SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended Commission file number
June 30, 1998 0-15645
FCNB Corp
(Exact name of registrant as specified in its charter)
MARYLAND 52-1479635
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7200 FCNB COURT, FREDERICK, MARYLAND 21703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301)662-2191
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $1 par value per
share, 7,895,024 shares outstanding as of July 30, 1998, as adjusted for the
effects of the 4-for-3 stock split declared on July 14, 1998 and payable on
August 14, 1998.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FCNB CORP AND SUBSIDIARY
<TABLE>
<CAPTION>
- -------------------------------------------------------------- ------------------------- -------------------------
Consolidated Balance Sheets (Unaudited) (Unaudited)
(dollars in thousands, except per share amounts) June 30, 1998 December 31, 1997
- -------------------------------------------------------------- ------------------------- -------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,194 $ 27,329
Interest-bearing deposits in other banks 840 755
Federal funds sold 25,187 14,231
- -------------------------------------------------------------- ------------------------- -------------------------
Cash and cash equivalents 52,221 42,315
- -------------------------------------------------------------- ------------------------- -------------------------
Loans held for sale 3,945 909
Investment securities held to maturity at amortized
cost-fair value of $38,646 in 1998 and $48,729 in
1997 38,294 48,389
Investment securities available for sale-at fair value 280,847 202,850
- -------------------------------------------------------------- ------------------------- -------------------------
Loans 587,067 574,205
Less: Allowance for credit losses (5,845) (5,713)
Unearned income (45) (100)
- -------------------------------------------------------------- ------------------------- -------------------------
Net loans 581,177 568,392
- -------------------------------------------------------------- ------------------------- -------------------------
Bank premises and equipment 23,178 22,705
Other assets 41,984 32,524
- -------------------------------------------------------------- ------------------------- -------------------------
Total assets $1,021,646 $918,084
============================================================== ========================= =========================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 95,500 $ 85,902
Interest-bearing deposits 586,070 530,610
- -------------------------------------------------------------- ------------------------- -------------------------
Total deposits 681,570 616,512
- -------------------------------------------------------------- ------------------------- -------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 65,129 65,163
Other short-term borrowings 187,136 152,138
Accrued interest and other liabilities 6,834 6,753
- -------------------------------------------------------------- ------------------------- -------------------------
Total liabilities 940,669 840,566
- -------------------------------------------------------------- ------------------------- -------------------------
SHAREHOLDERS' EQUITY
Preferred stock, per share par value $1.00;
1,000,000 shares authorized; none outstanding -- --
Common stock, per share par value $1.00;
20,000,000 shares authorized: 5,915,443
shares in 1998 and 5,912,284 shares in 1997
issued and outstanding 5,915 5,912
Capital surplus 43,445 43,398
Retained earnings 27,506 24,792
Accumulated other comprehensive income 4,111 3,416
- -------------------------------------------------------------- ------------------------- -------------------------
Total shareholders' equity 80,977 77,518
- -------------------------------------------------------------- ------------------------- -------------------------
Total liabilities and shareholders' equity $1,021,646 $918,084
============================================================== ========================= =========================
</TABLE>
2
<PAGE>
FCNB CORP AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ ------------------------------- -------------------------------
For the 3 months ended For the 6 months ended
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
June 30, June 30, June 30, June 30,
(dollars in thousands, except per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $13,049 $11,831 $25,765 $23,181
Interest and dividends on investment securities:
Taxable 3,989 3,250 7,628 6,206
Tax exempt 78 90 145 184
Dividends 245 141 473 290
Interest on federal funds sold 80 97 224 249
Other interest income 20 38 30 71
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Total interest income 17,461 15,447 34,265 30,181
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Interest expense:
Interest on deposits 5,891 5,481 11,642 10,748
Interest on federal funds purchased and securities
sold under agreements to repurchase 537 553 1,174 1,221
Interest on other short-term borrowings 2,471 1,352 4,679 2,373
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Total interest expense 8,899 7,386 17,495 14,342
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Net interest income 8,562 8,061 16,770 15,839
Provision for credit losses 350 231 450 462
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Net interest income after provision for credit losses 8,212 7,830 16,320 15,377
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Noninterest income:
Service fees 786 715 1,542 1,342
Net securities gains 161 57 313 144
Gain on sale of loans 180 88 332 236
Other operating income 892 592 1,616 1,023
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Total noninterest income 2,019 1,452 3,803 2,745
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Noninterest expenses:
Salaries and employee benefits 3,610 3,134 7,184 6,237
Occupancy expenses 640 524 1,292 1,144
Equipment expenses 630 478 1,215 1,001
Merger-related expenses 49 109 53 460
Other operating expenses 1,728 1,619 3,365 3,240
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Total noninterest expenses 6,657 5,864 13,109 12,082
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Income before provision for income taxes 3,574 3,418 7,014 6,040
Income tax expense 1,128 1,211 2,214 1,983
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Net income 2,446 2,207 4,800 4,057
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period 56 1,786 889 773
Less: reclassification adjustment for gain
(losses) included in net income, net of taxes of
$63, $22, $119 and $54, respectively. 98 35 194 90
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Other comprehensive income (loss) (42) 1,751 695 683
- ------------------------------------------------------------------ -------------- ---------------- -------------- ----------------
Comprehensive income $ 2,404 $ 3,958 $ 5,495 $ 4,740
================================================================== ============== ================ ============== ================
Net income - before merger-related expenses $2,480 $2,277 $4,834 $4,342
================================================================== ============== ================ ============== ================
Basic earnings per share (Note2) $0.31 $0.28 $0.61 $0.52
================================================================== ============== ================ ============== ================
Diluted earnings per share (Note2) $0.31 $0.28 $0.61 $0.52
================================================================== ============== ================ ============== ================
Basic earnings per share before merger-related expenses (Note2) $0.31 $0.29 $0.61 $0.55
================================================================== ============== ================ ============== ================
Diluted earnings per share before merger-related expenses (Note 2) $0.31 $0.29 $0.61 $0.55
================================================================== ============== ================ ============== ================
Basic weighted-average number of shares outstanding (Note2) 7,887,257 7,859,221 7,886,671 7,862,624
================================================================== ============== ================ ============== ================
