Rate
- -------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits .............. $ 73,710 --% $ 66,111 --% $ 58,789 --%
Interest-bearing
demand deposits .............. 130,387 2.5 136,280 2.75 136,274 2.97
Savings deposits ............. 80,812 2.5 84,294 3.08 81,128 3.08
Certificates of deposit
and other time deposits ...... 307,482 5.4 265,180 5.26 238,620 5.44
-------- --- -------- ---- -------- ----
Total average deposits ... $592,391 3.7 $551,865 3.67 $514,811 3.79%
-------- --- -------- ---- -------- ----
-------- --- -------- ---- -------- ----
</TABLE>
Maturities of Time Deposits--$100,000 or More
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- ------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Maturing in:
3 months or less ................... $18,119 $23,025 $13,218
Over 3 months through 6 months ..... 13,983 9,009 13,268
Over 6 months through 12 months .... 9,777 6,226 7,893
Over 12 months ..................... 16,966 11,991 10,944
------- ------- -------
$58,845 $50,251 $45,323
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
Short-term Borrowings
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Total outstanding at year-end .................... $65,163 $40,739 $21,043
------- ------- -------
Average amount outstanding during the year ....... $50,141 $24,815 $18,928
------- ------- -------
Maximum amount outstanding at any month-end ...... $66,143 $43,714 $28,237
------- ------- -------
Weighted-average interest rate at year-end ....... 5.76% 5.43% 5.65%
------- ------- -------
Weighted-average interest rate during the year ... 5.62% 5.47% 5.93%
------- ------- -------
</TABLE>
(1) Includes securities sold under agreements to repurchase with various
counterparties. Repurchase agreements mature primarily within 60 days and
are collateralized with certain debt securities.
Other Short-term Borrowings(2)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Total outstanding at year-end ................... $152,138 $76,516 $32,426
-------- ------- -------
Average amount outstanding during the year ...... $110,462 $46,626 $32,246
-------- ------- -------
Maximum amount outstanding at any month-end ..... $152,138 $76,516 $50,382
-------- ------- -------
Weighted-average interest rate at year-end ...... 5.36% 5.59% 5.91%
-------- ------- -------
Weighted-average interest rate during the year .. 5.48% 5.85% 5.84%
-------- ------- -------
</TABLE>
(2) Primarily reflects borrowings under a secured lending arrangement with the
Federal Home Loan Bank of Atlanta.
Included in other short-term borrowings at December 31, 1997 are the
following borrowings from the Federal Home Loan Bank of Atlanta. These
borrowings have scheduled maturity dates but are all callable at the sole
discretion of the Federal Home Loan Bank of Atlanta, within one year from the
date of their initial funding. All of these borrowings reprice monthly,
quarterly, semi-annually, or annually, until the first call date and then are
repriced quarterly, thereafter.
<TABLE>
<CAPTION>
December 31, 1997 Due in Interest rate range Amount
- ----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
1998 5.30%-5.89% $ 15,000
1999 5.74 10,000
2000 5.66 16,000
2002 5.30 29,000
2004 5.36 10,000
2007 5.03%-5.27% 72,000
----- ---------- ---------
Total $ 152,000
----- ---------- ---------
</TABLE>
<PAGE>
Capital Resources
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and 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 Company and the Bank to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1997 and 1996 that the
Company and the Bank meet all capital adequacy requirements to which they are
subject. See Note 13 to the consolidated financial statements for a table
depicting compliance with regulatory capital requirements.
As of December 31, 1997, the most recent notification from the regulatory
agency categorized the Bank as adequately capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table in Note 13.
There are no conditions or events since that notification which management
believes have changed the Bank's category.
The Company repurchased 10,000 and 30,000 shares of its outstanding common
shares under the stock repurchase program in 1997 and 1996, respectively. The
total number of shares repurchased was 40,000 as of December 31, 1997.
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. This plan provides that the Company will obtain
assurances from these software vendors that their product will be Year 2000
compliant. All systems potentially affected will be evaluated. The plan also
includes contacting large commercial loan 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. Since
many of the programs used by the Company are "off-the-shelf" as compared to
"highly customized," the cost to address these matters is not expected to
have a material impact on future operating results or financial condition.
This area is changing very rapidly and the actual results may differ from
what has been anticipated.
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.
<PAGE>
Financial Analysis 1996-1995
Earnings Summary:
Net income was $5.87 million in 1996 compared to $7.00 million for 1995.
Basic and diluted earnings per share were $0.99 in 1996 compared to $1.19 for
1995. Net income before merger-related expenses was $7.78 million in 1996 and
$7.30 million in 1995, while basic and diluted earnings per share were $1.31
and $1.24 for 1996 and 1995, respectively.
Return on average assets was 0.84% in 1996 compared to 1.09% for 1995.
Return on average shareholders' equity was 8.92% in 1996 compared to 11.21%
in 1995. However, before merger-related expenses the return on average assets
was 1.11% in 1996 and 1.14% in 1995, and the return on average shareholders
equity was 11.82% and 11.70% in 1996 and 1995, respectively.
Net Interest Income: On a fully taxable-equivalent basis, net interest
income increased $701,000 or 2.4% in 1996 and $866,000 or 3.1% in 1995.
In 1996, the net interest margin on average total interest-earning assets
decreased to 4.52% from 4.78% in 1995 and from 4.96% in 1994. Changes in net
interest income between periods are affected principally by the volume of
interest-earning assets and the yield on those assets, and by the volume of
interest-bearing deposits and other liabilities and the rates paid on those
deposits and liabilities. Table 2, "Rate/Volume Analysis," summarizes on a
fully taxable-equivalent basis, the impact of changes in average balances and
average rates on the Company's net interest income for the periods indicated.
Noninterest Income: Noninterest income increased by $343,000, or 8.8% in
1996 and by $1.04 million, or 36.1% in 1995.
The Company utilized the secondary mortgage market to satisfy its
customers' demand for long-term fixed-rate mortgage financing and, in so
doing, generated gains in the amount of $305,000 from the sale of conforming
mortgage loans and generated $490,000 in related servicing fees in 1996.
During 1995, the Company realized gains from loan sales and servicing fee
income of $315,000 and $597,000, respectively, from its activity in this
market.
The increased service fees on deposit accounts are attributed to increases
in both account volume and activity, since service charges per account and
per transaction remained relatively constant between the periods.
Noninterest Expenses: Noninterest expenses increased $3.78 million, but
excluding merger-related costs of $2.87 million in 1996 and $303,000 in 1995
would have only increased $1.22 million.
Increases in salaries and employee benefits of $428,000 or 3.8% in 1996
and $1.33 million or 13.5% in 1995, primarily reflect the effects of an
increase in the number of Company personnel during these periods.
Net occupancy and equipment expenses increased $736,000 (43.7%) and
$161,000 (11.2%), respectively, compared to those incurred in 1995. The
increase in occupancy and equipment expenses is primarily associated with the
increased costs of maintaining the new corporate headquarters facility. These
costs include additional depreciation, utility expenses and real estate taxes.
Other operating expenses decreased $106,000 or 1.7% in 1996, and by
$20,000 or 0.33% in 1995. See Note 12 to the consolidated financial
statements for a schedule showing a detailed breakdown of the Company's more
significant other operating expenses.
Income Taxes: Income tax expense decreased to $3.25 million in 1996,
compared to $3.89 million in 1995, reflecting the lower level of pretax
income in 1996.
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning the
Company, and is qualified in its entirety by the detailed information and
financial statements, including notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Total interest income.................................... $ 63,191 $ 54,653 $ 51,126 $ 43,892 $ 41,691
Total interest expense(1)................................ 31,012 25,014 22,759 17,010 16,054
---------- ---------- ---------- ---------- ----------
Net interest income...................................... 32,179 29,639 28,367 26,882 25,637
Provision for credit losses.............................. 1,329 318 710 525 765
---------- ---------- ---------- ---------- ----------
Net interest income after provision for credit losses.... 30,850 29,321 27,657 26,357 24,872
Net securities gains (losses)............................ 580 193 123 375 (1,183)
Noninterest income (excluding net securities gains
(losses)).............................................. 5,540 4,068 3,795 2,503 4,497
Noninterest expenses..................................... 23,949 24,470 20,689 19,191 18,013
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes................. 13,021 9,112 10,886 10,044 10,173
Provision for income taxes............................... 4,218 3,245 3,888 3,272 3,301
---------- ---------- ---------- ---------- ----------
Net income............................................... $ 8,803 $ 5,867 $ 6,998 $ 6,772 $ 6,872
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Per Share(2):
Basic and diluted earnings............................... $ 1.49 $ 0.99 $ 1.19 $ 1.15 $ 1.17
Cash dividends declared.................................. $ 0.57 $ 0.49 $ 0.50 $ 0.44 $ 0.35
Book value at year-end................................... $ 13.11 $ 11.71 $ 11.36 $ 10.18 $ 9.96
Shares outstanding at year end........................... 5,912,284 5,901,016 5,828,197 5,796,869 5,789,812
Weighted average shares outstanding:
Basic.................................................. 5,903,868 5,919,977 5,881,129 5,891,332 5,866,785
Diluted................................................ 5,918,571 5,933,411 5,895,803 5,905,186 5,873,288
Other Data (At Year-End):
Total loans, net of unearned income...................... $ 574,105 $ 497,995 $ 439,794 $ 390,177 $ 336,916
Total assets 918,084 779,169 660,984 627,050 603,497
Total deposits........................................... 616,512 587,074 529,988 505,202 485,543
Federal funds purchased and securities
sold under agreements to repurchase.................... 65,163 40,739 21,043 25,103 32,304
Other short-term borrowings.............................. 152,138 76,516 32,426 26,089 13,776
Long-term debt........................................... -- -- 5,680 7,000 10,106
Total shareholders' equity............................... 77,518 69,110 66,219 59,037 57,689
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Ratios:
Return on average total assets........................... 1.07% 0.84% 1.09% 1.14% 1.23%
Return on average shareholders' equity................... 12.25 8.92 11.21 11.79 12.73
Average shareholders' equity to average total assets..... 8.65 9.39 9.73 9.63 9.67
Cash dividends declared to net income.................... 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) Per share data for 1996, 1995, 1994 and 1993 has been restated for the
effects of a 10% stock dividend declared and paid in October 1997.
<PAGE>
FCNB Corp and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------
(dollars in thousands, except per share amounts) 1997 1996
- -------------------------------------------------------------------------------- -------- --------
<S> <C> <C>
ASSETS
Cash and due from banks......................................................... $ 27,329 $ 31,023
Interest-bearing deposits in other banks........................................ 755 1,065
Federal funds sold.............................................................. 14,231 12,438
--------- ---------
Cash and cash equivalents..................................................... 42,315 44,526
--------- ---------
Loans held for sale............................................................. 909 3,162
--------- ---------
Investment securities held to maturity--fair value of $48,729 in 1997 and
$33,740 in 1996............................................................... 48,389 33,525
--------- ---------
Investment securities available for sale--at fair value......................... 202,850 162,860
--------- ---------
Loans........................................................................... 574,205 498,391
Less: Allowance for credit losses............................................... (5,713) (5,123)
Unearned income............................................................. (100) (396)
--------- ---------
Net loans................................................................... 568,392 492,872
--------- ---------
Bank premises and equipment..................................................... 22,705 22,691
-------- ---------
Other assets.................................................................... 32,524 19,533
--------- ---------
Total assets................................................................ $918,084 $779,169
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits.................................................... $ 85,902 $ 76,365
Interest-bearing deposits....................................................... 530,610 510,709
--------- ---------
Total deposits.............................................................. 616,512 587,074
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase........................................... 65,163 40,739
Other short-term borrowings..................................................... 152,138 76,516
Accrued interest and other liabilities.......................................... 6,753 5,730
--------- ---------
Total liabilities........................................................... 840,566 710,059
-------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 9 & 16)
SHAREHOLDERS' EQUITY
Preferred stock, per share par value $1.00;
1,000,000 shares authorized; none outstanding................................. -- --
Common stock, per share par value $1.00;
20,000,000 shares authorized;
5,912,284 in 1997
and 5,364,560 in 1996 shares issued and outstanding........................... 5,912 5,365
Surplus......................................................................... 43,398 26,652
Retained earnings............................................................... 24,792 36,589
Net unrealized gain on securities available for sale............................ 3,416 504
--------- ---------
Total shareholders' equity.................................................. 77,518 69,110
--------- ---------
Total liabilities and shareholders' equity.................................. $918,084 $ 779,169
--------- ---------
--------- ---------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
FCNB Corp and Subsidiary
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
(dollars in thousands, except per share amounts) 1997 1996 1995
- ---------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans................................................ $ 48,562 $ 42,948 $ 39,341
Interest and dividends on investment securities:
Taxable................................................................. 13,181 9,728 9,292
Tax exempt.............................................................. 341 505 1,211
Dividends............................................................... 618 539 414
Interest on federal funds sold............................................ 389 759 457
Other interest income..................................................... 100 174 411
--------- --------- ---------
Total interest income................................................. 63,191 54,653 51,126
--------- --------- ---------
Interest expense:
Interest on deposits...................................................... 22,143 20,549 19,361
Interest on federal funds purchased and securities sold under agreements
to repurchase........................................................... 2,819 1,357 1,122
Interest on other short-term borrowings................................... 6,050 2,762 1,882
Interest on long-term debt................................................ -- 346 394
--------- --------- ---------
Total interest expense................................................ 31,012 25,014 22,759
--------- --------- ---------
Net interest income......................................................... 32,179 29,639 28,367
Provision for credit losses................................................. 1,329 318 710
--------- --------- ---------
Net interest income after provision for credit losses....................... 30,850 29,321 27,657
--------- --------- ---------
Noninterest income:
Service fees.............................................................. 2,855 2,454 2,104
Net securities gains...................................................... 580 193 123
Gain (loss) on sale of loans.............................................. 407 305 315
Servicing fees on loans sold.............................................. 374 490 597
Other operating income.................................................... 1,904 819 779
--------- --------- ---------
Total noninterest income.............................................. 6,120 4,261 3,918
--------- --------- ---------
Noninterest expenses:
Salaries and employee benefits............................................ 12,745 11,621 11,193
Occupancy expenses, net................................................... 2,463 2,419 1,683
Equipment expenses........................................................ 2,027 1,599 1,438
Merger-related expenses................................................... 460 2,865 303
Other operating expenses.................................................. 6,254 5,966 6,072
--------- --------- ---------
Total noninterest expenses............................................ 23,949 24,470 20,689
--------- --------- ---------
Income before provision for income taxes.................................... 13,021 9,112 10,886
Provision for income taxes.................................................. 4,218 3,245 3,888
--------- --------- ---------
Net income.................................................................. $ 8,803 $ 5,867 $ 6,998
--------- --------- ---------
--------- --------- ---------
Basic and diluted earnings per share........................................ $ 1.49 $ 0.99 $ 1.19
--------- --------- ---------
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
FCNB Corp and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Gain (loss)
(dollars in thousands, except per share amounts) on Total
- ---------------------------------------------------------- Securities Share-
Shares Common Retained Available holders'
Outstanding Stock Surplus Earnings Other for Sale Equity
----------- ----------- --------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994................. 3,913,549 $ 3,914 $ 26,369 $ 30,939 $ (35) $ (2,150) $ 59,037
Net income................................... -- -- -- 6,998 -- -- 6,998
Dividend reinvestment and stock purchase
plan....................................... -- -- -- (11) -- -- (11)
Shares issued with stock split, effected in
the form of a stock dividend............... 1,356,332 1,356 -- (1,356) -- -- --
Stock option transactions.................... 28,480 28 182 -- -- -- 210
Cash dividends declared ($0.50 per share).... -- -- -- (2,912) -- -- (2,912)
Other........................................ -- -- 182 -- 35 -- 217
Fair value adjustment for securities
available for sale, net.................... -- -- -- -- -- 2,680 2,680
----------- ----------- --------- --------- --- ------------ ---------
----------- ----------- --------- --------- --- ------------ ---------
Balance at December 31, 1995................. 5,298,361 5,298 26,733 33,658 -- 530 66,219
Net income................................... -- -- -- 5,867 -- -- 5,867
Dividend reinvestment and stock purchase
plan....................................... -- -- -- (11) -- -- (11)
Repurchase of common stock................... (30,000) (30) (550) -- -- -- (580)
Stock option transactions.................... 96,199 97 469 -- -- -- 566
Cash dividends declared ($0.49 per share).... -- -- -- (2,925) -- -- (2,925)
