UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 $20.50 per share) held by
nonaffiliates on February 9, 1999, was approximately $178,965,267. As of March
10, 1999, there were 10,066,435 shares of Common Stock, par value $1.00 per
share, of FCNB Corp issued and outstanding.
Documents Incorporated by Reference
Portions of the 1998 Annual Report to Shareholders for the year ended December
31, 1998, and the1999 Proxy Statement - PARTS I, II, III, & IV
<PAGE>
PART I
Item 1. Business.
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 principal wholly-owned subsidiary FCNB
Bank's (collectively, the "Registrant" or "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.
Additionally, the Company's future financial performance may be adversely
impacted by the inability of the Company to cause its information,
communications and environmental systems to be capable of correctly recognizing
and processing dates after December 31, 1999 ("Y2K Compliant") as currently
anticipated, and in any event, prior to January 1, 2000. Factors which may cause
actual results to differ from current Y2K Compliance plans include increased
costs of achieving Y2K Compliance, delayed timeframes for implementing and
testing Y2K Compliance measures, and delays by the Company's vendors in becoming
Y2K Compliant, or the inability of such vendors to become Y2K Compliant prior to
January 1, 2000. Additionally, the Company's performance may be adversely
affected by the failure of its customers or governmental authorities to become
Y2K Compliant prior to January 1, 2000. Because of these uncertainties and the
assumptions on which statements in this document are based, actual future
results may differ materially from those contemplated by such statements.
The 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 1998 Annual Report to Shareholders. Such
information is incorporated herein by reference to the Annual Report.
On March 16, 1999, the Company signed a definitive agreement through which First
Frederick Financial Corp. and its wholly owned banking subsidiary, First Bank of
Frederick, will merge with and into the Company and the Bank, both headquartered
in Frederick, Maryland. The merger is valued at approximately $37 million based
on closing stock prices as of March 11,
<PAGE>
1999. Through First Bank of Frederick, First Frederick Financial operates 6
full-service banking offices and had $123 million in assets as of December 31,
1998.
In the merger, shareholders of First Frederick Financial Corp. common stock will
receive 1.0434 shares of the Company's common stock, valuing the deal at $20.74
per First Frederick Financial Corp. share as of March 11, 1999.
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 Anne Arundel, Baltimore,
Carroll, Frederick, Howard, Montgomery, and Prince George's counties in
Maryland, Washington, D.C., and Fairfax County in Virginia. At December 31,
1998, the Bank operated eight banking offices in Frederick, Maryland, one office
each in Brunswick, Catonsville, Columbia, Damascus, Eldersburg, Elkridge,
Gaithersburg, Germantown, Glen Burnie, Laurel, Middletown, Monrovia, Mount Airy,
Odenton, Pikesville, Poolesville, Reisterstown, Rockville, Silver Spring,
Walkersville, and Westminster, Maryland, two offices in Washington, D.C., and
one office in Dunn Loring, Virginia. At December 31, 1998, the Bank had total
loans, net of unearned income, of approximately $727.57 million, total assets of
approximately $1.32 billion, total deposits of approximately $862.71 million,
and a legal lending limit of approximately $15.37 million to any one borrower.
The deposits of the Bank are insured by the FDIC.
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.
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 Anne Arundel, Baltimore, Carroll, Frederick, Howard, Montgomery,
and Prince George's 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
<PAGE>
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
41 and 42 of the Company's 1998 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 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.
<PAGE>
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.
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.
<PAGE>
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.
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
<PAGE>
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.
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, 1998, the Bank would be deemed to be a "well capitalized"
institution for purposes of Section 38 of the FDIA. Also at December 31, 1998,
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-
<PAGE>
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 Capital Trust
FCNB Capital Trust, a statutory business trust created under the laws of the
State of Delaware, is a wholly-owned subsidiary of the Company. This trust was
created to hold the 8.25% Subordinated Debentures issued by the Company on July
20, 1998, and to issue its 8.25% Cumulative Trust Preferred Securities.