Diluted weighted-average number of shares outstanding (Note2) 7,923,841 7,873,040 7,921,303 7,877,009
================================================================== ============== ================ ============== ================
</TABLE>
3
<PAGE>
FCNB CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------- --------------------- ---------------------
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,800 $ 4,057
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,020 725
Provision for credit losses 450 462
Provision for foreclosed properties 50 --
Deferred income taxes (benefits) (41) (91)
Net premium amortization (discount accretion) on investment (116) --
securities
Accretion of net loan origination fees (504) (318)
Net securities gains (313) (144)
Net loss on sale of foreclosed properties 23 --
Decrease (increase) in other assets (2,796) 913
Decrease (increase) in loans held for sale (1) (3,036) 3,136
Increase (decrease) in accrued interest and other liabilities 81 (608)
- ------------------------------------------------------------------------------- --------------------- ---------------------
Net cash provided by operating activities (382) 8,132
- ------------------------------------------------------------------------------- --------------------- ---------------------
Cash flows from investing activities:
Proceeds from sales of investment securities - available for sale 6,516 29,157
Proceeds from maturities of investment securities - available for
sale 33,041 21,464
Proceeds from maturities of investment securities - held to maturity 9,023 2,641
Purchases of investment securities - held to maturity (1,349) --
Purchases of investment securities - available for sale (113,500) (77,602)
Net decrease (increase) in loans (12,907) (35,213)
Purchases of bank premises and equipment (1,421) (1,033)
Proceeds from dispositions of bank premises and equipment 1 --
Purchase of foreclosed properties (21) (183)
Proceeds from dispositions of foreclosed properties 945 70
Purchase of investments in bank-owned life insurance (8,000) (10,000)
- ------------------------------------------------------------------------------- --------------------- ---------------------
Net cash (used in) investing activities (87,672) (70,699)
- ------------------------------------------------------------------------------- --------------------- ---------------------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits, NOW
accounts, money market account and savings accounts 53,939 (1,514)
Net increase (decrease) in time deposits 11,119 22,631
Net increase (decrease) in short-term borrowings 34,964 46,975
Proceeds from sale of stock 25 26
Repurchase of common stock -- (213)
Dividend reinvestment plan (17) --
Dividends paid (2,070) (1,612)
- ------------------------------------------------------------------------------- --------------------- ---------------------
Net cash provided by financing activities 97,960 66,293
- ------------------------------------------------------------------------------- --------------------- ---------------------
Increase (decrease) in cash and cash equivalents 9,906 3,726
Cash and cash equivalents:
Beginning of period 42,315 44,526
=============================================================================== ===================== =====================
End of period $ 52,221 $ 48,252
=============================================================================== ===================== =====================
</TABLE>
(CONTINUED)
4
<PAGE>
FCNB CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited) continued For the six months
ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- -------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Supplemental disclosures
Interest paid $17,068 $13,906
============================================================== ================ =================
Income taxes paid $3,649 $1,532
============================================================== ================ =================
Supplemental schedule of noncash investing and financing
activities:
Foreclosed properties acquired in settlement of loans $176 $157
Seller financed disposition of property $725 --
Surplus from stock option transactions $26 $21
============================================================== ================ =================
</TABLE>
(1) Loans held for sale are generally held for periods of ninety days or less.
FCNB CORP AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - The accompanying unaudited consolidated financial statements for FCNB
Corp (the "Company") have been prepared in accordance with the instructions for
Form 10-Q and, therefore, do not include all information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial statements have been prepared utilizing the interim basis
of reporting and, as such, reflect all adjustments which are normal and
recurring in nature and are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented.
Note 2 - Stock dividend and stock split: The June 30, 1998 data has been
adjusted for the four-for-three stock split declared on July 14, 1998, payable
August 14 to shareholders of record on August 7, while the June 30, 1997 data
has been adjusted for the 10% stock dividend declared in October 1997 as well as
the four-for-three stock split of July 1998.
Note 3 - Acquisitions: In June 1998, the Company assumed $44.8 million of
deposit liabilities, and purchased $126,000 of loans, $849,000 of fixed assets,
and recorded $2.3 million of intangible assets, relating to four branches of
First Virginia Bank-Maryland located in Gaithersburg, Germantown, Poolesville
and Silver Spring, Maryland, and three branches of its sister bank, Farmers'
Bank of Maryland, located in Catonsville, Pikesville and Reisterstown, Maryland.
On June 23, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Agreement") with Capital Bank, National
Association, Rockville, Maryland ("Capital"), pursuant to which Capital would be
merged (the "Merger") with and into FCNB Bank, Frederick, Maryland, the
Company's wholly owned subsidiary bank (the "Bank"), with the Bank surviving the
Merger. The Merger is intended to be a tax-free exchange of shares, in
connection with which, each share of Capital common stock will be converted into
shares of FCNB Common Stock having a value, determined in accordance with the
Agreement, of $40.00, subject to adjustment in certain circumstances as set
forth in the Agreement. In connection with the Merger Agreement, Capital has
granted the Company an option to acquire up to 248,278, or up to 19.9 percent of
the outstanding shares of Capital common stock, under certain circumstances.
The Company anticipates that it will issue approximately 1,780,000 shares, as
adjusted for the stock split discussed above, in connection with the
transaction, subject to adjustment, for an aggregate deal value of approximately
$42 million. At June 30, 1998, Capital had total assets of approximately $167.17
million, deposits of $135.24 million, and total shareholders' equity of $11.74
million. It is anticipated that the merger will be accounted for as a pooling of
interests. The Company anticipates that it will incur pretax one-time charges of
approximately $1.75 million upon consummation of the merger. The consummation of
the merger remains subject to regulatory and shareholder approvals, and the
satisfaction of a number of other conditions. The Company currently anticipates
that the merger would be consummated in the fourth quarter of 1998.
Note 4 - Investments: Using the criteria specified in Statement 115, the Company
classifies its investments in debt and equity securities at June 30, 1998 and
December 31, 1997 into two categories: held-to-maturity and available-for-sale.
Securities classified as held-to-maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed using the interest method over their contractual
lives.
5
<PAGE>
Securities classified as available-for-sale are equity securities with readily
determinable fair values and those debt securities that the Company intends to
hold for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at fair value with any unrealized gains or losses included in
accumulated other comprehensive income, a component of shareholders' equity, net
of the related deferred tax effect.