Fair value adjustment for securities
available for sale, net.................... -- -- -- -- -- (26) (26)
----------- ----------- --------- --------- --- ------------ ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net
Unrealized
Gain (loss)
(dollars in thousands, except per share amounts) on Total
- ---------------------------------------------------------- Securities Share-
Shares Common Retained Available holders'
Outstanding Stock Surplus Earnings Other for Sale Equity
----------- ----------- --------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.............. 5,364,560 5,365 26,652 36,589 -- 504 69,110
----------- ----------- --------- --------- ----------- ------------ ---------
Net income................................ -- -- -- 8,803 -- -- 8,803
Dividend reinvestment and stock purchase
plan.................................... -- -- -- (18) -- -- (18)
Shares issued with 10% stock dividend..... 536,503 536 16,634 (17,170) -- -- --
Repurchase of common stock................ (10,000) (10) (203) -- -- -- (213)
Stock option transactions................. 21,221 21 315 -- -- -- 336
Cash dividends declared ($0.57 per share). -- -- -- (3,412) -- -- (3,412)
Fair value adjustment for securities
available for sale, net................. -- -- -- -- -- 2,912 2,912
----------- ----------- --------- --------- ----------- ------------ ---------
Balance at December 31, 1997.............. 5,912,284 $ 5,912 $ 43,398 $ 24,792 -- $ 3,416 $77,518
----------- ----------- --------- --------- ----------- ------------ ---------
----------- ----------- --------- --------- ----------- ------------ ---------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
FCNB Corp and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
(dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 8,803 $ 5,867 $ 6,998
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization................................. 1,688 1,308 1,029
Provisions for credit losses and foreclosed properties........ 1,354 318 1,062
Deferred income taxes (benefits).............................. 561 (125) (210)
Net discount accretion on investment securities............... (123) (9) (87)
Noncash charitable contribution............................... 98 64 --
Accretion of net loan origination fees........................ (781) (496) (470)
Net securities gains.......................................... (580) (193) (123)
Net (gain) loss on sales of property.......................... 18 15 (55)
Increase in other assets...................................... (1,460) (466) (997)
Decrease (increase) in loans held for sale.................... 2,253 (800) (1,339)
Increase (decrease) in accrued interest and other liabilities. 1,023 (503) 992
Other operating activities.................................... -- -- 217
--------- --------- ---------
Net cash provided by operating activities................. 12,854 4,980 7,017
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities available for
sale........................................................ 60,351 33,434 21,618
Proceeds from maturities of investment securities available for
sale........................................................ 61,178 20,424 6,820
Proceeds from maturities of investment securities held to
maturity.................................................... 12,257 25,286 24,965
Purchases of investment securities available for sale......... (162,294) (104,922) (6,457)
Purchases of investment securities held to maturity........... (21,031) (25,209) (9,520)
Net increase in loans......................................... (76,657) (30,046) (50,566)
Purchases of bank premises and equipment...................... (1,612) (4,622) (8,778)
Proceeds from dispositions of property........................ 375 780 568
Purchase of foreclosed properties............................. (158) (76) --
Investments in other real estate owned........................ -- -- (196)
Purchases of investments in bank-owned life insurance......... (13,500) -- --
Acquisition of business, net of cash acquired................. -- (2,981) --
--------- --------- ---------
Net cash (used in) investing activities................... (141,091) (87,932) (21,546)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
FCNB Corp and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits, NOW accounts, money
market accounts, and savings accounts........................................ $ (7,468) $ 17,285 $ 1,866
Net increase in time deposits.................................................. 36,906 10,791 22,937
Net increase in short-term borrowings.......................................... 100,046 61,786 2,277
Payments on long-term debt..................................................... -- (5,680) (1,320)
Dividend reinvestment and stock purchase plan.................................. (18) (11) (11)
Proceeds from sale of common stock............................................. 185 449 130
Repurchase of common stock..................................................... (213) (580) --
Dividends paid................................................................. (3,412) (2,925) (2,912)
--------- --------- ---------
Net cash provided by financing activities.................................. 126,026 81,115 22,967
--------- --------- ---------
Increase (decrease)in cash and cash equivalents.................................. (2,211) (1,837) 8,438
Cash and cash equivalents-beginning of year...................................... 44,526 46,363 37,925
--------- --------- ---------
Cash and cash equivalents-end of year............................................ $ 42,315 $ 44,526 $ 46,363
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Noncash investing and financing activities:
Foreclosed properties acquired in settlement of loans......................... $ 589 $ 106 $ 1,513
--------- --------- ---------
--------- --------- ---------
Transfers from foreclosed properties to loans.................................. -- $ 1,165 $ 253
--------- --------- ---------
--------- --------- ---------
Bank premises transferred to other assets...................................... -- $ 1,190 --
--------- --------- ---------
--------- --------- ---------
Surplus from stock option transactions......................................... $ 151 $ 117 $ 80
--------- --------- ---------
--------- --------- ---------
Book value of securities transferred to available for sale from held to
maturity..................................................................... -- -- $ 23,751
--------- --------- ---------
--------- --------- ---------
Details of acquisition:
Fair value of assets acquired.................................................. -- $ 35,130 --
Fair value of liabilities assumed.............................................. -- (31,616) --
Purchase price in excess of the net assets acquired............................ -- 3,212 --
--------- --------- ---------
Cash paid...................................................................... -- 6,726 --
Less cash acquired............................................................. -- 3,745 --
--------- --------- ---------
Net cash paid for acquisition.................................................... -- $ 2,981 --
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
The Company paid interest of $30,138, $25,182 and $22,870 in 1997, 1996 and
1995, respectively. Income taxes paid by the Company were $2,662, $4,315 and
$3,216 in 1997, 1996 and 1995 respectively.
See Notes to Consolidated Financial Statements.
<PAGE>
FCNB Corp and Subsidiary
Notes to Consolidated Financial Statements
Note 1. Nature of operations and significant accounting policies:
FCNB Corp (the "Parent Company") is a one bank holding company (following the
merger of Elkridge Bank with FCNB Bank) that provides its customers with banking
and non-banking financial services through its wholly-owned subsidiary FCNB Bank
(the "Bank"). The Bank offers various loan, deposit and other financial service
products to their customers. The Bank's customers include individuals and
commercial enterprises located within the State of Maryland. Its principal
market areas encompass Frederick, Carroll, Howard, Prince George's, Anne Arundel
and Montgomery counties and portions of the adjacent counties within the State.
Additionally, the Bank maintains correspondent banking relationships and
transacts daily federal funds sales on an unsecured basis with regional
correspondent banks.
The accounting and reporting policies and practices of the Parent Company and
its subsidiary (collectively, the "Company") conform with generally accepted
accounting principles. The following is a summary of the Company's significant
accounting policies:
Basis of presentation:
The consolidated financial statements include the accounts of the Parent Company
and the Bank, presented on the accrual basis of accounting, after elimination of
all intercompany accounts and transactions. In the Parent Company's
unconsolidated financial statements, the investment in subsidiary is accounted
for using the equity method of accounting.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Presentation of cash flows:
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks (including cash items in process of clearing) with
a maturity of 90 days or less, and federal funds sold. Generally, federal funds
are sold for one day periods.
Investment securities:
Securities classified as held-to-maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost, adjusted for amortization of premium and
accretion of discount computed using the interest method over their contractual
lives.
Securities classified as available-for-sale are equity securities with readily
determinable fair values and those debt securities that the Company intends to
hold for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at estimated fair value, with any unrealized gains or losses
reported in shareholders' equity, net of the related deferred tax effect.
Dividend and interest income, including amortization of premium and accretion of
discount arising at acquisition, from all categories of investment securities
are included in interest income in the consolidated statements of income. Gains
and losses realized on sales of investment securities, determined using the
adjusted cost basis of the specific securities sold, are included in noninterest
income in the consolidated statements of income. Additionally, declines in the
estimated fair value of individual investment securities below their cost that
are other than temporary are reflected as realized losses in the consolidated
statements of income.
<PAGE>
*******************
Loans held for sale:
Loans held for sale are generally held for periods of ninety days or less and
are carried at the lower of aggregate cost or fair value.
Impaired loans:
The Company accounts for impaired loans following Financial Accounting Standards
Board ("FASB") Statement No. 114, "Accounting by Creditors for Impairment of a
Loan," (Statement 114) as amended by FASB Statement No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures".
Statement 114, as amended, requires that the measurement of a loan's impairment
be based on the present value of the loan's expected future cash flows or,
alternatively, the observable market price of the loan or the fair value of the
collateral. Statement 114 does not apply to large groups of homogeneous loans
such as consumer, credit card and residential mortgage loans. Impaired loans are
therefore primarily business loans, which include commercial loans, commercial
mortgages and construction real estate loans. The Company discontinues the
accrual of interest when a loan is specifically determined to be impaired.
Interest receipts on impaired loans are recognized as interest income or are
applied to principal when management believes ultimate collectability of
principal is in doubt.
Loans and allowance for credit losses:
Loans are carried at the amount of unpaid principal, adjusted for deferred loan
fees and origination costs. Interest on loans is accrued based on the principal
amounts outstanding. When principal or interest is delinquent for ninety days or
more the Company evaluates the loan for nonaccrual status. After a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period interest income. Consistent with the
Company's policy for impaired loans, interest receipts on nonaccrual loans are
recognized as interest income unless ultimate collectability is in doubt. Cash
collections on such loans are applied as reductions of the loan principal
balance and no interest income is recognized until the principal balance has
been collected.
Nonrefundable loan fees and related direct costs are deferred and the net amount
is amortized to income as a yield adjustment over the life of the loan using the
interest method.
The allowance for credit losses is maintained at a level that, in management's
judgment, is adequate to absorb credit losses inherent in the credit extension
process. Management's evaluation of the loan portfolio considers current
economic conditions, past loss experience, specific impaired loans and such
other factors as, in management's best judgment, deserve recognition in
estimating credit losses. Allowances for impaired loans are generally based on
collateral values or the present value of estimated cash flows. Uncertainties
inherent in the estimation process, might cause management's estimate of credit
losses in the loan portfolio and the related allowance to change in the near
term. The provisions for credit losses included in the consolidated statements
of income serve to maintain the allowance at a level which management considers
adequate.
Bank premises and equipment:
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. The provision for depreciation is computed using straight-line and
accelerated methods based on the estimated useful lives of the assets which
range from 5 to 75 years for bank premises and 5 to 25 years for equipment.
Leasehold improvements are amortized over the lesser of the terms of the leases
or their estimated useful lives. Expenditures for improvements, which extend the
life of an asset, are capitalized and depreciated over the asset's remaining
useful life. Gains or losses realized on the disposition of properties and
equipment are reflected in the consolidated statements of income. Expenditures
for repairs and maintenance are charged to operating expenses as incurred.
Foreclosed properties:
Foreclosed properties include properties that have been acquired in complete or
partial satisfaction of debt. These properties are initially recorded at fair
value on the date of acquisition, establishing a new cost basis. Any write-downs
at the time of acquisition are charged to the allowance for credit losses.
Subsequent to acquisition, a valuation allowance is established, if necessary,
to report these assets at the lower of (a) fair value minus estimated costs to
sell or (b) cost. Gains and losses realized on the sale, and any adjustments
resulting from periodic revaluation of this property are included in noninterest
income or expense, as appropriate. Net costs of maintaining and operating the
properties are expensed as incurred.
Goodwill:
Goodwill represents the excess of the cost of companies acquired over the fair
value of their net assets at dates of acquisition and is being amortized on the
straight-line method over 25 years.
<PAGE>
**********************
Income taxes:
Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the amount of
taxable income and pretax financial income and between the tax bases of assets
and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Per share amounts:
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS weighted-average shares outstanding.............................. 5,903,868 5,919,977 5,881,129
Effect of dilutive securities-stock options................................ 14,703 13,434 14,674
---------- ---------- ----------
Diluted EPS weighted-average shares outstanding............................ 5,918,571 5,933,411 5,895,803
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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 designed 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.
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 December 31, 1997 and 1996, 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.
Fair value of financial instruments:
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. When no market exists for the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on -and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage banking
operation, depositor relationships, deferred tax assets, and property, plant and
equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates. As a result, the
estimates are only
<PAGE>
**********************
indicative of individual financial instruments' values and should not be
considered an indication of the fair value of the combined Company taken as a
whole.
Reclassifications:
Certain reclassifications to prior year balances have been made in the
accompanying consolidated financial statements to make disclosures consistent
with those of the current year.
Note 2. Acquisitions:
On January 26, 1996, the Company acquired Laurel Bancorp, Inc. ("Laurel") in
exchange for approximately 1,453,000 shares of the Company's common stock
(adjusted for the 10% stock dividend declared in October 1997) in a transaction
accounted for using the pooling-of-interests method. Laurel was the holding
company for Laurel Federal Savings Bank ("Laurel FSB"), a thrift institution
with branch offices in Laurel and Monrovia, Maryland. Pursuant to the terms of
this acquisition and the 1997 merger of Elkridge Bank with FCNB Bank, the branch
offices of Laurel FSB became part of FCNB Bank. Laurel's fiscal year ended on
November 30, 1995. The Company's 1996 consolidated statements of income include
total income and net income of Laurel for the period from December 1, 1995
through the date of its acquisition in 1996 totaling $1,510,000 and $261,000,
respectively.
On April 30, 1996, the Company acquired all of the outstanding shares of common
stock of Harbor Investment Corporation ("Harbor") for a cash price of
approximately $6.7 million. Harbor was the holding company of Odenton Federal
Savings and Loan Association, a thrift institution located in Odenton, Maryland.
This acquisition has been accounted for under the purchase method of accounting
and the results of the operations of Harbor have been included in the
consolidated financial statements since the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired of $3.2 million,
was recognized as goodwill and is being amortized on a straight-line basis over
25 years. Amortization expense charged to operations for 1997 and 1996 was
approximately $125,000 and $85,000 respectively.
The following tables present the combined and separate results of operations for
Laurel and the Company for the periods preceding the acquisition of Laurel and,
additionally reflect the unaudited pro forma consolidated results of operations
of the Company and Harbor as if its acquisition had occurred on January 1, 1995.
<TABLE>
<CAPTION>
Basic and diluted
Total Net earnings per
(dollars in thousands, except per share data) income income share
- ---------------------------------------------------------------------- ------------ --------- -----------------
<S> <C> <C> <C>
Year ended December 31, 1995
Laurel................................................................ $ 9,395 $ 1,248
Company............................................................... 45,649 5,750 $ 1.28
------------ --------- ------
Combined.............................................................. 55,044 6,998 1.19
Harbor................................................................ 2,801 255
------------ --------- ------
Pro forma (unaudited)................................................. $ 57,845 $ 7,253 $ 1.23
------------ --------- ------
------------ --------- ------
Year ended December 31, 1996
Company............................................................... $ 58,914 $ 5,867 $ 0.99
Harbor................................................................ 1,037 81
------------ --------- ------
Pro forma (unaudited)................................................. $ 59,951 $ 5,948 $ 1.00
------------ --------- ------
------------ --------- ------
</TABLE>
The unaudited pro forma results in the preceding tables have been prepared
for comparative purposes only and include certain adjustments, such as
additional depreciation expense as a result of a step-up in basis of fixed
assets and additional amortization expense as a result of goodwill. They do
not purport to be indicative of the results of operations which actually
would have resulted had the combination been in effect on January 1, 1995, or
of future results of operations of the consolidated entities.