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.
Frederick Underwriters, Inc.
Frederick Underwriters, Inc., a Maryland corporation, was formerly the Company's
First Choice Insurance Agency, Inc ("First Choice") that was organized in April,
1994. In December 1998, the Company consummated the acquisition of Frederick
Underwriters, Inc. headquartered in Frederick, Maryland and its affiliated
agencies - Phillips Insurance Agency, Inc. and Carroll County Insurance Agency,
Inc. (collectively, "Frederick Underwriters"). Frederick Underwriters, Inc. was
merged with and into First Choice with First Choice surviving the merger.
Simultaneously with the merger, First Choice changed its name to Frederick
Underwriters, Inc. This subsidiary is a full-service insurance agency.
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
<PAGE>
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, 1998, the Company had approximately 552 employees of whom 13
were executive officers, 114 were other officers, 358 were full-time employees,
and 67 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 following properties:
Location Square footage
------------- ------------------
Catonsville
919 Frederick Road
Catonsville, MD 3,744
Columbia
5585 Twin Knolls Road
Columbia, MD 3,420
E. Frederick
1303 East Patrick Street
Frederick, MD 2,340
Eldersburg
6229 Sykesville Road
Eldersburg, MD 2,160
Elkridge
7290 Montgomery Road
Elkridge, MD 7,000
Laurel
380 Main Street
Laurel, MD 3,315
Odenton
1219 Annapolis Road
Odenton, MD 3,782
<PAGE>
Properties owned: (continued)
Location Square footage
------------- ------------------
Rosemont
1602 Rosemont Avenue
Frederick, MD 1,920
Route 85
5602 Buckeystown Pike
Frederick, MD 2,100
Square Corner
1 North Market Street
Frederick, MD 3,634
Walkersville
100 Commerce Drive
Walkersville, MD 2,510
The Bank leases the following properties:
Location Square Footage Lease Expiration Date
- -------- -------------- ---------------------
Antietam
1595 Opossumtown Pike
Frederick, MD 1,750 07/31/2003
Brunswick
94 Souder Road
Brunswick, MD 2,040 04/30/2015
Damascus
9815 Main Street
Damascus, MD 1,000 09/30/1999
Deerpath
6810 Deerpath Road
Elkridge, MD 5,718 06/30/2000
Englar Road
Route 140 & Englar Road
Westminster 1,500 09/30/2002
Farragut Square
815 Connecticut Avenue
Washington, DC 3,659 10/31/2005
40 West
1100 West Patrick Street
Frederick, MD 1,867 05/31/2003
<PAGE>
Properties leased: (continued)
Location Square Footage Lease Expiration Date
- -------- -------------- ---------------------
Friendship Heights
5200 Wisconsin Avenue, NW
Washington, DC
(Land lease) 5,831 (Land) 12/31/2002
FSK Mall
5500 Buckeystown Pike
Frederick, MD 470 07/31/2002
Fox Chapel
19801 Frederick Road
Germantown, MD 1,950 03/31/2001
Glen Burnie
7381 Baltimore-Annapolis
Blvd.