As of June 30, 1998, the gross unrealized losses in the Company's investment
portfolio were $123,000 in the held-to-maturity investment portfolio and
$219,000 in the available-for-sale investment portfolio compared to $212,000 and
$234,000, respectively, as of December 31, 1997. As of June 30, 1998, the gross
unrealized gains in the Company's investment portfolio were $475,000 in the
held-to-maturity investment portfolio and $6.94 million in the
available-for-sale investment portfolio compared to $552,000 and $5.75 million,
respectively, as of December 31, 1997. Since the Company's held-to-maturity
investment portfolio includes fixed rate investment securities that have below
current market interest rates, the future operating results of the Company would
be negatively impacted in an increasing rate environment. This reduction in net
interest income would result because the cost of funding the Company's
operations increases, while the income earned on the held-to-maturity portfolio
remains constant.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at June 30, 1998 are as follows:
HELD-TO-MATURITY PORTFOLIO
<TABLE>
<CAPTION>
- ----------------------------------------------------- -------------- -------------- -------------- --------------
Gross Gross
June 30, 1998 Amortized Unrealized Unrealized Estimated
(dollars in thousands) Cost Gains Losses Fair Value
- ----------------------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U. S. Treasury and other U.S. government
agencies and corporations $23,015 $ 40 $ -- $23,055
State and political subdivisions 5,109 351 6 5,454
Mortgage-backed debt securities 10,170 84 117 10,137
- ----------------------------------------------------- -------------- -------------- -------------- --------------
$38,294 $475 $123 $38,646
- ----------------------------------------------------- -------------- -------------- -------------- --------------
</TABLE>
The amortized cost and estimated fair value of securities classified as
available-for-sale at June 30, 1998 are as follows:
AVAILABLE-FOR-SALE-PORTFOLIO
<TABLE>
<CAPTION>
- ----------------------------------------------------- -------------- -------------- -------------- --------------
Gross Gross
June 30, 1998 Amortized Unrealized Unrealized Estimated
(dollars in thousands) Cost Gains Losses Fair Value
- ----------------------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U. S. Treasury and other U.S. government agencies
and corporations $136,510 $ 609 $ 27 $ 137,092
Corporate bonds 22,764 398 25 23,137
Mortgage-backed debt securities 91,555 1,229 163 92,621
Equity securities 23,294 4,707 4 27,997
- ----------------------------------------------------- -------------- -------------- -------------- --------------
$274,123 $6,943 $219 $280,847
- ----------------------------------------------------- -------------- -------------- -------------- --------------
</TABLE>
The gross realized gains on securities sold from the available-for-sale
portfolio for the first six months of 1998 and 1997 are $313,000 and $230,000,
respectively. The gross realized losses on securities sold from the
available-for-sale portfolio for the same periods are $86,000 for the first six
months of 1997 while no losses were realized in 1998.
The amortized cost and estimated fair value of securities classified as
held-to-maturity and available-for-sale at June 30, 1998 summarized by
contractual maturity are as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
June 30, 1998 Amortized Estimated Fair Amortized Estimated Fair
(dollars in thousands) Cost Value Cost Value
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 5,239 $ 5,245 $ 48,541 $ 48,598
Due after one through five years 21,035 21,396 43,867 44,121
Due after five through ten years 1,071 1,089 61,037 61,636
Due after ten years 779 779 5,829 5,874
Mortgage-backed debt securities 10,170 10,137 91,555 92,621
Equity securities -- -- 23,294 27,997
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
$38,294 $38,646 $274,123 $280,847
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
</TABLE>
6
<PAGE>
Actual maturities may differ from the contractual maturities reflected in the
preceding table because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Mortgage-backed securities
have no stated maturity and primarily reflect investments in various
Pass-through and Participation Certificates issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation,
respectively. Repayment of mortgage-backed securities is dependent on the
contractual repayment terms of the underlying mortgages collateralizing these
obligations and the current level of interest rates.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at December 31, 1997 are as follows:
HELD-TO-MATURITY PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------ ------------- -------------- ----------------- ----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- ------------------------------------ ------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury and other U.S.
government agencies and $25,523 $ 15 $ 29 $25,509
corporations
State and political subdivisions 3,690 387 - 4,077
Mortgage-backed debt securities 19,176 150 183 19,143
- ------------------------------------ ------------- -------------- ----------------- ----------------
$48,389 $552 $212 $48,729
- ------------------------------------ ------------- -------------- ----------------- ----------------
</TABLE>
The amortized cost and estimated fair value of securities available-for-sale at
December 31, 1997 are as follows:
AVAILABLE-FOR-SALE-PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------ ------------- -------------- ----------------- ----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------ ------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury and other U.S.
government agencies and $ 69,713 $ 570 $ 10 $ 70,273
corporations
Mortgage-backed debt securities 93,063 1,532 216 94,379
Corporate bonds 15,074 238 3 15,309
Equity securities 19,482 3,412 5 22,889
- ------------------------------------ ------------- -------------- ----------------- ----------------
$197,332 $5,752 $234 $202,850
- ------------------------------------ ------------- -------------- ----------------- ----------------
</TABLE>
Note 5 - Per share amounts: On December 31, 1997, the Company adopted FASB
Statement No. 128, "Earnings per Share." Statement 128 establishes standards for
computing and presenting earnings per share ("EPS") that simplify the standards
previously followed in Accounting Principals Board Opinion No. 15. It replaces
the former presentation of primary EPS with a presentation of basic EPS and,
where applicable, requires the dual presentation of basic and diluted EPS on the
face of the income statement. Basic EPS is generally computed by dividing net
income by the weighted-average number of common shares outstanding for the
period, whereas diluted EPS essentially reflects the potential dilution in basic
EPS that could occur if other contracts to issue common stock were exercised.
Per share amounts are based on the weighted-average number of shares outstanding
during each year as follows:
<TABLE>
<CAPTION>
For the 3 months ended For the 6 months ended
JUNE 30 JUNE 30
- ------------------------------------------------------- ------------- ------------- ------------- -------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic EPS weighted-average shares outstanding 7,887,257 7,859,221 7,886,671 7,862,624
Effect of dilutive securities - stock options 36,584 13,819 34,632 14,385
- ------------------------------------------------------- ------------- ------------- ------------- -------------
Diluted EPS weighted-average shares outstanding 7,923,841 7,873,040 7,921,303 7,877,009
======================================================= ============= ============= ============= =============
</TABLE>
7
<PAGE>
The June 30, 1998 data has been adjusted for the four-for-three stock split
declared in July 1998, while the June 30, 1997 data has been adjusted for the
10% stock dividend declared in October 1997 as well as the four-for-three stock
split of July 1998.