Merger-related expenses in the consolidated statements of income principally
include costs for investment bankers, professional fees, severance payments to
terminated employees, assessments to recapitalize the Savings Association
Insurance Fund and other conversion costs.
Note 3. Compensating balances:
<PAGE>
Compensating balance arrangements exist with various correspondent banks.
These noninterest-bearing deposits are maintained in lieu of cash payments
for standard bank services. The required balances amounted to $40,000 at
December 31, 1997 and $74,000 at December 31, 1996. In addition, for the
reserve maintenance period in effect at December 31, 1997 and 1996, the Bank
was required to maintain average daily balances totaling $7,323,000 and
$5,392,000, respectively, consisting of vault cash and noninterest-bearing
deposits with the Federal Reserve Bank.
Note 4. Investments:
The amortized cost and estimated fair value of securities being held to
maturity at December 31, 1997 and 1996 are as follows:
HELD-TO-MATURITY PORTFOLIO
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ------------------------------------------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
(dollars in thousands)
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
----------- ------- ------- -----------
----------- ------- ------- -----------
December 31, 1996
- ------------------------------------------------
U.S. Treasury and other U.S. government
agencies and corporations..................... $ 5,114 $ 17 $ 5 $ 5,126
State and political subdivisions................ 5,138 480 -- 5,618
Mortgage-backed debt securities................. 23,273 190 467 22,996
----------- ------- ------- -----------
$ 33,525 $ 687 $ 472 $ 33,740
----------- ------- ------- -----------
----------- ------- ------- -----------
</TABLE>
The amortized cost and estimated fair value of securities available for sale at
December 31, 1997 and 1996 are as follows:
<PAGE>
Available-for-sale portfolio
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ------------------------------------------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
(dollars in thousands)
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
---------- --------- ------ ----------
---------- --------- ------ ----------
December 31, 1996
- -------------------------------------------------
U.S. Treasury and other U.S. government
agencies and corporations...................... $ 34,300 $ 379 $ 42 $ 34,637
Mortgage-backed debt securities.................. 107,741 636 628 107,749
Corporate bonds.................................. 6,925 56 32 6,949
Equity securities................................ 13,080 457 12 13,525
---------- --------- ------ ----------
$ 162,046 $ 1,528 $ 714 $ 162,860
---------- --------- ------ ----------
---------- --------- ------ ----------
</TABLE>
The amortized cost and estimated fair value of securities being held to maturity
and those available for sale at December 31, 1997 by contractual maturity, are
as follows:
<PAGE>
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
------------------------ ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Due in one year or less........................................... $ 28 $ 28 $ -- $ --
Due after one through five years.................................. 28,369 28,634 48,598 48,918
Due after five years through ten years............................ 464 559 36,189 36,664
Due after ten years............................................... 352 365 -- --
Mortgage-backed debt securities................................... 19,176 19,143 93,063 94,379
Equity securities................................................. -- -- 19,482 22,889
----------- ----------- ---------- ----------
$ 48,389 $ 48,729 $ 197,332 $ 202,850
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</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, the Federal Home Loan Mortgage Corporation and the Government
National Mortgage Association. Repayment of mortgage-backed securities is
affected by the contractual repayment terms of the underlying mortgages
collateralizing these obligations and the current level of interest rates.
Included in the investment portfolio at December 31, 1997 and 1996, are
securities carried at $124,721,000 and $96,718,000, respectively, which are
pledged to secure public deposits, securities sold under agreements to
repurchase and for other purposes as required and permitted by law.
Gross realized gains and losses from the sale of securities available for sale
were as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- ---------------------------------------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Realized gains.......................... $ 765 $ 523 $ 214
--------- --------- ---------
--------- --------- ---------
Realized (losses)....................... $ (185) $ (330) $ (91)
</TABLE>
Note 5. Loans and allowance for credit losses:
Loans are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------- --------- ---------
<S> <C> <C>
(dollars in
thousands)
Real estate loans:
Construction and land development....... $ 77,701 $ 55,614
--------- ---------
Mortgage loans:
Secured by farmland..................... 2,752 3,154
Secured by 1 to 4 family residential
properties............................ 203,052 182,907
Secured by multi-family (5 or more)
residential properties................ 5,859 6,935
Secured by commercial properties........ 161,397 142,788
--------- ---------
Total mortgage loans.................... 373,060 335,784
--------- ---------
Total loans secured by real estate...... 450,761 391,398
Commercial and industrial loans......... 58,844 51,454
Industrial revenue bonds................ 4,457 36
Loans to farmers........................ 810 1,025
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------- ---------- ----------
<S> <C> <C>
(dollars in thousands)
Loans to individuals for household,
family and other personal expenditures............ 59,333 54,478
---------- ----------
$ 574,205 $ 498,391
---------- ----------
---------- ----------
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was $94,000,000 and $123,621,000 at December 31, 1997 and
1996, respectively.
Transactions in the allowance for credit losses are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- ------------------------------------------------ --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year.................... $ 5,123 $ 5,242 $ 4,691
Provision for credit losses..................... 1,329 318 710
Recoveries...................................... 455 100 50
Other transfers and allowance on
loans acquired with purchased entity.......... -- 462 --
--------- --------- ---------
6,907 6,122 5,451
Credits charged-off............................. (1,194) (999) (209)
--------- --------- ---------
Balance at end of year.......................... $ 5,713 $ 5,123 $ 5,242
--------- --------- ---------
--------- --------- ---------
</TABLE>
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------- --------- ---------
<S> <C> <C>
(dollars in thousands)
Impaired loans with specific
allocation of allowance for credit losses.......... $ 1,480 $ 1,670
Specific allocation of allowance for credit losses.. 638 427
Other impaired loans................................. 1,460 2,230
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
- ----------------------------------------------------- --------- ---------
<S> <C> <C>
(dollars in thousands)
Average recorded investment in impaired loans........ $ 3,030 $ 5,540
Interest income recognized on impaired loans
based on cash payments received.................... 33 205
</TABLE>
<PAGE>
Additional information concerning the Company's recorded investment in
nonaccrual loans, for which impairment had not been recognized are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996 1995
------ ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans...................................... $ 697 $ 731 $ 664
Interest income not recognized due to
loans in nonaccrual status.......................... 94 73 12
----- ----- -----
</TABLE>
Note 6. Bank premises and equipment:
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------- --------- ---------
(dollars in thousands)
<S> <C> <C>
Bank premises and leasehold improvements................... $ 22,742 $ 21,733
Equipment.................................................. 8,476 8,879
--------- ---------
31,218 30,612
Less accumulated depreciation and amortization............. 8,513 7,921
--------- ---------
$ 22,705 $ 22,691
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization charged to operations amounted to $1,568,000 for
1997, $1,369,000 for 1996 and $1,029,000 for 1995.
Note 7. Deposits:
Certificates of deposit and other time deposits issued in denominations of
$100,000 or more totaled $58,845,000 and $50,251,000 at December 31, 1997 and
1996, respectively, and are included in interest-bearing deposits in the
consolidated balance sheets.
At December 31, 1997, the maturity distribution of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
Certificates of
Deposit
(dollars in thousands)
----------------------
<S> <C>
Maturing:
1998................................. $ 222,841
1999................................. 53,930
2000................................. 39,822
2001................................. 3,012
2002................................. 2,345
Thereafter........................... --
--------
$ 321,950
--------
--------
</TABLE>
<PAGE>
Interest on deposits consists of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands)
NOW and Super NOW accounts....................................................... $ 952 $ 1,180 $ 1,195
Savings accounts................................................................. 2,082 2,632 2,497
Money market accounts............................................................ 2,357 2,625 2,852
Certificates of deposit and other time deposits less than $100,000............... 13,966 11,887 10,135
Certificates of deposit and other time deposits of $100,000 or more.............. 2,786 2,267 2,846
--------- --------- ---------
22,143 20,591 19,525
Less capitalized construction period interest.................................... -- 42 164
--------- --------- ---------
$ 22,143 $ 20,549 $ 19,361
--------- --------- ---------
--------- --------- ---------
</TABLE>
Note 8. Short-term borrowings:
The Company purchases federal funds and enters into sales of securities under
agreements to repurchase the same securities, which generally mature within one
to ninety days from the transaction date. Securities pledged as collateral for
securities sold under agreements to repurchase include various debt securities
having aggregate amortized cost book values of $52,750,000 and $47,649,000 at
December 31, 1997 and 1996, respectively.
Other short-term borrowings primarily reflect the amount borrowed under a
secured lending arrangement with the Federal Home Loan Bank of Atlanta. These
borrowings are secured by a blanket lien on real estate mortgages secured by 1
to 4 family residential properties. In addition, at December 31, 1997 various
debt securities having aggregate amortized cost book values of $52,670,000 were
pledged to secure these borrowings.
The Company's unused lines of credit for short-term borrowings totaled
$4,289,000 at December 31, 1997.
Selected information on short-term borrowings is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(dollars in
thousands)
Federal funds purchased and securities sold under agreement to repurchase:
Total outstanding at year-end.............................................................. $ 65,163 $ 40,739
---------- ---------
Average amount outstanding during year..................................................... 50,141 $ 24,815
---------- ---------
Maximum amount outstanding at any month-end................................................ 66,143 $ 43,714
---------- ---------
Weighted-average interest rate at year-end................................................. 5.76% 5.43%
---------- ---------
Weighted-average interest rate for the year................................................ 5.62% 5.47%
---------- ---------
Other short-term borrowings:
Total outstanding at year-end.............................................................. $ 152,138 $ 76,516
---------- ---------
Average amount outstanding during year..................................................... 110,462 $ 46,626
---------- ---------
Maximum amount outstanding at any month-end................................................ 152,138 $ 76,516
---------- ---------
Weighted-average interest rate at year-end................................................. 5.36% 5.59%
---------- ---------
Weighted-average interest rate for the year................................................ 5.48% 5.85%
---------- ---------
</TABLE>
Included in the other short-term borrowings schedule above at December 31, 1997
are the following borrowings from the Federal Home Loan Bank of Atlanta. These
borrowings have scheduled maturity dates but are callable at the sole discretion
of the Federal Home Loan
<PAGE>
Bank of Atlanta, one year from the date of the initial funding. All of these
borrowings re-price monthly, quarterly, semi-annually, or annually, until the
first call date and then are repriced quarterly, thereafter.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31, 1997 Due in Interest rate range Amount
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
1998 5.30% - 5.89% $ 15,000
1999 5.74% 10,000
2000 5.66% 16,000
2002 5.30% 29,000
2004 5.36% 10,000
2007 5.03% - 5.27% 72,000
----- --------
Total $152,000
----- --------
----- --------
</TABLE>
Note 9. Leasing arrangements:
The Company leases branch office facilities under noncancellable operating lease
arrangements whose terms do not extend beyond November 2039. These leases
contain options, which enable the Company to renew the leases at fair rental
value for periods of 3 to 10 years. In addition to minimum rentals, certain
leases have escalation clauses based upon various price indices and include
provisions for additional payments to cover taxes, insurance and maintenance.
The total minimum rental commitment, including renewal periods under these
leases at December 31, 1997 is outlined below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Years ending December 31, (dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
1998................................................................. $ 354
1999................................................................. 350
2000................................................................. 343
2001................................................................. 338
2002................................................................. 315
Later years.......................................................... 4,667
------
$6,367
------
------
</TABLE>
Rent expense included in occupancy expenses amounted to $480,000 for 1997,
$555,000 for 1996, and $532,000 for 1995.
Note 10. Employee benefit plans:
401(k) profit sharing plan:
The Company has a Section 401(k) profit sharing plan covering employees meeting
certain eligibility requirements as to minimum age and years of service.
Employees may make voluntary contributions to the Plan through payroll
deductions on a pre-tax basis. The Company makes discretionary contributions to
the Plan based on the Company's earnings. The Company's contributions are
subject to a vesting schedule (20 percent per year) requiring the completion of
five years of service with the Company, before these benefits are fully vested.
A participant's account under the Plan, together with investment earnings
thereon, is normally distributable, following retirement, death, disability or
other termination of employment, in a single lump-sum payment.
The Company's annual contribution to the Plan totaled $466,000 in 1997, $357,000
in 1996 and $300,000 in 1995.
Deferred compensation plans:
The Company maintains deferred compensation plans for certain key executives and
its directors. The Plans provide for a maximum ten year period of supplemental
retirement income for the Plan's participants. Amounts to be paid by the Company
under these Plans will be recovered through life insurance policies purchased on
the lives of the participants. The expense for the deferred compensation plans
is included in the consolidated statements of income and totaled $211,000,
$175,000 and $149,000 for 1997, 1996, and 1995, respectively.
Stock option plan:
<PAGE>
On December 31, 1997, the Company had two stock-based compensation plans, the
1992 Employee Stock Option Plan ("1992 Plan") and the 1997 Stock Option Plan for
Directors ("1997 Plan"). Both Plans are accounted for in accordance with
Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations.
During 1997, an amendment to the 1992 Plan and adoption of the 1997 Plan were
approved by the Company's Board of Directors, and options were granted under
both Plans. These Plans, however, require the formal approval of the
shareholders. Significant amendments to the 1992 Plan are prospective only and
include, but are not limited to, elimination of the vesting period for options
granted and addition of "reload" options. A reload feature is one that provides
for grants of additional options whenever a participant exercises previously
granted options. The terms of the Plans provide that the number of reload
options granted is the same as the number of original options exercised, and the
exercise price of the reload is the market price of the stock on the date the
reload option is granted. The following information is presented based on the
anticipated shareholder approval of these Plans.
In connection with the stock options granted under the 1992 Plan, additional
restricted stock grants for 17,328 shares at December 31, 1997 may be awarded at
no additional cost to the Plan's participants. Restricted stock, subject to a
three-year restriction period and certain other conditions, is awarded to the
Plan's participants following their purchase of the shares granted under the
1992 Plan. In addition, participants under the 1992 Plan, as amended, may
receive additional reload options upon the exercise of options issued under the
Plan, if the exercise occurs within three years from the date of the original
grant and certain other conditions. Compensation expense, reflecting the fair
value of the restricted shares on the date the stock options were initially
granted, is recognized ratably over a four year period, commencing on the date
the stock options were granted and ending with the expiration of the three year
restriction period. Compensation expense recognized under this Plan for years
ended December 31, 1997, 1996, and 1995 totaled $65,000, $52,000, and $35,000,
respectively.
The 1997 Plan requires the Company to issue options to each non-employee
Director on the day after each annual meeting of the Company's shareholders.
Participants under this Plan will receive reload options upon the exercise of
options issued under this Plan, provided the options are exercised within three
years from the date of the original grant and certain other conditions.