Glen Burnie, MD
(Land lease) 2,400 (Land) 11/22/1999
Green Valley
11801 Fingerboard Road
Monrovia, MD 1,200 03/01/1999
Kentlands
265 Kentlands Blvd.
Gaithersburg, MD 2,946 11/30/2003
Middletown
819 East Main Street
Middletown, MD
(Land Lease) 23,705 (Land) 11/25/2009
Mt. Airy
400 Ridgeville Blvd.
Mt. Airy, MD 2,000 03/31/1999
Owings Mills
11299 Owings Mills Blvd.
Owings Mills, MD 3,800 02/28/2004
Pikesville
1777 Reisterstown Road
Pikesville, MD 2,560 11/30/2008
Pikesville (Old)
678 Reisterstown Road
Pikesville, MD 2,269 02/29/2000
<PAGE>
Properties leased: (continued)
Location Square Footage Lease Expiration Date
- -------- -------------- ---------------------
Poolesville
19645 Fisher Avenue
Poolesville, MD 2,380 11/30/2000
Reisterstown
11702 Reisterstown Road
Reisterstown, MD 2,520 02/31/2004
Rockville Offices
One Church Street
Rockville, MD 5,062 02/28/2005
Silver Spring
8121 Georgia Avenue
Silver Spring, MD 1,799 05/31/2000
Tysons Corner
2230 Gallows Road
Dunn Loring, VA 22027 2,700 12/31/2000
Westminster Regional Office
Winchester Exchange Bldg.
15 East Main Street
Westminster, MD 1,010 12/31/1999
Frederick Underwriters, Inc. lease the following properties:
Location Square Footage Lease Expiration Date
- -------- -------------- ---------------------
1209 East Street
Frederick, Maryland 14,500 03/31/2001
Brunswick Shopping Center
94 Souder Road
Brunswick, MD 620 02/28/2005
Carroll County Insurance
Agency
125 Airport Drive
Westminster, MD 2,500 05/31/2006
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.
<PAGE>
During the fourth quarter of 1998, there were two matters submitted for voting
to the shareholders. The first meeting was held on November 4, 1998, to vote on
the acquisition of Capital Bank, N.A. The total number of votes was 5,926,087 of
which 5,787,277 were voted FOR the transaction. The second meeting was held on
December 30, 1998, to vote on the acquisition of Frederick Underwriters, Inc.
The total number of votes was 5,689,483 of which 5,324,931 voted FOR this
transaction.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information required by this item is contained on page 49 of the Company's
1998 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 41 of the
Company's 1998 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.
<PAGE>
The information required by this item is contained on page 26 of the Company's
1998 Annual Report to Shareholders. Such information is incorporated herein by
reference to the Annual Report.
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 25 of the
Company's 1998 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 to 18 of the
Company's 1998 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 27
to 48 of the Company's 1998 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.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is contained on pages 2 to 4 of the
Company's 1999 Proxy Statement. Such information is incorporated herein by
reference to the Proxy Statement.
Compliance with Section 16(a) of the Exchange Act
The information required by this item is contained on page 13 of the Company's
1999 Proxy Statement. Such information is incorporated herein by reference to
the Proxy Statement.
Executive Officers of the Company.
<PAGE>
Information concerning non-director executive officers of the Registrant is as
follows:
Martin S. Lapera (age 46) 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 50) 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, 1998.
Mark A. Severson (age 45) 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 61) is a Vice President of the Company and is a Senior Vice
President of the Bank.
Helen G. Hahn (age 62) is a Vice President and Secretary of the Company. Mrs.
Hahn is a Senior Vice President and Cashier of the Bank.
VOTING SECURITIES
The information required by this item is contained on page 6 of the Company's
1999 Proxy Statement. Such information is incorporated herein by reference to
the Proxy Statement.
Item 11. Executive Compensation.
Compensation of Directors
The information required by this item is contained on pages 4 to 5 of the
Company's 1999 Proxy Statement. Such information is incorporated herein by
reference to the Proxy Statement.
EXECUTIVE OFFICERS' COMPENSATION AND CERTAIN TRANSACTIONS
Compensation - Overview
The information required by this item is contained on pages 7 to 13 of the
Company's 1999 Proxy Statement. Such information is incorporated herein by
reference to the Proxy Statement.
<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 1998 Annual Report to Shareholders
are incorporated herein by reference under Item 8 of
this Report:
Page Number
in Annual Report
Consolidated Balance Sheets 27
Consolidated Statements of Income
And Comprehensive Income 28
Consolidated Statements of Changes
in Shareholders' Equity 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial
Statements 32-47
Report of Independent Auditors 48
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:
Exhibit No. Item
----------- ----
3.1 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.
<PAGE>
Exhibit No. Item
----------- ----
3.2 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 Supplemental Executive
Retirement Plan of FCNB Bank is
hereby incorporated by reference to
Exhibit 10.3 of the Annual Report on
Form 10-K for 1997 of the
Registrant.