Note 6 - Risk management instruments: Interest rate swaps used to achieve
interest rate risk management objectives are accounted for in a manner
consistent with the accounting basis of the related asset or liability. An
instrument designated to hedge an asset or liability carried at historical cost
is accounted for on an accrual basis, whereby the interest income or expense of
the related asset or liability is adjusted for the net amount of any interest
receivable or payable generated by the hedging instrument during the reporting
period. For such instruments, no amounts other than any accrued interest
receivable or payable are included in the accompanying consolidated balance
sheets.
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 June 30, 1998 and December 31, 1997, there were no deferred gains
or losses in the accompanying consolidated balance sheets arising from the
termination of instruments qualifying for accrual accounting prior to maturity.
Note 7 - Comprehensive income: On January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
Comprehensive income, as defined by Statement 130, is the change in equity of a
business enterprise during a reporting period from transactions and other events
and circumstances from non-owner sources. In addition to an enterprise's net
income, change in equity components under comprehensive income reporting would
also include such items as the net change in unrealized gain or loss on
available-for-sale securities and foreign currency translation adjustments.
Statement 130 requires disclosure of comprehensive income and its components
with the same prominence as the Company's other financial statements.
Note 8 - Recent accounting pronouncements: In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In management's opinion, the adoption of
this Statement will not have a material impact on the financial position or the
results of operations of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
This section of the report contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to the Company's beliefs, expectations, anticipations and
plans regarding, among other things, general economic trends, interest rates,
product expansions and other matters. Such statements are subject to numerous
uncertainties, such as federal monetary policy, inflation, employment,
profitability and consumer confidence levels, both nationally and in the
Company's market area, the health of the real estate and construction market in
the Company's market area, the Company's ability to develop and market new
products and to enter new markets, competitive challenges in the Company's
market, legislative changes and other factors, and as such, there can be no
assurance that future events will develop in accordance with the forward looking
statements contained herein.
In June 1998, the Company assumed $44.8 million of deposit liabilities, and
purchased $126,000 of loans, $849,000 of fixed assets, and recorded $2.3 million
of intangible assets, relating to four branches of First Virginia Bank-Maryland
located in Gaithersburg, Germantown, Poolesville and Silver Spring, Maryland,
and three branches of its sister bank, Farmers' Bank of Maryland, located in
Catonsville, Pikesville and Reisterstown, Maryland.
8
<PAGE>
On June 23, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Agreement") with Capital Bank, National
Association, Rockville, Maryland ("Capital"), pursuant to which Capital would be
merged (the "Merger") with and into FCNB Bank, Frederick, Maryland, the
Company's wholly owned subsidiary bank (the "Bank"), with the Bank surviving the
Merger. The Merger is intended to be a tax-free exchange of shares, in
connection with which, each share of Capital common stock will be converted into
shares of FCNB Common Stock having a value, determined in accordance with the
Agreement, of $40.00, subject to adjustment in certain circumstances as set
forth in the Agreement. In connection with the Merger Agreement, Capital has
granted the Company an option to acquire up to 248,278, or up to 19.9 percent of
the outstanding shares of Capital common stock, under certain circumstances.
The Company anticipates that it will issue approximately 1,780,000 shares, as
adjusted for the stock split discussed above, in connection with the
transaction, subject to adjustment, for an aggregate deal value of approximately
$42 million. At June 30, 1998, Capital had total assets of approximately $167.17
million, deposits of $135.24 million, and total shareholders' equity of $11.74
million. It is anticipated that the merger will be accounted for as a pooling of
interests. The Company anticipates that it will incur pretax one-time charges of
approximately $1.75 million upon consummation of the merger. The consummation of
the merger remains subject to regulatory and shareholder approvals, and the
satisfaction of a number of other conditions. The Company currently anticipates
that the merger would be consummated in the fourth quarter of 1998.
The following discussion and related financial data for the Company provides an
overview of the financial condition and results of operations of the Company and
its wholly-owned subsidiary, which is presented on a consolidated basis. The
principal subsidiary of the Company is FCNB Bank. For the first six months, the
Company reported earnings of $4.80 million in 1998 and $4.06 million in 1997.
However, net income before specific one-time merger related costs ("core
earnings") was $4.83 million in 1998 compared to $4.34 million for the same
period in 1997. For the second quarter the Company had core earnings of $2.48
million and reported earnings of $2.45 million in 1998, and in 1997 had core
earnings of $2.28 million and reported earnings of $2.21 million
Return on average assets and return on average equity are key measures of
earnings performance. Return on average assets measures the ability of a bank to
utilize its assets in generating income. Annualized return on average assets for
the six months ended June 30, 1998 was 1.04% for reported earnings and 1.05% on
earnings before specific one-time merger-related costs compared to annualized
rates of 1.02% and 1.09%, respectively, for the six months ended June 30, 1997.
The annualized return on average shareholders' equity, which measures the income
earned on the capital invested, for the six months ended June 30, 1998 was
12.22% for reported earnings and 12.31% on earnings before specific one-time
merger-related costs compared to annualized rates of 11.69% and 12.51%,
respectively, for the six months ended June 30, 1997.
Annualized return on average assets for the quarter ended June 30, 1998 was
1.05% for reported earnings and 1.06% on earnings before specific one-time
merger-related costs compared to annualized rates of 1.09% and 1.13%,
respectively, for the same period in 1997. The annualized return on average
shareholders' equity for the three months ended June 30, 1998 was 12.33% for
reported earnings and 12.51% on earnings before specific one-time merger-related
costs compared to annualized rates of 12.64% and 13.05%, respectively, for the
same period in 1997.
In the ordinary course of its business, the Company routinely explores
opportunities for additional growth and expansion of its core banking business
and related activities, by acquisition of existing branches, by merger with
other institutions, and by de novo branching, both within the Company's existing
market, and in new markets. There can be no assurance that any growth or
expansion will have a positive impact on the Company's earnings, dividends, book
value or market value.
NET INTEREST INCOME
Net interest income represents the Company's gross profit from lending and
investment activities, and is the most significant component of the Company's
earnings. Net interest income is the difference between interest and related fee
income on earning assets (primarily loans and investment securities) and the
cost of funds (primarily deposits and short-term borrowings) supporting them. To
facilitate the analysis of net interest income, the table on page 15 is
presented on a taxable equivalent basis to adjust for the tax-exempt status of
certain loans and investment securities. This adjustment, based on the statutory
federal income tax rate of 35%, increases the tax-exempt income to an amount
representing an estimate of what would have been earned if that income were
fully taxable.