Had compensation expense for both Plans been determined based on the fair value
of each option granted on the date of grant using an option-pricing model as
prescribed in FASB Statement 123, "Accounting for Stock-Based Compensation," the
Company's net income and basic and diluted earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported................................................................... $8,803 $5,867 $6,998
Pro forma..................................................................... $8,121 $5,678 $6,998
Basic and diluted earnings per share:
As reported................................................................... $ 1.49 $ 0.99 $ 1.19
Pro forma..................................................................... $ 1.37 $ 0.96 $ 1.19
------ ------ ------
</TABLE>
The 1992 Plan provides that 454,782 shares of the Company's common stock
(adjusted for stock splits and stock dividends) will be reserved for the
granting of both incentive stock options (ISO) and non-qualified stock options
(NQSO) to purchase these shares. At December 31, 1997, reserved shares remaining
for future grants under this plan totaled 294,989. The 1997 Plan provides that
250,000 shares of the Company's common stock will be reserved for the granting
of NQSO's to purchase these shares. At December 31, 1997, reserved shares
remaining for future grants under this plan totaled 228,562. Under both Plans,
the exercise price per share shall not be less than the fair market value of a
share of common stock on the date on which such options were granted, subject to
adjustments for the effects of any stock splits or stock dividends, and may be
exercised immediately upon being granted.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield.................................................................. 2.5% 2.5% 2.5%
Expected volatility............................................................. 40.71% 49.66% 53.87%
Risk free interest rate......................................................... 5.740% 6.420% 5.585%
Expected life, in years......................................................... 10 10 10
------ ------ ------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Weighted-average fair value of options granted during the year.................. $12.56 $9.43 $9.88
------ ----- -----
------ ----- -----
</TABLE>
The following is a summary of transactions for both Plans during the three years
ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Options Issued Weighted-Average
and Outstanding Exercise Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1994.................................................. 194,341 $ 6.81
------- ------
Exercised..................................................................... (31,328) 4.15
Granted....................................................................... 20,923 19.09
------- ------
Balance at December 31, 1995.................................................. 183,936 8.65
------- ------
Exercised..................................................................... (105,819) 4.23
Terminated.................................................................... (858) 15.47
Granted....................................................................... 23,421 18.64
------- ------
Balance at December 31, 1996.................................................. 100,680 15.57
------- ------
Exercise...................................................................... (20,639) 9.73
Terminated.................................................................... (1,594) 18.84
Granted....................................................................... 52,935 28.57
------- ------
Balance at December 31, 1997.................................................. 131,382 $21.69
------- ------
------- ------
</TABLE>
At December 31, 1997, the 131,382 options issued and outstanding had exercise
prices ranging from $5.98 to $28.63 and had a weighted-average remaining
contractual life of 82 months.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exercisable options:
Options outstanding........................................................... 131,382 77,260 163,013
Weighted-average price........................................................ $ 21.69 $14.65 $7.32
</TABLE>
<PAGE>
Note 11. Income taxes:
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------- --------------------- ---------
<S> <C> <C>
(dollars in thousands)
Deferred tax assets:
Provision for credit losses.................................................... $ 2,012 $ 1,612
Net securities losses.......................................................... 169 250
Deferred compensation.......................................................... 459 438
Postretirement benefits........................................................ 253 251
Provision for foreclosed properties............................................ 149 204
Deferred Fees.................................................................. 317 704
Depreciation................................................................... -- 38
Other.......................................................................... 312 260
- ---------------------------------------------------------------------------------------------------------------------
Total deferred tax assets........................................................ 3,671 3,757
Valuation allowance for deferred tax assets...................................... -- --
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax assets after valuation allowance...................................... 3,671 3,757
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities available for sale............................... 2,105 308
Depreciation................................................................... 444 --
Other.......................................................................... 209 178
- ---------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities..................................................... 2,758 486
- ---------------------------------------------------------------------------------------------------------------------
Net deferred tax assets............................................................ $ 913 $ 3,271
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
A reconciliation of the maximum statutory income tax to the provision for income
taxes attributable to continuing operations included in the consolidated
statements of income, is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands)
Income before income tax.......................................................... $ 13,021 $ 9,112 $ 10,886
Tax rate.......................................................................... 35% 35% 35%
- ---------------------------------------------------------------------------------------------------------------------
Income tax at statutory rate...................................................... 4,557 3,189 3,810
Increases (decreases) in tax resulting from:
Tax-exempt interest income...................................................... (149) (160) (394)
Insurance cash values........................................................... (217) (3) (2)
State income taxes, net of federal income tax benefit........................... 299 267 367
Benefit of federal surtax exemption............................................. (100) (82) (92)
Other........................................................................... (172) 34 199
- ---------------------------------------------------------------------------------------------------------------------
$ 4,218 $ 3,245 $ 3,888
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands)
Taxes currently payable:
Federal............................................................................ $ 3,332 $ 2,923 $ 3,440
State.............................................................................. 325 447 658
- ---------------------------------------------------------------------------------------------------------------------
Total taxes currently payable.................................................... 3,657 3,370 4,098
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities (benefits):
Federal............................................................................ 459 (102) (170)
State.............................................................................. 102 (23) (40)
- ---------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (benefits)........................................ 561 (125) (210)
- ---------------------------------------------------------------------------------------------------------------------
Total................................................................................ $ 4,218 $ 3,245 $ 3,888
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the above amounts are income taxes of $224,000 in 1997, $75,000 in
1996, and $48,000 in 1995 related to net security gains.
Note 12. Other operating expenses:
Other operating expenses in the consolidated statements of income include the
following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands)
FDIC and general insurance........................................................... $ 201 $ 410 $ 897
Professional and directors fees...................................................... 2,301 1,284 1,122
Advertising and public relations..................................................... 980 890 703
Credit and collection expense........................................................ 266 252 134
Postage and supplies................................................................. 1,050 1,059 914
Net loss on foreclosed properties.................................................... 131 83 352
Other................................................................................ 1,325 1,988 1,950
- ---------------------------------------------------------------------------------------------------------------------
$ 6,254 $ 5,966 $ 6,072
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Changes in the allowance for foreclosed properties are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands)
Balance at beginning of year.............................................................. $ 392 $ 536 $ 286
Provision charged to income............................................................... 25 -- 352
Losses charged to the allowance........................................................... (112) (32) (102)
Other transfers net of allowance on properties acquired with purchased entity............. -- (112) --
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of year.................................................................... $ 305 $ 392 $ 536
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 13. Shareholders' equity:
Restrictions on dividends:
The amount of dividends that the Bank can pay to the Parent Company without
approval from the Federal Reserve Board is limited to its net profits for the
current year plus its retained net profits for the preceding two years.
Amounts available for the payment of dividends during 1997 aggregated
$14,285,000.
Restrictions on lending from subsidiary to parent:
Federal law imposes certain restrictions limiting the ability of the Bank to
transfer funds to the Parent Company in the forms of loans or advances.
Section 23A of the Federal Reserve Act prohibits the Bank from making loans
or advances to the Parent Company in excess of 10 percent of its capital
stock and surplus, as defined therein. There were not material loans or
advances outstanding at December 31, 1997.
Preferred stock:
The Board of Directors has the authority to issue preferred stock in one or
more classes or series, with such designations, voting powers, preferences,
participation, redemption, sinking fund, conversion, dividend and other
optional or special rights, and such restrictions, limitations and
qualifications as the Board of Directors may determine.
Repurchase plan:
On March 28, 1996, the Board of Directors authorized a stock repurchase
program. Pursuant to the terms of this program, the Company may repurchase up
to 80,000 shares of its common stock in open market transactions during the
two year period ending March 27, 1998. Not more than 120,000 additional
shares of common stock can be repurchased between March 28, 1998 and March
27, 2001. All repurchases are limited to an aggregate maximum expenditure of
approximately $4,000,000. Repurchases will be made in the open market, from
time to time, in the discretion of management, based upon market, business,
legal, regulatory, accounting and other factors. There is no minimum number
of shares, which the Company is obligated to repurchase. The total number of
shares purchased was 40,000 as of December 31, 1997.
Capital:
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-- and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and 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 Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes that the Company
and the Bank meet all capital adequacy requirements to which it is subject as of
December 31, 1997.
<PAGE>
As of December 31, 1997, the most recent notification from the regulatory agency
categorized the Bank as adequately capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately 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 which management believes have changed the Bank's
category.
The Company and the Bank's actual capital amounts and ratios are presented in
the following table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount
--------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997: (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets):
FCNB Corp....................................................... $ 76,450 11.92% $ 51,328 8.0% N/A
FCNB Bank....................................................... $ 62,230 9.84% $ 50,601 8.0% $ 63,252
Tier I Capital (To Risk-Weighted Assets):
FCNB Corp....................................................... $ 70,737 11.03% $ 25,664 4.0% N/A
FCNB Bank....................................................... $ 56,517 8.94% $ 25,301 4.0% $ 37,951
Tier I Capital (To Average Assets):
FCNB Corp....................................................... $ 70,737 8.10% $ 26,193 3.0% N/A
FCNB Bank....................................................... $ 56,517 6.52% $ 26,005 3.0% $ 43,341
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
FCNB Corp....................................................... $ 70,221 13.57% $ 41,384 8.0% N/A
FCNB Bank(1).................................................... $ 62,033 12.04% $ 41,217 8.0% $ 51,521
Tier I Capital (To Risk-Weighted Assets):
FCNB Corp....................................................... $ 65,098 12.58% $ 20,692 4.0% N/A
FCNB Bank(1).................................................... $ 56,910 11.05% $ 20,608 4.0% $ 30,913
Tier I Capital (To Average Assets):
FCNB Corp....................................................... $ 65,098 8.74% $ 22,351 3.0% N/A
FCNB Bank(1).................................................... $ 56,910 7.74% $ 22,064 3.0% $ 36,774
<CAPTION>
Ratio
-----
<S> <C>
As of December 31, 1997:
- ----------------------------------------------------------------------------
Total Capital (to Risk-Weighted Assets):
FCNB Corp....................................................... N/ A
FCNB Bank....................................................... 10.0%
Tier I Capital (To Risk-Weighted Assets):
FCNB Corp....................................................... N/ A
FCNB Bank....................................................... 6.0%
Tier I Capital (To Average Assets):
FCNB Corp....................................................... N/ A
FCNB Bank....................................................... 5.0%
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
FCNB Corp....................................................... N/ A
FCNB Bank(1).................................................... 10.0%
Tier I Capital (To Risk-Weighted Assets):
FCNB Corp....................................................... N/ A
FCNB Bank(1).................................................... 6.0%
Tier I Capital (To Average Assets):
FCNB Corp....................................................... N/ A
FCNB Bank(1).................................................... 5.0%
- -------------------------------------------------------------------------------
</TABLE>
N/A = Not applicable
(1) During 1997, the two banking affiliates of the Company were merged into one
banking entity, named FCNB Bank. All data as of December 31, 1996 for FCNB
Bank reflects the pro forma balance of the two affiliates (FCNB Bank and
Elkridge Bank) as if the merger had taken place on December 31, 1996. Each
individual affiliate was "well capitalized" as of year-end 1996 under the
applicable regulatory guidelines.
Dividend reinvestment plan:
The Company maintains a Dividend Reinvestment and Stock Purchase Plan for all
Shareholders of the Company. This Plan provides that 181,913 shares, as adjusted
for stock splits and stock dividends, of the Company's common stock will be
reserved for issuance under the Plan. At December 31, 1997, reserved shares
remaining for future issuance under this plan totaled 20,060. The terms of this
Plan allow
<PAGE>
participating Shareholders to purchase additional shares of common stock in
the Company by reinvesting the dividends paid on shares registered in their
name, by making optional cash payments, or both. Shares purchased under the
Plan with reinvested dividends or optional cash payments can be acquired at
97% of current market prices. Optional cash payments to this Plan are limited
and may not exceed $2,500 in any calendar quarter.
Contributions to the Plan will be used by a designated agent to acquire common
shares of the Company at current market prices. The Company reserves the right
to amend, modify, suspend or terminate this Plan at any time at its discretion.
Special bad debt deduction:
The thrift institutions acquired by the Company were allowed special bad debt
deductions limited generally to 8% of otherwise taxable income for the year
beginning December 1, 1987 and thereafter. If the amounts, which qualify as
deductions for income tax purposes, are later used for purposes other than to
absorb loan losses, including distributions in liquidation, they will be subject
to income tax at the applicable current rates. Retained earnings at December 31,
1997, 1996, and 1995 include $4,136,000, for which no provision for income tax
has been provided. The unrecorded deferred income tax liability on the above
amount was approximately $1,601,000.
Note 14. Fair value of financial instruments:
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards No. 107, the estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------- ----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 42,315 $ 42,315 $ 44,526 $ 44,526
Loans held for sale....................................... 909 909 3,162 3,162
Investment securities..................................... 251,239 251,579 196,385 196,600
Net loans................................................. 568,392 571,689 492,872 496,564
-------- ---------- ---------- ----------
Total financial assets.................................... $ 862,855 $ 866,492 $ 736,945 $ 740,852
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
FINANCIAL LIABILITIES
Deposits.................................................. $ 616,512 $ 617,929 $ 587,074 $ 587,832
Short-term borrowings..................................... 217,301 217,384 117,255 116,360
-------- ---------- ---------- ----------
Total financial liabilities............................... $ 833,813 $ 835,313 $ 704,329 $ 704,192
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments as of December 31, 1997 and 1996:
Cash and cash equivalents:
The fair value of cash and cash equivalents is estimated to approximate the
carrying amounts.
Loans held for sale:
Fair value is estimated to equal the carrying amount due to their short holding
period.
Investment securities:
Fair values are based on quoted market prices.
<PAGE>
Loans:
Fair values are estimated for portfolios of loans with similar financial
characteristics. Each portfolio is further segmented into fixed and adjustable
rate interest terms by performing and non-performing categories.
The fair value of performing loans with original maturities greater than one
year is calculated by discounting estimated cash flows using current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. The estimated cash flows do not anticipate
prepayments. The fair value of performing loans with original maturities of one
year or less is considered equal to the carrying amount.
Fair value for non-performing loans is based on estimated cash flows, which are
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount rates
are judgmentally determined using available market information and specific
borrower information.
Management has made estimates of fair value discount rates that it believes to
be reasonable. However, because there is no market for many of these financial
instruments, management has no basis to determine whether the fair value
presented for loans would be indicative of the value negotiated in an actual
sale.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW accounts and money market accounts, is equal to
the amount payable on demand at the reporting date (that is, their carrying
amounts). The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
Short-term borrowings:
The fair value of short-term borrowings is determined using rates currently
available to the Company for debt with similar terms and remaining maturities.
Interest rate swaps:
The fair values of interest rate swaps are estimated based on the amount the
Company would receive or pay to terminate the contracts or agreements. The
carrying value of interest rate swaps related to interest rate risk management
activities was immaterial at December 31, 1997 and 1996. The carrying value of
such instruments, if any, includes any accrued interest receivable and/or
payable balances
Note 15. Transactions with related parties:
In the normal course of banking business, loans are made to officers and
directors of the Company, as well as to their associates. Such loans are made
in the ordinary course of business with substantially the same terms
(including interest rates and collateral) as those prevailing at the time for
comparable transactions with other persons. They do not involve more than
normal risk of collectability or present other unfavorable features. An
analysis of the activity during 1997 is as follows:
<TABLE>
<CAPTION>
(dollars in
thousands)
---------------------
<S> <C>
Balance at December 31, 1996................................................................ $ 8,554
------
New loans................................................................................... 1,266
Repayments.................................................................................. (590)
------
Balance at December 31, 1997................................................................ $ 9,230
------
------
</TABLE>
<PAGE>
Note 16. Commitments and contingencies:
Financial instruments:
In the normal course of business, there are outstanding commitments, contingent
liabilities and other financial instruments that are not reflected in the
accompanying consolidated financial statements. These include commitments to
extend credit, standby letters of credit and interest rate swaps, which are some
of the instruments used by the Company to meet the financing needs of its
customers and to manage its own interest rate risk. These instruments involve,
to varying degrees elements of credit and interest rate risk in excess of the
amounts recognized in the consolidated balance sheets. Any losses which may
result from these transactions are not expected to have a material effect on the
accompanying consolidated financial statements. Notional principal amounts often
are used to express the volume of the transaction, but the amounts potentially
subject to credit risk are much smaller. The contract or notional amount of each
class of such instruments at December 31 was:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------ ---------- ----------
December 31, 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
Contract/ Contract/
Notional Notional
(dollars in thousands) Amount Amount
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Financial instruments whose notional or contract amounts represent credit risk:
Commitments to extend credit............................................................ $ 130,578 $ 104,047
Standby letters of credit............................................................... 9,790 7,790
---------- ----------
---------- ----------
Total..................................................................................... $ 140,368 $ 111,837
---------- ----------
---------- ----------
Financial instruments whose notional or contract amounts exceeded maximum credit risk:
For interest rate risk management
Interest rate swaps..................................................................... $ 10,000 --
---------- ----------
Total..................................................................................... $ 10,000 --
---------- ----------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Certain
commitments have fixed expiration dates, or other termination clauses, and may
require payment of a fee. Many of the commitments are expected to expire without
being drawn upon, accordingly, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral or other
security obtained, if deemed necessary by the Company upon extension of credit,
is based on management's credit evaluation. Collateral held varies but may
include deposits held in financial institutions; U.S. Treasury securities; other
marketable securities; accounts receivable; inventory; property and equipment;
personal residences; income-producing commercial properties and land under
development. Personal guarantees are also obtained to provide added security for
certain commitments.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to guarantee the installation of real property improvements and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company holds collateral and obtains personal guarantees supporting those
commitments for which collateral or other security is deemed necessary.
As a financial institution, the Company assumes interest rate risk as a
provider of banking services to its customers. This risk can be managed
through derivative interest rate contracts, such as interest rate swaps.
Changes in the fair value of such derivatives are generally offset by changes
in the fair value of the underlying hedged asset or liability. For interest
rate risk management purposes, the Company was using interest rate
(pay-fixed) swaps with notional balances of $10,000,000 at December 31, 1997
to convert fixed rate loans to variable rates.
Legal proceedings:
The Company is subject to various legal proceedings which are incidental to the
ordinary course of business. In the opinion of the management of the Company,
there are no material pending legal proceedings to which the Company is a party
or which involves any of its property.
<PAGE>
Note 17. FCNB Corp (Parent Company) condensed financial information:
FCNB Corp (Parent Company)
<TABLE>
<CAPTION>
Balance Sheets
- -------------------------------------------------------------------------------------------- --------- ---------
December 31, 1997 1996
- -------------------------------------------------------------------------------------------- --------- ---------
(dollars in
thousands)
<S> <C> <C>
ASSETS
Cash........................................................................................ $ 4,042 $ 6,488
Receivable from subsidiary banks............................................................ 1,103 357
Investment securities available for sale-at fair value...................................... 10,845 2,034
Investment in subsidiaries.................................................................. 61,384 60,861
Other assets................................................................................ 1,346 187
--------- ---------
Total assets.............................................................................. $ 78,720 $ 69,927
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities................................................................................. $ 1,202 $ 817
--------- ---------
Common stock................................................................................ 5,912 5,365
Surplus..................................................................................... 43,398 26,652
Retained earnings........................................................................... 24,792 36,589
Net unrealized gain on securities available for sale........................................ 3,416 504
--------- ---------
Total shareholders' equity................................................................ 77,518 69,110
--------- ---------
Total liabilities and shareholders' equity................................................ $ 78,720 $ 69,927
--------- ---------
--------- ---------
</TABLE>
FCNB Corp (Parent Company)
Statements of Income
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------ --------- --------- ---------
For the years ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------ --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks................................................... $ 3,792 $ 10,638 $ 3,382
Net securities gains.............................................................. 173 82 47
Other income, principally interest................................................ 278 189 53
--------- --------- ---------
Total income........................................................................ 4,243 10,909 3,482
Expenses............................................................................ 344 843 634
--------- --------- ---------
Income before provision for income taxes and equity in undistributed (excess
distributions of) earnings of subsidiaries........................................ 3,899 10,066 2,848
Provision for income taxes (benefits)............................................... (7) (141) (92)
--------- --------- ---------
Income before equity in undistributed (excess distributions of) earnings of
subsidiaries...................................................................... 3,906 10,207 2,940
Equity in undistributed (excess distributions of) earnings of subsidiaries.......... 4,897 (4,340) 4,058
--------- --------- ---------
Net income.......................................................................... $ 8,803 $ 5,867 $ 6,998
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
FCNB Corp (Parent Company)
<TABLE>
<CAPTION>
Statements of Cash Flows
- ------------------------------------------------------------------------------------- --------- --------- ---------
For the years ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 8,803 $ 5,867 $ 6,998
Adjustments to reconcile net income to net cash provided by operating activities:
(Equity in undistributed) excess distribution of earnings of subsidiary............ (4,897) 4,340 (4,058)
Noncash charitable contribution.................................................... 98 64 --
Net securities gains............................................................... (173) (82) (47)
Decrease (increase) in receivable from subsidiary bank............................. (746) 93 1,258
Decrease (increase) in other assets................................................ (1,159) 120 177
Increase (decrease) in other liabilities........................................... (590) 306 269
--------- --------- ---------
Net cash provided by operating activities........................................ 1,336 10,708 4,597
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale..................... 510 140 68
Purchase of investment securities available for sale............................... (6,330) (1,360) (173)
Investment in subsidiary........................................................... 5,496 (1,490) (2,284)
--------- --------- ---------
Net cash (used in) investing activities.......................................... (324) (2,710) (2,389)
--------- --------- ---------
Cash flows from financing activities:
Dividend reinvestment plan......................................................... (18) (11) (11)
Proceeds from issuance of common stock............................................. 185 449 130
Repurchase of common stock......................................................... (213) (580) --
Cash dividends paid................................................................ (3,412) (2,925) (2,912)
--------- --------- ---------
Net cash (used in) financing activities.......................................... (3,458) (3,067) (2,793)
--------- --------- ---------
Increase (decrease) in cash.......................................................... (2,446) 4,931 (585)
Beginning cash....................................................................... 6,488 1,557 2,142
--------- --------- ---------
Ending cash.......................................................................... $ 4,042 $ 6,488 $ 1,557
--------- --------- ---------
--------- --------- ---------
Supplemental schedule of noncash investing and financing activities:
Surplus from stock options granted................................................. $ 151 $ 117 $ 80
--------- --------- ---------
--------- --------- ---------
Fair value adjustment for securities available for sale,
net of applicable deferred income tax effects.................................... $ 1,790 $ (36) $ (58)
--------- --------- ---------
--------- --------- ---------
Fair value adjustment for securities available for sale held in
subsidiary bank, net of deferred income tax effects.............................. $ 1,122 $ 10 $ 2,738
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
Note 18. Current accounting developments:
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which will become effective for fiscal
years beginning after December 15, 1997. 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. The Company is currently evaluating the
alternative formats for reporting comprehensive income in 1998.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which will become effective for fiscal
years beginning after December 15, 1997. Statement 131 establishes standards for
the manner in which a publicly-held enterprise reports certain information about
operating segments of their business in both their annual and interim financial
reports provided to shareholders. The information required to be disclosed for
an entity's operating segments not only consists of financial information, but
also certain related disclosures of the segment's products and services,
geographic areas, and major customers. The requirements of this new standard are
being evaluated but the Company, currently believes that it will not have any
segment reporting requirements related to this pronouncement.
Note 19. Quarterly results of operations (unaudited):
The following is a summary of the Company's unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
1997 December 31 September 30 June 30 March 31
- -------------------------------------------------------------- ------------ ------------ --------- -----------
<S> <C> <C> <C> <C>
(dollars in thousands, except per share amounts)
Interest income............................................... $ 16,728 $ 16,282 $ 15,447 $ 14,734
Net interest income........................................... 8,208 8,132 8,061 7,778
Provision for credit losses................................... 415 452 231 231
Net securities gains.......................................... 222 214 57 87
Income before income taxes.................................... 3,454 3,527 3,418 2,622
Net income.................................................... 2,379 2,367 2,207 1,850
Basic and diluted earnings per share.......................... .40 .40 .38 .31
------------ ------------ --------- -----------
</TABLE>
<TABLE>
<CAPTION>
1996 December 31 September 30(2) June 30 March 31(1)
- --------------------------------------------------------- ------------ --------------- --------- -----------
<S> <C> <C> <C> <C>
(dollars in thousands, except per share amounts)
Interest income.......................................... $ 14,243 $ 13,832 $ 13,079 $ 13,499
Net interest income...................................... 7,501 7,424 7,209 7,505
Provision for credit losses.............................. 102 72 72 72
Net securities gains..................................... 22 10 96 65
Income before income taxes............................... 2,939 1,950 2,855 1,368
Net income (loss)........................................ 1,902 2,921 1,853 (809)
Basic and diluted earnings (loss) per share.............. .32 .50 .31 (.14)
------------ ------- --------- -----------
</TABLE>
- ------------------------
(1) During the quarter ended March 31, 1996, the Company recognized a current
period income tax provision totaling $1,601,000, for the tax effects of
certain pre-1988 tax reserves for bad debts originally deducted by Laurel.
(2) During the quarter ended September 30, 1996, certain tax laws were enacted
that allowed the Company to reverse the provision for income taxes
recognized on certain pre-1988 tax reserves in the first quarter of 1996.
Additionally, the Company was assessed approximately $813,000 to
recapitalize the Savings Association Insurance Fund (SAIF). The combined
effect of these matters served to increase net income in the third quarter
of 1996 by approximately $1,100,000.
Market For Registrant's Common Equity And Related Stockholder Matters
<TABLE>
<CAPTION>
1997
-----------------------------------
<S> <C> <C> <C>
Price Range Dividend
Quarterly stock prices and dividends(1) High Low Declared
- -------------------------------------------------------------------------------- ----------- --------- -----------
First Quarter................................................................... $ 20.45 $ 18.18 $ .13
Second Quarter.................................................................. 20.00 18.18 .14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
---------------------------------------
<S> <C> <C> <C>
Price Range Dividend
Quarterly stock prices and dividends(1) High Low Declared
- --------------------------------------------------------------------------------- ------------- --------- -------------
Third Quarter.................................................................... 31.82 18.64 .15
Fourth Quarter................................................................... 31.59 27.73 .15
--
--
----- ---------
----- ---------
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------
Price Range Dividend
Quarterly stock prices and dividends(1) High Low Declared
- -------------------------------------------------------------------------------- ----------- --------- -----------
<S> <C> <C> <C>
First Quarter................................................................... $ 20.00 $ 16.14 $ .11
Second Quarter.................................................................. 17.73 15.68 .12
Third Quarter................................................................... 18.18 15.45 .13
Fourth Quarter.................................................................. 18.86 17.50 .13
</TABLE>
- ------------------------
(1) The quarterly stock prices and dividends have been restated for the effects
of a 10% stock dividend declared and paid in October 1997.
The stock prices are the high and low sale prices as recorded on the NASDAQ
National Market. The Company trades on the NASDAQ National Market under the
symbol FCNB.
Number of shareholders of record, December 31,1997 3,575
PRINCIPAL AFFILIATE
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands) Assets Liabilities and Equity
- ---------------------------- ---------------------------- ----------------------------------------------------
FCNB Bank Cash and due from banks $27,329 Total deposits $ 620,554
7200 FCNB Court Earning assets 830,394 Short-term borrowings 217,301
Frederick, MD 21703 Accrued interest and 7,856
(301) 662-2191 other liabilities
21 Offices Allowance for credit losses (5,713) Shareholders' equity 61,384
Other Assets 55,085
------ ----------
Total liabilities
Total assets $907,095 and equity $ 907,095
------ ----------
Net income $8,689
</TABLE>
Annual Meeting of Shareholders
Tuesday, April 21, 1998--7:00 p.m.
7200 FCNB Court
Frederick, Maryland 21703
Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone (800) 937-5449
<PAGE>
Analyst Contact
Alex C. Hart
Vice President, Investor Relations
Phone (301 or 800) 662-2191 or (301) 624-2340 Direct
Shareholder Contact
Kristen Howes
Senior Shareholders Relations Officer
Phone (301 or 800) 662-2191 or (301) 624-2306 Direct
Availability of 10-K Report
The annual report on Form 10-K filed with the Securities and Exchange Commission
is available without charge upon written request to: Mark A. Severson, Senior
Vice President and Treasurer, FCNB CORP, 7200 FCNB Court, Frederick, Maryland
21703.
Profile
FCNB CORP is a one bank holding company organized under the laws of the State of
Maryland. FCNB Bank, a state-chartered commercial bank under the laws of the
State of Maryland was converted from a national bank in June 1993, and was
originally chartered in 1818. The Bank is engaged in a general commercial and
retail banking business serving individuals and businesses in Frederick,
Carroll, Howard, Prince George's, Anne Arundel and Montgomery counties located
in Maryland. The deposits of the Bank are insured by the FDIC. FCNB Corp trades
on the NASDAQ Stock market under the symbol "FCNB".
The following brokers are registered as market makers of FCNB Corp Common Stock:
<TABLE>
<S> <C>
Ferris, Baker, Watts & Co. Legg Mason Wood Walker, Inc.
365 West Patrick Street 30 West Patrick Street
Frederick, MD 21701 Frederick, MD 21701
(301) 662-6488 (301) 663-8833
F.J. Morrisey & Co., Inc. Ryan, Beck & Co.
1700 Market Street, Suite 1420 3 Parkway
Philadelphia, PA 19102 Philadelphia, PA 19102
(215) 563-8500 (800) 342-2325
Herzog, Heine, Geduld, Inc. Sandler O'Neill & Partners, L.P.
26 Broadway, 2nd Floor Two World Trade Center
New York, NY 10004 104th Floor
(212) 908-4000 New York, NY 10048
(800) 635-6860
Janney Montgomery Scott, Inc. Wheat First Securities, Inc.
1801 Market Street 18 West Patrick Street
Philadelphia, PA 19103 Frederick, MD 21701
(215) 665-6000 (301) 662-0002
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Corporate Headquarters Subsidiary
FCNB Corp (MD) FCNB Bank (MD)*
7200 FCNB Court 7200 FCNB Court
Frederick, Maryland 21703 Frederick, Maryland 21703
(301) 662-2191 (301) 662-2191
</TABLE>
<PAGE>
* The Bank is the principal subsidiary of FCNB Corp as of December 31, 1997.
The voting securities of the Bank are owned entirely by FCNB Corp.
<PAGE>
Exhibit 23
Keller Bruner & Company, L.L.C.
Certified Public Accountants
The Board of Directors
FCNB Corp
We consent to incorporation by reference of our report dated January 23, 1998
relating to the consolidated balance sheets of FCNB Corp and its subsidiaries of
December 31, 1997 and 1996, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
three year period ended December 31, 1997, which report appears on page 45 of
the 1997 FCNB Corp Annual Report, in this Annual Report on Form 10-K, and in the
following Registration Statements of FCNB Corp: Number 33-63092 on Form S-8 and
Number 33-55040 on Form S-3.
Keller Bruner & Company, L.L.C.