Taxable equivalent net interest income for the first six months of 1998 totaled
$16.90 million, increasing 5.96% from the $15.95 million recorded for the same
period in 1997. The Company's average interest-earning assets increased 14.8% to
9
<PAGE>
$842.86 million from June 30, 1997. This increase was primarily funded with a
16.3% increase in the Company's average interest-bearing liabilities.
For the second quarter, the taxable equivalent net interest income increased by
$462,000 (5.7%) to $8.59 million in 1998 from the same period in 1997.
The Company's net interest margin (taxable equivalent net interest income as a
percent of average interest-earning assets) was 4.01% and 4.35% for the first
half of 1998 and 1997, respectively. The net interest margin is impacted by the
change in the spread between yields on earning assets and rates paid on
interest-bearing liabilities. This spread decreased by 31 basis points in the
first six months of 1998 when compared to the same period in the prior year. The
yield on earning assets dropped to 8.16% from 8.26%, while the rates paid on
interest-bearing liabilities increased by 21 basis points to 4.63%.
For the second quarter of 1998 the net interest margin was 4.02% compared to
4.38% in 1997. The spread during the period decreased by 32 basis points which
was primarily caused by an increase in rates paid on interest-bearing
liabilities and a decrease in the yields earned on the loan and investment
portfolios. The yield on earning assets dropped by 17 basis points to 8.19%,
while the rates paid on interest-bearing liabilities increased by 15 basis
points to 4.64%.
The rate of interest earned on interest-earning assets and the rate paid on
interest-bearing liabilities, while significantly affected by the actions taken
by the Federal Reserve to control economic growth, are influenced by competitive
factors within the Company's market. Competitive pressures during early 1998 and
late 1997 for both loans and the funding sources needed to satisfy loan demand
within the Company's market area caused its net interest spread to narrow. The
management of the Company feels that the competitive pressures in this market
will cause the net interest spread to continue to be under pressure during 1998.
Therefore, the Company is currently pursuing operating efficiencies through
improved technology and is evaluating new products and services in an effort to
enhance its level of noninterest income. There can be no assurance that these
benefits will be realized.
MARKET RISK
The Company employs computer model simulations to monitor its interest rate
sensitivity. Interest rate risk ("IRR") management has various sources and it is
not simply the risk from rates rising and falling. In fact, there are four
sources of IRR: repricing risk, basis risk, yield curve risk and option risk.
Gap modeling only focuses on repricing risk. Income simulations that incorporate
cash flow analyses: (1) measure the size and direction of interest rate exposure
under a variety of interest rate and yield curve shape scenarios; (2) provide
the opportunity to capture all critical elements such as volume, maturity dates,
repricing dates, prepayment volumes and hidden options such as caps, floors,
puts and calls; (3) utilize data to clearly focus attention on critical
variables; (4) are dynamic; and (5) reflect changes in prevailing interest rates
which affect different assets and liabilities in different ways. These
simulations are run on a monthly basis using a ramped technique to determine the
effects on the Company's net income and the Market Value of Portfolio Equity
("MVPE"), assuming an immediate increase or decrease in interest rates. The MVPE
simulation is the process of generating multiple forecasts for future interest
rate scenarios and then discounting the estimated cash flows anticipated under
those scenarios. The MVPE is the estimated economic value of the Company based
on the net difference between the value of the interest-earning assets ("IEA")
and the value of the interest bearing liability ("IBL"), using the current
characteristics of each. Some factors that influence the value of the IEA and
the IBL are the rate, maturity, repricing frequency and prepayment options. The
Company has an interest rate risk management policy that limits the amount of
deterioration in net interest income, associated with an assumed interest rate
shock of +/-100, +/-200 and +/-300 basis points change in interest rates, to no
more than 7.5% (+/-100), 10.0% (+/-200) and 12.5% (+/-300) of net interest
income, respectively. The model results as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Change in Interest Rate Assumption
- ----------------------------- ----------- ----------- ------------ ----------- ----------- ------------
(dollars in thousands) +100 bp +200 bp +300 bp -100 bp -200 bp -300 bp
- ----------------------------- ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income -
increase (decrease) $ (869) $ (2,043) $ (2,755) $ 763 $ 1,452 $ 1,733
- ----------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Net interest income - %
change -2.52% -5.93% -7.99% 2.21% 4.21% 5.03%
- ----------------------------- ----------- ----------- ------------ ----------- ----------- ------------
MVPE - increase (decrease) $(7,031) $(19,740) $(29,676) $ 2,826 $ 5,766 $ 8,775
- ----------------------------- ----------- ----------- ------------ ----------- ----------- ------------
MVPE - % change -7.19% -20.19% -30.35% 2.89% 5.90% 8.97%
- ----------------------------- ----------- ----------- ------------ ----------- ----------- ------------
</TABLE>
NONINTEREST INCOME
Noninterest income increased $1.06 million (38.5%) for the six months ended June
30, 1998, when compared to the same period in 1997. This increase was partially
attributable to the increase in service fee income of $200,000, which was due to
an increase in the volume of deposit accounts maintained. Security gains
increased in 1998 to $313,000 from the $144,000 realized in 1997. The increase
in other operating income of $593,000 includes approximately $297,000
attributable to the Company's bank-owned life insurance program that generates
tax-exempt income to partially offset the cost of employee benefit programs.
10
<PAGE>
For the second quarter of 1998, noninterest income increased $567,000. This
increase was primarily caused by the $157,000 increase in income generated from
the bank-owned life insurance program, $104,000 of additional securities gains
and $92,000 of additional gains on the sale of loans.
The Company is adding new products and services to strengthen the ratio of
noninterest income to total revenue to mitigate the effect of its decreasing net
interest spread. Some of these products are fee-based and, accordingly, the
income from these products is less sensitive to fluctuations in the level of
interest rates. The Company offers asset management and trust services and in
December, 1997, the Company began to offer Financial Planning and Investment
Services. This new division will offer customers comprehensive financial
planning as well as investment and insurance products.
The Company's management is committed to developing and offering innovative,
market-driven products and services that will generate additional sources of
noninterest income. However, the future results of any of these products or
services cannot be predicted at this time.
NONINTEREST EXPENSES
Noninterest expenses, excluding merger-related expenses, increased $1.43 million
(12.3%) for the first six months of 1998, when compared to the first six months
of 1997.
Total salaries and employee benefits increased $947,000 (15.2%) over the first
six months of 1997. The increase in salaries and employee benefits reflects
general merit and cost-of-living adjustments, plus the additional staffing of
the Financial Planning and Investment Services Division in December, 1997.
Additional increased health care costs and pension expenses are the primary
causes for the remaining portion of this increase.
Occupancy expenses increased $148,000 (12.9%) and equipment expenses increased
$214,000 (21.4%) over the first six months of 1997. The increase in occupancy
expenses is primarily related to additional depreciation expense on the
facilities and increased utility costs. The increase in equipment expenses is
primarily associated with the additional depreciation expense incurred as a
result of implementing new technology.
Other operating expenses increased $125,000 (3.9%) compared to the first half of
1997.
For the second quarter of 1998, salaries and benefits increased $476,000
(15.2%), occupancy expenses increased $116,000 (22.1%), equipment expenses
increased $152,000 (31.8%), and other operating expenses increased $109,000
(6.7%). The increase in salaries and benefits costs is primarily related to the
increased number of employees, which increased to 404 from 355 as of June 30,
1997. The increase in the number of employees includes approximately 33
employees related to the acquisition of the seven branches from First Virginia
as discussed in the "Overview Section."
INCOME TAXES
The Company's effective tax rates for the first six months of 1998 and 1997 were
31.6% and 32.8%, respectively, and were 31.5% and 35.4%, for the second quarter
of 1998 and 1997, respectively. The Company's income tax expense differs from
the amount computed at statutory rates primarily due to the tax-exempt earnings
from certain loans, investment securities and the bank-owned life insurance
program. Additionally, the Company derives income tax benefits from a subsidiary
located in the state of Delaware that holds and manages a portion of its
investment portfolio.
ALLOWANCE FOR CREDIT LOSSES AND PROBLEM ASSETS
The Company follows the guidance of Statement of Financial Accounting Standards
No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan" as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." It requires that impaired loans within
its scope be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable market
price, or the fair value of the collateral if the loan is collateral dependent.
SFAS 114 excludes smaller balance and homogeneous loans from impairment
reporting. Therefore, the Company has designated consumer, credit card and
residential mortgage loans to be excluded for this purpose. From the remaining
loan portfolio, loans rated as doubtful or worse, classified as nonaccrual, and
troubled debt restructurings are considered to be impaired. Loans are placed on
nonaccrual when a loan is specifically determined to be impaired or when
principal or interest is delinquent for 90 days or more. Any unpaid interest
previously accrued on those loans is reversed from income. Interest
11
<PAGE>
income generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on such loans
are applied as a reduction of the loan principal balance. Interest income on
other nonaccrual loans is recognized only to the extent of interest payments
received. Up to this point, the Company considers slow payment on a loan, to
only be a minimum delay. The Company has identified commercial real estate and
commercial and industrial type loans as the major risk classifications to be
used in the application of SFAS 114.
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
June 30, 1998 1997
- ------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Impaired loans with specific allocation of allowance for credit losses $3,063 $1,970
Specific allocation of allowance for credit losses 1,093 556
Other impaired loans 1,423 1,090
Average recorded investment in impaired loans 4,143 3,097
Interest income recognized on impaired loans based on cash payments received 38 69
==================================================================================== ========== ==========
</TABLE>
Additional information concerning the Company's recorded investment in
nonaccrual loans, for which impairment had not been recognized are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
June 30, 1998 1997
- ------------------------------------------------------------------------------------ -------- --------
<S> <C>
Nonaccrual loans 652 --
Interest income not recognized due to loans in nonaccrual status 30 --
==================================================================================== ======== ========
</TABLE>
The Company maintains its allowance for credit losses at a level deemed
sufficient to provide for estimated potential losses in the credit extension
process. Management reviews the adequacy of the allowance each quarter,
considering factors such as current and future economic conditions and their
anticipated impact on specific borrowers and industry groups, the growth and
composition of the loan portfolio, the level of classified and problem assets,
historical loss experience, and the collectability of specific loans. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows.
The provision for credit losses is charged to income in an amount necessary to
maintain the allowance at the level management believes is appropriate.
<TABLE>
<CAPTION>
- ----------------------------------------------------- ------------------------ ----------------
JUNE 30 DECEMBER 31
- ----------------------------------------------------- ------------ ----------- ----------------
1998 1997 1997
- ----------------------------------------------------- ------------ ----------- ----------------
<S> <C> <C> <C>
Allowance for credit losses $ 5,845 $ 5,649 $ 5,713
- ----------------------------------------------------- ------------ ----------- ----------------
% of total loans net of unearned income 1.00% 1.06% 1.00%
- ----------------------------------------------------- ------------ ----------- ----------------
Nonaccrual loans $ 5,137 $ 3,107 $ 3,637
Past due loans 2,927 2,975 982
- ----------------------------------------------------- ------------ ----------- ----------------
Nonperforming loans 8,064 6,082 4,619
Foreclosed properties 1,951 3,097 3,496
- ----------------------------------------------------- ------------ ----------- ----------------
Nonperforming assets $10,015 $9,179 $8,115
- ----------------------------------------------------- ------------ ----------- ----------------
Allowance for credit losses to nonperforming loans 72.5% 92.9% 123.7%
- ----------------------------------------------------- ------------ ----------- ----------------
Nonperforming assets to total assets .98% 1.08% .88%
- ----------------------------------------------------- ------------ ----------- ----------------
</TABLE>
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------- --------------------- ----------------------
Six months
ended Year ended
June 30, 1998 December 31, 1997
- ---------------------------------------------------------------- --------------------- ----------------------
<S> <C> <C>
Average total loans outstanding during period $578,339 $535,921
- ---------------------------------------------------------------- --------------------- ----------------------
Allowance at beginning of year $5,713 $5,123
- ---------------------------------------------------------------- --------------------- ----------------------
Charge-offs:
Real estate - construction 58 588
Real estate - mortgage 58 12
Commercial and agricultural 63 306
Consumer 324 288
- ---------------------------------------------------------------- --------------------- ----------------------
Total charge-offs 503 1,194
- ---------------------------------------------------------------- --------------------- ----------------------
Recoveries:
Real estate - construction 14 24
Real estate - mortgage 11 4
Commercial and agricultural 28 369
Consumer 132 58
- ---------------------------------------------------------------- --------------------- ----------------------
Total recoveries 185 455
- ---------------------------------------------------------------- --------------------- ----------------------
Net charge-offs (recoveries) 318 739
- ---------------------------------------------------------------- --------------------- ----------------------
Additions to allowance charged to operating expenses 450 1,329
================================================================ ===================== ======================
Allowance at end of period $5,845 $5,713
================================================================ ===================== ======================
Ratio of net charge-offs to average total loans 0.04% 0.14%
================================================================ ===================== ======================
</TABLE>
12
<PAGE>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
December
June 30, 31,
1998 %(1) 1997 %(1)
-------------------------------------------------- -------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Real estate - construction $ 721 16% $ 557 14%
Real estate - mortgage 2,883 63% 2,703 65%
Commercial and agricultural 1,143 11% 993 11%
Consumer 462 10% 380 10%
Unallocated 636 - 1,080 -
-------------------------------------------------- -------------- -------- ------------- -------------
Total Allowance $ 5,845 100% $ 5,713 100%
================================================== ============== ======== ============= =============
</TABLE>
(1) Percent of loans in each category to total loans, net of unearned income.