Frederick, Maryland
March 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 27,329
<INT-BEARING-DEPOSITS> 755
<FED-FUNDS-SOLD> 14,231
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 202,850
<INVESTMENTS-CARRYING> 48,389
<INVESTMENTS-MARKET> 48,729
<LOANS> 574,105
<ALLOWANCE> 5,713
<TOTAL-ASSETS> 918,084
<DEPOSITS> 616,512
<SHORT-TERM> 217,301
<LIABILITIES-OTHER> 6,753
<LONG-TERM> 0
0
0
<COMMON> 5,912
<OTHER-SE> 71,606
<TOTAL-LIABILITIES-AND-EQUITY> 918,084
<INTEREST-LOAN> 48,562
<INTEREST-INVEST> 14,140
<INTEREST-OTHER> 489
<INTEREST-TOTAL> 63,191
<INTEREST-DEPOSIT> 22,143
<INTEREST-EXPENSE> 31,012
<INTEREST-INCOME-NET> 32,179
<LOAN-LOSSES> 1,329
<SECURITIES-GAINS> 580
<EXPENSE-OTHER> 23,949
<INCOME-PRETAX> 13,021
<INCOME-PRE-EXTRAORDINARY> 13,021
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,803
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
<YIELD-ACTUAL> 8.29
<LOANS-NON> 3,637
<LOANS-PAST> 982
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 15,350
<ALLOWANCE-OPEN> 5,123
<CHARGE-OFFS> 1,194
<RECOVERIES> 455
<ALLOWANCE-CLOSE> 5,713
<ALLOWANCE-DOMESTIC> 5,713
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<CIK> 0000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1998 JAN-01-1996
JAN-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996
SEP-30-1996
<CASH> 31,023 24,085 23,936 24,052
23,822
<INT-BEARING-DEPOSITS> 1,065 2,261 2,876 1,229
1,615
<FED-FUNDS-SOLD> 12,438 20,017 23,526 16,315
12,454
<TRADING-ASSETS> 0 0 0 0
0
<INVESTMENTS-HELD-FOR-SALE> 162,860 83,987 108,235 128,911
156,431
<INVESTMENTS-CARRYING> 33,525 58,511 37,871 38,422
34,552
<INVESTMENTS-MARKET> 33,740 59,192 37,962 38,839
34,395
<LOANS> 497,995 439,794 439,400 469,278
480,021
<ALLOWANCE> 5,123 5,242 5,252 5,450
5,432
<TOTAL-ASSETS> 779,169 660,984 670,771 717,747
749,049
<DEPOSITS> 587,074 529,988 537,052 568,821
569,621
<SHORT-TERM> 117,255 53,469 58,010 72,578
100,606
<LIABILITIES-OTHER> 5,730 5,628 4,923 5,067
5,330
<LONG-TERM> 0 5,680 6,180 6,180
6,180
0 0 0 0
0
0 0 0 0
0
<COMMON> 5,365 5,298 5,391 5,381
5,376
<OTHER-SE> 63,745 60,921 59,215 59,720
61,936
<TOTAL-LIABILITIES-AND-EQUITY> 779,169 660,984 670,771 717,747
749,049
<INTEREST-LOAN> 42,948 39,341 10,769 21,173
31,994
<INTEREST-INVEST> 10,772 10,917 2,373 4,833
7,873
<INTEREST-OTHER> 933 868 357 572
743
<INTEREST-TOTAL> 54,653 51,126 13,499 26,578
40,410
<INTEREST-DEPOSIT> 20,549 19,361 5,225 10,170
15,333
<INTEREST-EXPENSE> 25,014 22,759 5,994 11,864
18,272
<INTEREST-INCOME-NET> 29,639 28,387 7,505 14,714
22,138
<LOAN-LOSSES> 318 710 72 144
216
<SECURITIES-GAINS> 193 123 65 161
171
<EXPENSE-OTHER> 24,470 20,889 7,078 12,535
18,925
<INCOME-PRETAX> 9,112 10,886 1,368 4,223
6,173
<INCOME-PRE-EXTRAORDINARY> 9,112 10,886 1,368 4,223
6,173
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 5,867 6,998 (809) 1,044
3,965
<EPS-PRIMARY> 0.99 1.19 (0.14) 0.17
0.67
<EPS-DILUTED> 0.99 1.19 (0.14) 0.17
0.67
<YIELD-ACTUAL> 8.33 8.62 8.43 8.38
8.36
<LOANS-NON> 4,831 2,532 4,294 5,417
5,310
<LOANS-PAST> 2,531 122 334 1,099
1,861
<LOANS-TROUBLED> 0 0 0 0
0
<LOANS-PROBLEM> 16,880 13,480 21,652 16,532
17,480
<ALLOWANCE-OPEN> 5,242 4,691 5,242 5,242
5,242
<CHARGE-OFFS> 999 209 382 451
573
<RECOVERIES> 100 50 22 53
85
<ALLOWANCE-CLOSE> 5,123 5,242 5,252 5,450
5,432
<ALLOWANCE-DOMESTIC> 5,123 5,242 5,252 5,450
5,432
<ALLOWANCE-FOREIGN> 0 0 0 0
0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<CIK> 0000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 24,057 30,506 24,583
<INT-BEARING-DEPOSITS> 3,632 826 9,803
<FED-FUNDS-SOLD> 14,885 16,918 15,493
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 167,097 182,051 174,750
<INVESTMENTS-CARRYING> 32,243 39,947 53,775
<INVESTMENTS-MARKET> 32,277 40,115 54,119
<LOANS> 513,140 533,433 561,397
<ALLOWANCE> 5,513 5,649 5,360
<TOTAL-ASSETS> 807,332 849,615 894,260
<DEPOSITS> 595,899 608,191 603,424
<SHORT-TERM> 135,627 164,230 209,282
<LIABILITIES-OTHER> 6,847 5,122 6,217
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 5,359 5,359 5,375
<OTHER-SE> 63,600 66,713 69,962
<TOTAL-LIABILITIES-AND-EQUITY> 807,332 849,615 894,260
<INTEREST-LOAN> 11,350 23,181 35,658
<INTEREST-INVEST> 3,199 6,680 10,407
<INTEREST-OTHER> 185 320 398
<INTEREST-TOTAL> 14,734 30,181 46,463
<INTEREST-DEPOSIT> 5,267 10,748 16,334
<INTEREST-EXPENSE> 6,956 14,342 22,492
<INTEREST-INCOME-NET> 7,778 15,639 23,971
<LOAN-LOSSES> 231 462 914
<SECURITIES-GAINS> 87 144 358
<EXPENSE-OTHER> 6,218 12,062 17,898
<INCOME-PRETAX> 2,622 6,040 9,567
<INCOME-PRE-EXTRAORDINARY> 2,622 6,040 9,567
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,850 4,057 6,424
<EPS-PRIMARY> 0.31 0.69 1.09
<EPS-DILUTED> 0.31 0.69 1.09
<YIELD-ACTUAL> 8.16 8.26 8.28
<LOANS-NON> 3,080 3,110 2,590
<LOANS-PAST> 2,800 2,980 1,040
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 14,780 14,680 16,610
<ALLOWANCE-OPEN> 5,123 5,123 5,123
<CHARGE-OFFS> 113 329 1,097
<RECOVERIES> 272 393 420
<ALLOWANCE-CLOSE> 5,513 5,649 5,360
<ALLOWANCE-DOMESTIC> 5,513 5,649 5,360
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
<PAGE>
Exhibit 99.2
FCNB CORP
1992 EMPLOYEE STOCK OPTION PLAN
1. Purpose.
This plan, which shall be known as the FCNB Corp 1992 Employee Stock
Option Plan (the "Plan"), is intended to promote the interests of FCNB Corp
(the "Company") and its stockholders by encouraging employees of the Company
and its present and future subsidiaries to acquire equity interests or
increase their equity interests in the Company, thereby giving them an added
incentive to work toward the continued growth and success of the Company, and
by enhancing the ability of the Company and its subsidiaries to compete for
the services of personnel needed for their continued growth and success.
2. Shares Subject to the Plan
Subject to adjustment as provided in Section 10 hereof, the aggregate
number of shares of the Common Stock, par value $1.00 per share, of the
Company ("Shares") available for issuance upon exercise of options granted
under the Plan, or upon the grant of restricted stock (as hereinafter
defined, "Restricted Stock") pursuant to the Plan, shall not exceed 250,000
Shares. In the event the number of Shares to be delivered upon the exercise
of any option granted under the Plan or in connection with the grant of any
Restricted Stock award is reduced for any reason whatsoever, or in the event
any option or Restricted Stock award shall expire, terminate or be canceled
for any reason without the option being exercised in full, the number of
Shares no longer subject to such option or Restricted Stock award shall
thereafter be available for the grant of new options or Restricted Stock
awards. Notwithstanding the preceding sentence, Shares of Restricted Stock
that have been issued and thereafter are forfeited pursuant to Section 9
hereof shall not be available for the grant of new options or Restricted
Stock awards.
3. Effective Date.
The Plan was adopted on March 3, 1992, which, subject to approval by
stockholders of the Company at the 1992 Annual Meeting of Stockholders, or any
adjournment or postponement thereof, is the effective date ("Effective Date") of
the Plan. In the event that the Plan is not approved by stockholders within one
year of the Effective Date, the Plan shall terminate, and any awards made under
the Plan shall be null and void.
4. Administration.
(a) Committee. The Plan shall be administered by a committee (the
"Committee") consisting of not less than two directors of the Company who
shall be appointed, from time to time, by the Board of Directors of the
Company. Each member of the Committee shall be a "non-employee director"
within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934
(the "Exchange Act"), or any successor rule adopted by the Securities and
Exchange Commission.
<PAGE>
(b) Authority. Subject to the provisions of the Plan, the Committee shall
make all determinations necessary or advisable for the administration of the
Plan, including the selection of employees to whom awards shall be made and
the terms of specific awards, shall interpret the Plan and the options and
Restricted Stock awards granted under the Plan, and shall correct any defect
or supply any omission or reconcile any inconsistency in the Plan or in any
option or Restricted Stock award, in the manner and to the extent the
Committee deems desirable to carry the Plan or any option or Restricted Stock
award into effect. Each option and Restricted Stock award under the Plan
shall be evidenced by an agreement which shall be signed by an officer of the
Company and shall contain such provisions as shall be approved by the
Committee. The Committee, in its absolute discretion and without shareholder
consent, may grant to holders of outstanding options, in exchange for the
surrender and cancellation of such options, new options having exercise
prices lower than the exercise price provided in the options so surrendered
for the purpose of replacing options which have an exercise price higher than
the then current fair market value of the Shares, or for such other purpose
as the Committee may determine, and containing such other terms and
conditions as the Committee may deem appropriate.
(c) Procedure. All determinations of the Committee shall be made by not less
than a majority of its members present at a meeting at which a quorum is
present. A majority of the entire Committee shall constitute a quorum for the
transaction of business. Any action required or permitted to be taken at a
meeting of the Committee may be taken without a meeting, if a unanimous written
consent which sets forth the action is signed by each member of the Committee
and filed with the minutes of proceedings of the Committee. No member of the
Committee shall be liable, in the absence of bad faith, for any act or omission
with respect to his service on the Committee. Service on the Committee shall
constitute service as a director of the Company so that members of the Committee
shall be entitled to indemnification and reimbursement for their service as
members of the Committee to the same extent as for service as directors of the
Company.
5. Granting of Options.
(a) Grant of Options. The Committee may grant to such key employees
(including officers) of the Company and its present and future subsidiaries
as may be selected by it ("Recipients"), options to purchase Shares on such
terms and conditions as shall be established by the Committee, subject to
such limitations and conditions as are required by the provisions of the
Plan. In selecting Recipients, and in determining the number of Shares to be
covered by any award hereunder, the Committee may consider the office or
position held by the Recipient, the Recipient's degree of responsibility for
and contribution to the growth and success of the Company, the Recipient's
length of service, promotions, potential or any other factors which it
considers relevant. The Committee shall have authority to determine whether
options granted hereunder shall be incentive stock options ("incentive stock
options") as defined in Section 422 of the Internal Revenue Code of 1986
("Code"). All other options granted under the Plan shall be referred to as
"nonqualified options." No options shall be granted pursuant to the Plan
after March 2, 2002.
(b) Time of Granting. Nothing contained in the Plan or any resolutions
adopted or to be adopted by the Board of Directors or the stockholders of the
Company shall constitute the granting of
<PAGE>
any option hereunder. Grants shall be made hereunder only by action of the
Committee; provided, however, that no participant shall have any rights with
respect to such grant unless and until he or she shall have executed and
delivered an agreement with respect to such option in form and substance
satisfactory to the Committee.
(c) Reload of Options. At the discretion of the Committee (which may be
exercised with respect to new grants, as well as to outstanding grants), if a
Recipient exercises an option at any time and from time to time within three
years of its grant date, the Recipient will receive a reload option ("Reload
Option") to purchase a number of Shares equal to the number of Shares purchased
upon exercise of the option; provided the Recipient is employed by the Company
or an affiliate when the option is exercised; and provided further that grants
of Reload Options shall be made only to the extent there are still Shares
remaining from total number of Shares authorized under Section 2. On the day on
which the Shares authorized under the Plan in Section 2 are fully depleted, any
Recipients exercising options and determined to be entitled to a grant of Reload
Options will have their Reload Options reduced pro rata based on the number of
Shares purchased on that day. The exercise price for the Reload Option will be
the fair market value of the underlying Shares on the grant date of the Reload
Option. The exercise of a Reload Option will not trigger another option grant.
6. Price.
(a) Minimum Option Price. The option price per Share underlying each option
shall be fixed by the Committee, but shall not be less than 100% of the fair
market value of such Shares on the date the option is granted. Such fair market
value shall be determined by he Committee, which may use any reasonable method
of valuation, including: (i) the mean between the high and low prices of the
Common Stock on the principal exchange on which it is then trading, if any, on
the day previous to the grant date (or, if shares were not traded on the day
previous to such date, then on the next preceding trading day during which a
sale occurred); (ii) if the Common Stock is not traded on an exchange but is
quoted on NASDAQ or a successor quotation system, (1) the mean between the high
and low sales prices (if the Common Stock is then listed as a National Market
Issue under the NASDAQ National Market System) or (2) the mean between the
representative high bid and low asked prices (in all other cases) for the Common
Stock on the day previous to the grant date as reported by NASDAQ or such
successor quotation system (or, if shares were not traded on the day previous to
such date, then on the next preceding trading day during which a sale occurred);
or (iii) if the Common Stock is not publicly traded on an exchange or is not
quoted on NASDAQ or a successor quotation system, the fair market value
determined by taking into account all relevant facts and circumstances, which
may include the advice of an independent appraiser.
(b) Limitations on Incentive Stock Options. No incentive stock option
shall be granted to any person who, at the time the option is granted, owns
(within the meaning of Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the Company
or of any parent or subsidiary of the Company, unless the option price is at
least 110% of the fair market value of the Shares subject to the option. In
addition, to the extent that the aggregate fair market value of Shares with
respect to which incentive stock options are exercisable for the first time
by any individual during any calendar year (under all employee benefit plans,
including the Plan,
<PAGE>
of the Company and its subsidiaries) exceeds $100,000, such options shall be
treated as options which are not incentive stock options.
7. Other Terms and Conditions of Options.
Options granted under the Plan shall be in such form as the Committee may
from time to time approve, subject to the following terms and conditions, and
may contain such additional terms and conditions (which terms and conditions
need not be the same in each case), not inconsistent with the Plan, as the
Committee shall deem desirable:
(a) Period of Exercise; Conditions and Limitations. No option shall be
exercisable with respect to any of the Shares subject to the option later than
ten years from the date of grant. Notwithstanding the foregoing, in the case of
a Recipient owning (within the meaning of Section 424(d) of the Code), at the
time an incentive stock option is granted, more than 10% of the total combined
voting power of all classes of stock of the Company or of any parent or
subsidiary of the Company, such incentive stock option shall not be exercisable
with respect to any of the Shares subject thereto later than five years after
the date of grant. The date on which an option ultimately becomes unexercisable
under either of the previous two sentences is hereinafter referred to as the
"Expiration Date". To the extent not prohibited by other provisions of the Plan,
each option shall be exercisable at such time or times and subject to such
conditions as are set forth in the related option agreement. A Reload Option
becomes exercisable one year after its grant date, provided that a Recipient
shall forfeit a Reload Option upon selling any Shares that triggered its grant
within one year of the date of grant of the Reload Option.