The Company makes real estate-construction, real estate-mortgage, commercial and
agricultural, and consumer loans. The real estate-construction loans are
generally secured by the construction project financed, and have a term of one
year or less. The real estate-mortgage loans are generally secured by the
property with a maximum loan to value ratio of 75% and generally a term of one
to five years. The commercial and agricultural loans consist of secured and
unsecured loans. The unsecured commercial loans are made based on the financial
strength of the borrower and usually require personal guarantees from the
principals of the business. The collateral for the secured commercial loans may
be equipment, accounts receivable, marketable securities or deposits in the
subsidiary bank of the Company. These loans have a maximum loan to value ratio
of 75% and a term of one to five years. The consumer loan category consists of
secured and unsecured loans. The unsecured consumer loans are made on the
financial strength of the individual borrower. The collateral for the secured
consumer loans may be marketable securities, automobiles, recreational vehicles
or deposits in the Company's subsidiary bank. The usual term for these loans is
three to five years.
As of June 30, 1998, the Company had loans totaling $16.80 million that were
current but as to which there are concerns as to the ability of the borrowers to
comply with present loan repayment terms. While management of the Company does
not anticipate any loss not previously provided for on these loans, changes in
the financial condition of these borrowers may necessitate future modifications
in their loan repayment terms.
At June 30, 1998, the Company had no concentrations of loans in any one industry
exceeding 10% of its total loan portfolio. An industry for this purpose is
defined as a group of counterparties that are engaged in similar activities and
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.
There were no other interest-bearing assets at June 30, 1998, classifiable as
nonaccrual, past due, restructured or problem assets.
13
<PAGE>
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differentials
The following table shows average balances of asset and liability categories,
interest income and paid, and average yields and rates for the periods
indicated:
<TABLE>
<CAPTION>
- ------------------------------------------- --------------------------------------- --------------------------------------
Six months ended Six months ended
June 30, 1998 June 30, 1997
--------------------------------------- --------------------------------------
Average Interest Average Average Interest Average
Daily Income(1)/ Yield/ Daily Income(1)/ Yield/
(dollars in thousands) Balance Paid Rate Balance Paid Rate
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 964 $ 30 6.23% $ 3,034 $ 71 4.68%
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Federal funds sold 7,232 224 6.19 9,498 249 5.24
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Loans held for sale 2,790 69 4.95 1,146 49 8.56
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Investment securities:
Taxable 249,417 8,101 6.50 202,135 6,493 6.42
Tax exempt 4,119 223 10.83 4,995 279 11.16
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Total investment securities 253,536 8,324 6.57 207,130 6,772 6.54
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Loans(2) 578,339 25,750 8.90 513,105 23,152 9.02
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Total interest-earning assets 842,861 34,397 8.16 733,913 30,293 8.26
Noninterest-earning assets 73,675 61,166
Net Effect of SFAS 115 3,837 183
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Total assets $920,373 $795,262
=========================================== ============== ============ =========== ============= =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Interest-bearing liabilities:
Interest-bearing deposits $536,028 11,642 4.34% $519,766 10,748 4.14%
Other short-term borrowings 218,899 5,853 5.35 129,215 3,594 5.56
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Total interest bearing liabilities 754,927 17,495 4.63 648,981 14,342 4.42
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Noninterest-bearing deposits 80,218 70,619
Noninterest-bearing liabilities 6,682 6,279
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Total liabilities 841,827 725,879
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Shareholders' equity 74,709 69,200
Accumulated other comprehensive income 3,837 183
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Total shareholders' equity 78,546 69,383
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Total liabilities and
shareholders' equity $920,373 $795,262
- ------------------------------------------- -------------- ------------ ----------- ------------- ----------- ------------
Net interest income $16,902 $15,951
=========================================== ============== ============ =========== ============= =========== ============
Net interest spread 3.53% 3.84%
=========================================== ============== ============ =========== ============= =========== ============
Net interest margin 4.01% 4.35%
=========================================== ============== ============ =========== ============= =========== ============
</TABLE>
1 Taxable equivalent adjustments of $132,000 for 1998 and $112,000 for 1997
are included in the interest income for total interest-earning assets.
2 Nonaccruing loans, which include impaired loans, are included in the
average balances. Net loan fees included in interest income totaled
$820,000 in 1998 and $634,000 in 1997.
14
<PAGE>
CAPITAL RESOURCES
The following table shows the risk-based capital and the leverage ratios for the
Company as of June 30, 1998:
<TABLE>
<CAPTION>
- --------------------------------------- --------------------------- --------------------------- ---------------------------
To Be Well
Capitalized Under Prompt
For Capital Corrective Action
(dollars in thousands) Actual Adequacy Purposes Provisions:
- --------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
AS OF JUNE 30, 1998 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $77,191 10.97% $56,267 8.00% N/A N/A
FCNB Bank $69,740 10.06% $55,437 8.00% $69,296 10.00%
- --------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Tier I Capital
(to Risk-Weighted Assets):
FCNB Corp $71,346 10.14% $28,133 4.00% N/A N/A
FCNB Bank $63,895 9.22% $27,718 4.00% $41,577 6.00%
- --------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Tier I Capital
(to Average Assets):
FCNB Corp $71,346 7.71% $27,772 3.00% N/A N/A
FCNB Bank $63,895 6.98% $27,465 3.00% $45,775 5.00%
- --------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required for this section can be located in the Notes to
Consolidated Financial Statements, Note 6 Risk management instruments on page 8
and Market Risk on page 10.