(b) Vesting Period. The options and Restricted Stock awards granted
pursuant to the Plan may be made subject to such vesting period or periods as
determined by the Committee.
(c) Acceleration of Vesting Period Under Certain Circumstances.
(A) If a Recipient's employment is terminated as a result of
voluntary retirement each option granted under the Plan and outstanding at
the time of termination shall become fully and immediately exercisable, and
any restrictions or conditions applicable to Shares of Restricted Stock
issuable upon exercise of any such option shall be deemed satisfied
simultaneously with any such exercise. Recipients eligible for "Voluntary
Retirement" shall include:
(1) Any Recipient who has completed fifteen (15) years of
service and who is at least age sixty-two (62) as of the date of termination.
(B) If a Recipient's employment is terminated, including a voluntary
termination, within two years following a Change in Control of the Company
(for any reason other than death, disability or for cause) each option
granted under the Plan and outstanding at the time of termination shall
become fully and immediately exercisable, and any restrictions or conditions
applicable to Shares of Restricted Stock issuable upon exercise of any such
option shall be deemed satisfied simultaneously with any such exercise. As
used herein, a "Change in Control" shall mean:
<PAGE>
(1) Any corporation, person or entity becomes the "beneficial owner"
(as such term is defined in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Company representing 20% or more
of the combined voting power of the Company's then outstanding securities,
other than beneficial ownership by a Recipient, the Company, any employee
benefit plan of the Company or any person or entity organized, appointed or
established pursuant to the terms of any such benefit plan;
(2) The Company's stockholders approve an agreement to merge or
consolidate the Company with another corporation, or an agreement providing
for the sale of substantially all of the assets of the Company to one or more
corporations, in any case other than with or to a corporation 50% or more of
which is controlled by, or is under common control with, the Company; or
(3) During any two-year period, individuals who at the date on which
the period commences constitute a majority of the Board of Directors cease to
constitute a majority thereof for any reason; provided, however, that the
preceding clause shall not apply as to any director who was not a director at
the beginning of such period if such director was elected by, or on the
recommendation of, at least two-thirds of the directors who were directors at
the beginning of such period (either actually or by prior operation of this
provision), other than any director who is so approved in connection with any
actual or threatened contest for election to positions on the Board of
Directors.
(d) Termination of Employment. If a Recipient's employment is terminated
for any reason whatsoever (including his death), the right to exercise an
option shall terminate:
(1) At the close of business on the day preceding the date of
termination of the Recipient's employment, if termination (except a termination
covered by Section 7(c) hereof occurs within one year following the date of
grant; or
(2) At the close of business on the day preceding the date of
termination of the Recipient's employment, if termination occurs for cause, as
hereinafter defined; or
(3) At the expiration of a period of one year after the
Recipient's death, if the Recipient's employment is terminated by reason of
death, or if the Recipient had a right to exercise an option on the date of
death pursuant to Section 7(c)(4) or (5); and prior to such date such option may
be exercised by the estate or by the person or persons who acquire the right to
exercise such option by bequest or inheritance with respect to any or all of the
Shares remaining subject to such option at the time of such exercise; or
(4) At the expiration of a period of one year after the Recipient
ceases to receive wages through the Company's or a subsidiary's payroll
because of disability, as determined in accordance with applicable Company
personnel policies (the determination of the Committee on any question
involving disability shall be conclusive and binding on all parties); or
<PAGE>
(5) At the expiration of three months after the Recipient's
employment is terminated, if the Recipient's employment is terminated for any
reason other than death, disability or for cause.
The right of the Recipient to exercise an option during the period
specified in Section 7(c)(4) or (5) may be made subject to the condition that
at the date of exercise the Recipient shall not be rendering services to any
organization engaged directly or indirectly in any business which, in the
opinion of the Committee, competes with or is in conflict with the interests
of the Company or any of its subsidiaries.
For purposes of the Plan, the term "cause" shall mean (i) any gross or
habitual neglect of duty or misconduct of a Recipient in discharging any of
his duties and responsibilities as an employee of the Company or any of its
subsidiaries, (ii) fraud, theft or embezzlement committed against the Company
or any subsidiary or customer of the Company, or (iii) a Recipient's
conviction of a felony or any other crime involving moral turpitude.
Notwithstanding the foregoing provisions of this Section 7(c), the
Committee, in its sole discretion, may amend any particular option agreement
to provide that the right to exercise such option shall continue for a
period, which shall be specified by the Committee, after termination of the
Recipient's employment and no later than the Expiration Date. An option
exercised after cessation of employment by a Recipient for any reason may,
subject to adjustment as provided in Section 10, be exercised only with
respect to the number of Shares which the Recipient could have acquired under
the grant immediately prior to the cessation of such employment. In no event
may an option be exercised after its Expiration Date. Subject to the
limitations set forth in Section 422 of the Code applicable to incentive
stock options, the Committee may adopt, amend or rescind from time to time
such provisions as it deems appropriate with respect to the effect of leaves
of absence approved by any duly authorized officer of the Company or any
subsidiary with respect to any Recipient.
(e) Limited Transferability of Restricted Stock Awards and Nonqualified
Options. Restricted Stock awards and options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than
by will or by the laws of descent and distribution. Notwithstanding the
foregoing, or any other provision of this Plan, a Recipient who holds
Restricted Stock awards and nonqualified options (collectively, "Awards") may
transfer such Awards to his or her spouse, lineal ascendants, lineal
descendants, or to a duly established trust for the benefit of one or more of
these individuals. Awards so transferred may thereafter be transferred only
to the Recipient who originally received the grant or to an individual or
trust to whom the Recipient could have initially transferred the Awards
pursuant to this Section 7(e). Awards which are transferred pursuant to this
Section 7(e) shall be exercisable by the transferree according to the same
terms and conditions as applied to the Recipient.
(f) Legal Limitations. Notwithstanding any provision of the Plan or the
terms of any option issued pursuant to the Plan, the Company shall not be
required to issue any Shares hereunder if such issuance would, in the
judgment of the Committee, constitute a violation of any state or federal
law, or of the rules or regulations of any governmental regulatory body, or
any securities exchange.
<PAGE>
(g) Outstanding Options--Certain Other Transactions. In the event of (i)
a dissolution or liquidation of the Company, (ii) a sale of all or
substantially all of the Company's assets, (iii) a merger or consolidation
involving the Company in which the Company is not the surviving corporation
or (iv) a merger or consolidation involving the Company in which the Company
is the surviving corporation but the holders of Shares receive securities of
another corporation and/or other property, including cash, the Committee may,
in its absolute discretion, cancel, effective immediately prior to the
occurrence of such event, each option (including each Restricted Stock award,
if any, related thereto) outstanding immediately prior to such event (whether
or not then exercisable), and in full consideration of such cancellation, pay
to the Recipient to whom such option was granted an amount in cash, for each
Share subject to such option (and Restricted Stock award, if any) equal to
the excess of (A) the value, as determined by the Committee in its absolute
discretion, of the property (including cash) received by the holder of a
Share as a result of such event over (B) the exercise price of such option.
8. Exercise of Options; Payment.
(a) Exercise of Options. In order to exercise an option under the Plan,
the person or persons entitled to exercise it shall deliver to the Company
written notice of the number of full Shares with respect to which such option
is being exercised accompanied by payment in full for the Shares being
purchased plus, in the case of a nonqualified option, any required
withholding tax to the extent that payment of such withholding tax is not
satisfied in the manner prescribed in Section 11 hereof. No fractional Shares
will be issued. The payment of the option exercise price shall either be (i)
in cash, (ii) through delivery to the Company of Shares evidenced by
negotiable certificates registered in the sole name of the Recipient or in
the names of the Recipient and spouse, (iii) through delivery to the Company
of a secured or unsecured promissory note acceptable to the Committee, or
(iv) by any combination of cash, Shares and promissory notes. To the extent
that the withholding tax is not paid in the manner prescribed in Section 11
hereof, the withholding tax shall be paid in cash.
(b) Payment in Shares. The value of Shares delivered as payment of the
option price shall be based on the fair market value of the Shares at the
time the option is exercised. Such fair market value shall be determined by
the Committee, which may use any reasonable method of valuation, including
the method prescribed by Section 6(a) hereof. If certificates representing
Shares are used to pay all or part of the exercise price of an option,
separate certificates shall be delivered by the Company representing the same
number of Shares as each certificate so used and an additional certificate or
certificates shall be delivered representing the additional Shares to which
the option holder is entitled as a result of exercise of the option.
Notwithstanding the foregoing provisions of Section 8(a) and (b), the
Committee, in its sole discretion, may refuse to accept Shares or promissory
notes in payment of the option price of the Shares with respect to which such
option is to be exercised. In such event, any certificates representing
Shares or any promissory notes which were actually received by the Company
with the written notice of exercise shall be returned to the person
exercising such option, together with notice by the Company of its refusal to
accept such Shares or promissory notes, and the Recipient shall be deemed to
have withdrawn the option exercise and shall continue to have the right to
exercise the option in accordance with the terms of the option agreement. If
any Shares are purchased pursuant to delivery of promissory notes, the
certificate or certificates evidencing such Shares shall bear a legend
stating that future payments are required to be made on account of such
Shares, and the Company shall
<PAGE>
retain possession of such certificate or certificates until full payment of the
option exercise price has been made.
(c) Supplemental Cash Payments. The Committee, in its sole discretion,
may provide for payment by the Company of a cash supplement to the Recipient
upon exercise of any option, for the purpose of defraying the cost to the
recipient of purchasing the Shares subject to the option. The Committee may
provide for such payment in the option agreement or, if the agreement does
not so provide, may authorize such payment in connection with the exercise of
any option. Supplemental cash payments shall be in such amounts and subject
to such terms and conditions as the Committee may determine.
9. Restricted Stock.
(a) Grant of Restricted Stock. In conjunction with any option granted
pursuant to the Plan, the Committee may award a Recipient the right to
receive, upon exercise of such option (such option being referred to in this
Section 9 as a "related option") a number of Shares that shall be subject to
such limitations on transfer and other restrictions as are set forth below or
in such award ("Restricted Stock"). Each award of Restricted Stock under the
Plan shall be evidenced by the agreement covering the related option or by
such other agreement or instrument in such form as the Committee shall
prescribe from time to time in accordance with the Plan.
(b) Terms and Conditions of Restricted Stock. An award of Restricted
Stock shall comply with the following terms and conditions, and with such
other terms and conditions as the Committee, in its discretion, shall
establish:
(i) The Committee shall determine the number of Shares of Restricted
Stock to be issued to a Recipient pursuant to the Restricted Stock award.
(ii) The Restricted Stock shall be immediately forfeited and returned to
the Company for cancellation: (A) upon a sale, assignment, transfer,
pledge, hypothecation or other disposition of any of the Shares received
upon exercise of the related option occurring within such period as the
Committee may establish (the "Restricted Period"), (B) if the Recipient's
continuous employment with the Company or any subsidiary shall terminate
for any reason, except as provided in Section 9(d), prior to the
expiration of the Restricted Period, (C) if, on or prior to the
expiration of the Restricted Period, or by such later date as the
Committee in its sole discretion may determine, the participant has not
paid to the Company an amount equal to any federal, state or local income
or other taxes which the Committee determines is required to be withheld
in respect of such Shares, or (D) under such other circumstances as
determined by the Committee in its discretion.
(c) Stock Certificates. Each certificate for Shares issued pursuant to an
award of Restricted Stock (a "Restricted Certificate") shall bear an
appropriate legend referring to the foregoing Restricted Period and other
restrictions, shall be deposited by the Recipient with the Company, together
with a stock power endorsed in blank, or shall be evidenced in such other
manner permitted by applicable law
<PAGE>
as determined by the Committee in its discretion. Any attempt to dispose of any
Shares of Restricted Stock in contravention of the foregoing Restricted Period
and other restrictions shall be null and void and without effect.
(d) Termination of Award. If a Recipient's employment is terminated
because of death or (permanent) disability, (i) any outstanding shares of
Restricted Stock with Recipient held prior to death or the date of such
(permanent) disability (which date is deemed to be the date on which the
Recipient ceased to receive wages through the company's or a subsidiary's
payroll because of disability, or on such other date required by the
Company's personnel policies in the judgment of the Committee) will vest
immediately and (ii) the right to receive Restricted Stock upon exercise of
options transferred to the Recipient's estate, or held by the disabled
Recipient on the date of (permanent) disability commenced, shall continue for
as long as those options are exercisable, and any Restricted Stock issued
upon exercise of such options shall be deemed to vest immediately. If a
Recipient's employment is terminated for any other reason whatsoever, the
right to receive Restricted Stock shall continue only to the extent that, and
for the period during which, the related option is exercisable, and shall
terminate simultaneously with the termination of the right to exercise a
related option, subject to such further terms and conditions as The Committee
shall specify in connection with any such Restricted Stock award.
(e) Rights as Stockholder. During the Restricted Period, the Recipient
shall have voting rights and the right to receive dividends with respect to
the Shares of Restricted Stock as to which the Recipient is the holder of
record, provided that any Shares received as a stock dividend with respect to
Restricted Stock shall be subject to the same restrictions and limitations as
the Restricted Stock with respect to which such stock dividend is distributed.
(f) Issuance of Certificate Upon Termination of Restricted Period. At the
expiration of the Restricted Period, a stock certificate free of all
restrictions for the number of Shares of Restricted Stock registered in the name
of the Recipient shall be delivered to the Recipient to replace the Restricted
Certificate, and the restrictions imposed pursuant to this Section 9 shall
terminate and be of no further force and effect.
10. Adjustment of Shares.
In the event that any time after the Effective Date, the outstanding
Shares are changed into or exchanged for a different number or kind of shares
of the Company or other securities of the Company by reason of merger,
consolidation, recapitalization, reclassification, stock split, stock
dividend, or combination of shares, or any spin-off or other distribution of
assets to stockholders, the Committee may make an adjustment in the number
and kind of Shares subject to outstanding options and Re stricted Stock
awards, or portions thereof then unexercised or unissued, and the number of
Shares subject to the Plan to the end that after such event the Shares
subject to the Plan and the Recipient's right to a proportionate interest in
the Company shall be maintained as before the occurrence of such event. Any
such adjustment in an outstanding option or Restricted Stock award shall be
made without change in the total exercise price applicable to the grant or
the unexercised portion thereof (except for any change in the aggregate price
resulting from rounding-off share quantities or prices) and with any
<PAGE>
necessary corresponding adjustment in the exercise price per Share. Any such
adjustment made by the Committee shall be final and binding upon all Recipients,
the Company, and all other interested persons.
11. Withholding.
The Company shall have the right to withhold from any payments of cash or
issuance of Shares by the Company under this Plan, or to collect as a condition
of such payment or issuance, any taxes required by law to be withheld. At any
time when a Recipient is required to pay to the Company an amount required to be
withheld under applicable income tax laws in connection with the exercise of an
option or the grant of Restricted Stock (including upon election by the
Recipient to include the fair market value of such Restricted Stock in gross
income for federal income tax purposes), the Recipient may, subject to such
rules or procedures as may be adopted by the Committee, satisfy such requirement
in whole or in part by electing (the "Election") either to deliver to the
Company certificates representing Shares having a value equal to the amount
required to be withheld, or to have the Company withhold from the issuance which
would otherwise be made to the Recipient a number of Shares (or their monetary
equivalent.) having a value equal to the amount required to be withheld. Such
value shall be determined by the Committee, which may use any reasonable method
of valuation, including the method prescribed by Section 6(a) hereof. The
Committee may disapprove any Election, suspend or terminate the right of
Recipients to make Elections, or provide with respect to the grant of any option
or Restricted Stock award that the right to make Elections shall not apply to
that option or Restricted Stock award. Any Election shall be irrevocable and
shall be deemed to have been made when a completed form of election is hand
delivered to the Secretary of the Company or if mailed, on the day such form is
postmarked.