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.
SUBSEQUENT EVENTS
On July 20, 1998, the Company raised $40.25 million in capital (before expenses
and commissions) through the public issuance of 1,610,000 8.25% Trust Preferred
Securities by its subsidiary FCNB Capital Trust, a Delaware, business trust
organized for the purpose of issuing the Preferred Securities. In connection
with the issuance of the Preferred Securities, the Company issued $40.25 million
of its 8.25% subordinated debentures, duly July 31, 2028, to FCNB Capital Trust.
On July 23, 1998, the Company announced that its wholly owned subsidiary FCNB
Bank would be forming a new mortgage company called FCNB Mortgage Company, Inc.
The new company will be the result of transferring FCNB Bank's existing mortgage
operations to the new company and combining it with the staff and assets of
Genesis Mortgage Co., Inc, Owings
15
<PAGE>
Mills, Maryland. The formation of FCNB Mortgage Company, Inc. will allow
diversification of future FCNB Bank noninterest source of revenues.
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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Security Holders.
The Company's Annual Meeting of Shareholders was held on April 21, 1998. The
directors that were elected are as follows: Shirley D. Collier, Miles M. Circo,
James S. Grimes, Gail T. Guyton, A. Patrick Linton, and Jacob R. Ramsburg, Jr.
The directors continuing in office after the meeting are as follows: George B.
Callan, Jr., Clyde C. Crum, Bernard L. Grove, Jr., Frank L. Hewitt, III, Ramona
C. Remsberg, Kenneth W. Rice, Rand D. Weinberg, and DeWalt J. Willard, Jr.
A vote to adopt the Company's 1997 Director Stock Option Plan was approved with
4,269,854 Votes For, 367,441 Votes Against and 128,559 Abstaining.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
No. 11 Statement Regarding Computation of Per Share Earnings
No. 27 Financial Data Schedule
(b) Report on Form 8-K
On June 9, 1998, the Company filed an 8-K announcing that it had delayed the
pricing and sale of 1,400,000 Trust Preferred Securities proposed to be issued
by FCNB Capital Trust. The pricing and sale were delayed in order to accommodate
pending negotiations for the acquisition by the Company of another financial
institution. The proposed transaction is subject to the negotiation and
execution of a definitive agreement.
On June 23, 1998, the Company filed an 8-K announcing that it had entered into
an Agreement and Plan of Reorganization and Merger with Capital Bank, National
Association, Rockville, Maryland ("Capital"), pursuant to which Capital would be
merged (the "Merger") with and into FCNB Bank, Frederick, Maryland, the
Company's wholly owned subsidiary bank (the "Bank"), with the Bank surviving the
Merger. The consummation of the merger remains subject to regulatory and
shareholder approvals, and the satisfaction of a number of other conditions. The
Company anticipates that the merger would be consummated in the fourth quarter
of 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FCNB CORP
(Registrant)
August 5, 1998 By:
------------------------------------------------
A. Patrick Linton,
President, Chief Executive Officer and Director
August 5, 1998 By:
------------------------------------------------
Mark A. Severson
Senior Vice President and Treasurer
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FCNB CORP
(Registrant)
August 5, 1998 By: /s/ A. Patrick Linton
--------------------------------------------------
A. Patrick Linton
President Chief Executive Officer and Director
August 5, 1998 By: /s/ Mark A. Severson
--------------------------------------------------
Mark A. Severson
Senior Vice President and Treasurer
19
EXHIBIT NO. 11
STATEMENT REGARDING THE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
============================================================ ================ =================
June 30, June 30,
1998 1997
- ------------------------------------------------------------ ---------------- -----------------
<S> <C> <C>
Basic earnings per common share $0.61 $0.52
- ------------------------------------------------------------ ---------------- -----------------
Basic earnings per common share before merger-related
expenses $0.61 $0.55
- ------------------------------------------------------------ ---------------- -----------------
Basic weighted average number of share outstanding 7,886,671 7,862,624
- ------------------------------------------------------------ ---------------- -----------------
Diluted earnings per common share $0.61 $0.52
- ------------------------------------------------------------ ---------------- -----------------
Diluted earnings per common share before merger-related
expenses $0.61 $0.55
- ------------------------------------------------------------ ---------------- -----------------
Diluted weighted average number of shares outstanding 7,921,303 7,877,009
============================================================ ================ =================
</TABLE>
The June 30, 1998 data has been adjusted for the four-for-three stock split
declared in July 1998, while the June 30, 1997 data has been adjusted for the
10% stock dividend declared in October 1997 as well as the four-for-three stock
split of July 1998.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1
<CASH> 26,194
<INT-BEARING-DEPOSITS> 840
<FED-FUNDS-SOLD> 25,187
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 280,847
<INVESTMENTS-CARRYING> 38,294
<INVESTMENTS-MARKET> 38,646
<LOANS> 587,022
<ALLOWANCE> 5,845
<TOTAL-ASSETS> 1,021,646
<DEPOSITS> 681,570
<SHORT-TERM> 252,265
<LIABILITIES-OTHER> 6,834
<LONG-TERM> 0
0
0
<COMMON> 5,915
<OTHER-SE> 75,062
<TOTAL-LIABILITIES-AND-EQUITY> 1,021,646
<INTEREST-LOAN> 25,765
<INTEREST-INVEST> 8,246
<INTEREST-OTHER> 254
<INTEREST-TOTAL> 34,265
<INTEREST-DEPOSIT> 11,642
<INTEREST-EXPENSE> 17,495
<INTEREST-INCOME-NET> 16,770
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 313
<EXPENSE-OTHER> 13,109
<INCOME-PRETAX> 7,014
<INCOME-PRE-EXTRAORDINARY> 7,014
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,800
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
<YIELD-ACTUAL> 8.16
<LOANS-NON> 5,137
<LOANS-PAST> 2,927
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 16,820
<ALLOWANCE-OPEN> 5,713
<CHARGE-OFFS> 340
<RECOVERIES> 122
<ALLOWANCE-CLOSE> 5,845
<ALLOWANCE-DOMESTIC> 5,845
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 636
</TABLE>