12. Amendments and Termination.
The Board of Directors of the Company may at any time terminate, suspend
or amend the Plan in such respects as it shall deem advisable. Except as
otherwise provided in Section 10, no action of the Board of Directors may
without approval or ratification by the Company's stockholders (i) increase
the aggregate number of Shares as to which options or Restricted Stock awards
may be granted under the Plan, (ii) reduce the minimum price at which options
may be granted, (iii) extend the period within which options or Restricted
Stock awards may be exercised beyond the Expiration Date, (iv) change the
class of employees eligible to receive options or Restricted Stock awards, or
(v) extend the period within which options or Restricted Stock awards may be
granted. No termination, suspension or amendment of the Plan may, without the
consent of the Recipient to whom any option or Restricted Stock award shall
theretofore have been granted, adversely affect the rights of such Recipient
under any such option or Restricted Stock award then outstanding.
13. No Rights as Stockholder.
The person or persons entitled to exercise, or who have exercised, an
option or have been granted a Restricted Stock award shall not be entitled to
any rights as a stockholder of the Company with respect to any Shares subject
to the option or Restricted Stock award until such person or persons
<PAGE>
shall have become the holder of record of such Shares.
14. No Right to Continued Employment.
An option or Restricted Stock award granted under this Plan shall not
confer upon the Recipient any right to remain in the employment of the
Company or any of its subsidiaries, nor shall it interfere in any way with
the right of the Company or any of its subsidiaries to terminate the
Recipient's employment at any time.
15. Unfunded Plan.
THE PLAN SHALL BE UNFUNDED. The Company shall not be required to segregate
any cash or any Shares which may at any time be represented by options or
Restricted Stock awards granted hereunder. Neither the Company, its Board of
Directors nor the Committee shall be deemed to be a trustee of any amounts to be
paid under the Plan. Any liability of the Company to any Recipient with respect
to an option or Restricted Stock award granted hereunder shall be based solely
upon contractual obligations created under this Plan and the related agreement,
and the rights of any Recipient shall be limited to those of a general creditor
of the Company.
16. Governing Law.
The Plan shall be governed by the laws of the State of Maryland, without
regard to principles of conflicts of law.
<PAGE>
Exhibit 99.3
FCNB CORP
1997 STOCK OPTION PLAN FOR DIRECTORS
1. Purpose of the Plan.
The purpose of this Plan is to advance the interests of the Company
through providing its Directors with the opportunity to acquire Shares. By
encouraging such stock ownership, the Company seeks to attract, retain and
motivate the best available Directors and to provide additional incentives to
Directors of the Company to promote the success of the business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).
(c) "Bank" shall mean FCNB Bank.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Committee" shall mean not only the Human Resources Committee
consisting of at least two Non-Employee Directors appointed by the Board in
accordance with Paragraph 5(a) hereof, but also the Board.
(g) "Common Stock" shall mean the common stock of the Company. (h)
"Company" shall mean FCNB Corp.
(i) "Continuous Service" shall mean the absence of any interruption or
termination of service as a Director of the Company or an Affiliate.
Continuous Service shall not be considered interrupted in the case of sick
leave, military leave or any other leave of absence approved by the Company,
in the case of transfers between payroll locations of the Company or between
the Company, an Affiliate or a successor, or in the case of a Director's
performance of services in an emeritus or advisory capacity.
(j) "Director" shall mean any member of the Board who is not an Employee.
(k) "Effective Date" shall mean the date specified in Paragraph 12 hereof.
(l) "Employee" shall mean any person employed by the Company, the Bank,
or an Affiliate.
(m) "Exercise Price" shall mean the price per Optioned Share at which an
Option may be exercised.
(n) "Market Value" shall mean the fair market value of the Common Stock,
as determined under Paragraph 7(b) hereof.
<PAGE>
(o) "Non-Employee Director" shall have the meaning provided in Rule 16b-3.
(p) "Option" means a stock option or Reload Option granted pursuant to the
Plan. Options granted pursuant to the Plan are not intended to be "incentive
stock options" within the meaning of Section 422 of the Code.
(q) "Optioned Shares" shall mean Shares purchased pursuant to the
exercise of an Option.
(r) "Participant" shall mean any Director who at the time receives an
Option grant pursuant to Paragraph 6.
(s) "Reload Option" shall mean an Option granted pursuant to Paragraph
6(d).
(t) "Plan" shall mean this FCNB Corp 1997 Stock Option Plan. (u) "Rule
16b-3" shall mean Rule 16b-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended.
(v) "Share" shall mean one share of Common Stock.
3. Term of the Plan and Options.
(a) Term of the Plan. The Plan shall continue in effect for a term of ten
years from the Effective Date, unless sooner terminated pursuant to Paragraph
14 hereof. No Option shall be granted under the Plan after ten years from the
Effective Date.
(b) Term of Options. The term of each Option granted under the Plan shall
be established by the Committee, but shall not exceed 10 years.
4. Shares Subject to the Plan.
Subject to the adjustments required under Paragraph 9, the aggregate
number of Shares deliverable pursuant to Options shall not exceed 250,000
Shares. Such Shares may either be authorized but unissued Shares, Shares held
in treasury, or Shares held in a grantor trust created by the Company. If any
Options should expire, become unexercisable, or be forfeited for any reason
without having been exercised, the Optioned Shares shall, unless the Plan
shall have been terminated, be available for the grant of additional Options
under the Plan.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the
Committee, which shall consist of not less than two (2) members of the Board
who are Non-Employee Directors. Members of the Committee shall serve at the
pleasure of the Board. In the absence at any time of a duly appointed
Committee, the Plan shall be administered by the Board.
(b) Powers of the Committee. Except as limited by the express provisions
of the Plan or by resolutions adopted by the Board, the Committee shall have
sole and complete authority and discretion (i) to select Participants and
grant Options, (ii) to determine the form and content of Options to be issued
in the form of Agreements under the Plan, (iii) to interpret the Plan, (iv)
to prescribe, amend and rescind rules and regulations relating to the Plan,
and (v) to make other determinations necessary or advisable for the
administration of the Plan. The Committee shall have and may exercise such
other power and authority as may be delegated to it by the Board from time to
time. A majority of the entire Committee shall constitute a quorum and the
action of a majority of the members present at any meeting at which a quorum
is present, or acts approved in writing by a majority of the Committee
without a meeting, shall be deemed the action of the Committee.
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(c) Agreement. Each Option shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall
be bound by the terms and restrictions of the Plan and of such Agreement. The
terms of each such Agreement shall be in accordance with the Plan, but each
Agreement may include such additional provisions and restrictions determined
by the Committee, in its discretion, provided that such additional provisions
and restrictions are not inconsistent with the terms of the Plan. In
particular, the Committee shall set forth in each Agreement (i) the Exercise
Price of an Option, (ii) the number of Shares subject to the Option, and its
expiration date, (iii) the manner, time, and rate (cumulative or otherwise)
of exercise or vesting of such Option, and (iv) the restrictions, if any, to
be placed upon such Option, or upon Shares which may be issued upon exercise
of such Option. The Chairman of the Committee and such other Directors and
officers as shall be designated by the Committee are hereby authorized to
execute Agreements on behalf of the Company and to cause them to be delivered
to the recipients of Options.
(d) Effect of the Committee's Decisions. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
(e) Indemnification. In addition to such other rights of indemnification
as they may have, the members of the Committee shall be indemnified by the
Company in connection with any claim, action, suit or proceeding relating to
any action taken or failure to act under or in connection with the Plan or
any Option, granted hereunder to the full extent provided for under the
Company's governing instruments with respect to the indemnification of
Directors.
6. Grant of Options.
(a) General Rule. Subject to Paragraph 12 hereof, the Committee shall
have the discretion to grant Options to Directors (including members of the
Committee).
(b) Automatic Grants. Subject to Paragraph 12 hereof, each Participant
who is a non-Employee Director on the Effective Date will receive an Option
to purchase 1,750 Shares. On the day after each annual meeting of the
Company's stockholders (beginning with 1998), each Participant who is then a
non-Employee Director will receive an Option to purchase 1,750 Shares.
(c) Terms of Grants. With respect to each of the above-named
Participants, the Option granted to the Participant hereunder (i) have an
Exercise Price determined in Paragraph 7 of the Plan, (ii) shall be
immediately exercisable, in accordance with Paragraph 8, (iii) shall have a
term of ten years from the Effective Date, and (iv) shall be subject to the
general rule set forth in Paragraph 8(c) with respect to the effect of a
Participant's termination of Continuous Service on the Participant's right to
exercise his or her Options.
(d) Reload of Options. If a Participant exercises an Option at any time
and from time to time within three years of its grant date, the Participant
will receive a Reload Option to purchase a number of Shares equal to the
number of Shares purchased upon exercise of the Option; provided the
Participant is a non-Employee Director when the Option is exercised; and
provided further that grants of Reload Options shall be made only to the
extent there are still Shares remaining from total number of Shares
authorized under Paragraph 4. On the day on which the Shares authorized under
the Plan in Paragraph 4 are fully depleted, any Participants exercising
Options and determined to be entitled to a grant of Reload Options will have
their Reload Options reduced pro rata based on the number of Optioned Shares
purchased on that day. The Exercise Price for the Reload Option will be the
Market Value of the underlying Shares on the grant date of the Reload Option.
The exercise of a Reload Option will not trigger another Option grant.
7. Exercise Price for Options.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Option shall equal 100% of the Market Value of the Optioned Shares
on the date of grant.
<PAGE>
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National
Market System) on the date in question, then the Market Value per Share shall
be the average of the highest and lowest selling price on such exchange on
such date, or if there were no sales on such date, then the Market Value
shall be the mean between the bid and asked price on such date. If the Common
Stock is traded otherwise than on a national securities exchange on the date
in question, then the Market Value per Share shall be the mean between the
bid and asked price on such date, or, if there is no bid and asked price on
such date, then on the next prior business day on which there was a bid and
asked price. If no such bid and asked price is available, then the Market
Value per Share shall be its fair market value as determined by the
Committee, in its sole and absolute discretion.
8. Exercise of Options and Reload Options.
(a) Generally. Subject to Paragraph 12 hereof, each Option shall become
fully (100%) exercisable immediately upon the date of its grant. An Option
may not be exercised for a fractional Share. A Reload Option becomes
exercisable one year after its grant date, provided that a Participant shall
forfeit a Reload Option upon selling any Optioned Shares that triggered its
grant within one year of the date of grant of the Reload Option.
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise,
only by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of
cash and Common Stock, of the amount of the Exercise Price for the number of
Shares with respect to which the Option is then being exercised. Each such
notice (and payment where required) shall be delivered, or mailed by prepaid
registered or certified mail, addressed to the Treasurer of the Company at
its executive offices. Common Stock utilized in full or partial payment of
the Exercise Price for Options shall be valued at its Market Value at the
date of exercise, and may consist of Shares subject to the Option being
exercised.
(c) Period of Exercisability. Except to the extent otherwise provided in
the terms of an Agreement, an Option may be exercised by a Participant only
while he is a Director and has maintained Continuous Service from the date of
the grant of the Option, or within two years after termination of such
Continuous Service (but not later than the date on which the Option would
otherwise expire).
(d) Mandatory Six-Month Holding Period. Notwithstanding any other
provision of this Plan to the contrary, Optioned Shares may not be sold
within the six-month period following the grant of that Option, provided that
such six-month holding period shall not apply in the event of a transaction
described in Paragraph 9(b) hereof.
9. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares
subject to outstanding Options, and the Exercise Price thereof, shall be
proportionately adjusted for any increase, decrease, change or exchange of
Shares for a different number or kind of shares or other securities of the
Company which results from a merger, consolidation, recapitalization,
reorganization, reclassification, stock dividend, split-up combination of
shares, or similar event in which the number or kind of shares is changed
without the receipt or payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In the
event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any
of the foregoing to be referred to herein as a "Transaction"), all
outstanding Options, together with the Exercise Price thereof, shall be
equitably adjusted for any change or exchange of Shares for a different
number or kind of shares or other securities which results from the
Transaction.
<PAGE>
(c) Conditions and Restrictions on New, Additional, or Different Shares
or Securities. If, by reason of any adjustment made pursuant to this
Paragraph, a Participant becomes entitled to new, additional, or different
shares of stock or securities, such new, additional, or different shares of
stock or securities shall thereupon be subject to all of the conditions and
restrictions which were applicable to the Shares pursuant to the Option
before the adjustment was made.
(d) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any class, or
of securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, shall not affect, and
no adjustment shall be made with respect to, the number, class, or Exercise
Price of Shares then subject to Options or reserved for issuance under the
Plan.
10. Non-Transferability of Options.
Options may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, or any other provision of this
Plan, a Participant who holds Options may transfer such Options to his or her
spouse, lineal ascendants, lineal descendants, or to a duly established trust
for the benefit of one or more of these individuals. Options so transferred
may thereafter be transferred only to the Participant who originally received
the grant or to an individual or trust to whom the Participant could have
initially transferred the Options pursuant to this Paragraph 10. Options
which are transferred pursuant to this Paragraph 10 shall be exercisable by
the transferee according to the same terms and conditions as applied to the
Participant.
11. Time of Granting Options.
The date of grant of an Option shall, for all purposes, be the date on
which the Committee makes the determination of granting such Option. Notice
of the determination shall be given to each Participant to whom an Option is
so granted within a reasonable time after the date of such grant.
12. Effective Date.
The Plan shall become effective upon its adoption by the Board, subject
to approval of the Plan by a favorable vote of stockholders owning at least a
majority of the total votes cast at a duly called meeting of the Company's
stockholders held in accordance with applicable laws. Any Options granted
prior to approval of the Plan by the stockholders of the Company shall be
contingent on such approval, and shall not be exercisable prior thereto.
13. Modification of Options.
At any time, and from time to time, the Committee may direct execution of
an instrument providing for the modification of any outstanding Option,
provided no such modification shall confer on the holder of said Option any
right or benefit which could not be conferred on him by the grant of a new
Option at such time, or impair the Option without the consent of the holder
of the Option.
14. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Options, suspend or
terminate the Plan. No amendment, suspension or termination of the Plan
shall, without the consent of any affected holders of an Option, alter or
impair any rights or obligations under any Option theretofore granted.
15. Conditions Upon Issuance of Shares.
<PAGE>
(a) Compliance with Securities Laws. Shares of Common Stock shall not be
issued with respect to any Option unless the issuance and delivery of such
Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law, and the
requirements of any stock exchange upon which the Shares may then be listed.
(b) Special Circumstances. The inability of the Company to obtain
approval from any regulatory body or authority deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares
hereunder shall relieve the Company of any liability in respect of the
non-issuance or sale of such Shares. As a condition to the exercise of an
Option, the Company may require the person exercising the Option to make such
representations and warranties as may be necessary to assure the availability
of an exemption from the registration requirements of federal or state
securities law.
(c) Committee Discretion. The Committee shall have the discretionary
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to
impose a right of first refusal or to establish repurchase rights or both of
these restrictions.
16. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available
a number of Shares sufficient to satisfy the requirements of the Plan.
17. No Employment or Other Rights.
In no event shall a Director's eligibility to participate or
participation in the Plan create or be deemed to create any legal or
equitable right of the Director to continue service as a Director with the
Company, the Bank, or any Affiliate of such corporations. No Director shall
have a right to be granted an Option or, having received an Option, the right
to again be granted an Option. However, a Director who has been granted an
Option may, if otherwise eligible, be granted an additional Option or Options.
18. Governing Law.
The Plan shall be governed by and construed in accordance with the laws
of the State of Maryland, except to the extent that federal law shall be
deemed to apply.