10.3 A copy of the Severance Agreement
between FCNB Corp, FCNB Bank and A.
Patrick Linton is hereby
incorporated by reference to
Exhibit 10.4 of the Annual Report
on Form 10-K for 1997 of the
Registrant.
10.4 A copy of the Severance Agreement
between FCNB Corp, FCNB Bank and
Martin S. Lapera is hereby
incorporated by reference to
Exhibit 10.5 of the Annual Report
on Form 10-K for 1997 of the
Registrant.
10.5 A copy of the Severance Agreement
between FCNB Corp, FCNB Bank and
Mark A. Severson is hereby
incorporated by reference to
Exhibit 10.6 of the Annual Report
on Form 10-K for 1997 of the
Registrant.
10.6 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.
10.7 A copy of the Compensation
Agreement with Clyde C. Crum is
hereby incorporated by reference to
Exhibit 10.8 of the Annual Report
on Form 10-K for 1997 of the
Registrant.
11 Statement Regarding Computation of
Basic and Diluted Per Share
Earnings, filed herewith.
<PAGE>
Exhibit No. Item
----------- ----
12 Statement Regarding Computation of
Ratios, filed herewith.
13 The Company's 1998 Annual Report to
Shareholders, filed herewith.
21 A list of the subsidiaries of FCNB
Corp is hereby incorporated by
reference to the 1998 Annual Report
to Shareholders at page 50.
23.1 Consent of Independent Auditor
23.2 Consent of Independent Auditor
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated 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 is hereby incorporated by
reference to Exhibit 99.2 of the
Annual Report on Form 10-K for 1997
of the Registrant. . 99.3 A copy of
the FCNB Corp 1997 Stock Option
Plan for Directors is hereby
incorporated by reference to
Exhibit 99.3 of the Annual Report
on Form 10-K for 1997 of the
Registrant.
99.3 A copy of the FCNB Corp 1997 Stock
Option Plan for Directors is hereby
incorporated by reference to Exhibit
99.3 of the Annual Report on Form
10-K for 1997 of the Registrant.
(b) An 8-K was filed under Item 5. Other Events. on October 19, 1998
announcing the termination of the Company's stock repurchase program.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant had duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FCNB CORP
(Registrant)
Date: March 23, 1999 By:/s/A. Patrick Linton
- --------------------- -----------------------
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 23, 1999 /s/ A. Patrick Linton
- --------------------- ---------------------
A. Patrick Linton
President, Chief Executive
Office and Director
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
Date: March 23, 1999 /s/Mark Severson
- --------------------- ----------------
Mark Severson
Senior Vice President and Treasurer
Date: March 23, 1999 /s/ George B. Callan, Jr.
- --------------------- -------------------------
George B. Callan, Jr., Director
Date: March 23, 1999 /s/ Shirley D. Collier
- --------------------- ----------------------
Shirley D. Collier, Director
Date: March 23, 1999 /s/ Miles M. Circo
- --------------------- ------------------
Miles M. Circo, Director
Date: March 23, 1999 /s/Clyde C. Crum
- --------------------- ----------------
Clyde C. Crum, Director
Date: March 23, 1999 /s/James S. Grimes
- --------------------- ------------------
James S. Grimes, Director
<PAGE>
Signatures (continued)
Date: March 23, 1999 /s/Bernard L. Grove, Jr.
- -------------------- ------------------------
Bernard L. Grove, Jr., Director
Date: March 23, 1999 /s/Gail T. Guyton
- --------------------- -----------------
Gail T. Guyton, Director
Date: March 23, 1999 /s/Frank L. Hewitt, III
- --------------------- -----------------------
Frank L. Hewitt, III, Director
Date: March 23, 1999
- ---------------------
----------------------------
Ramona C. Remsberg, Director
Date: March 23, 1999 /s/Jacob R. Ramsburg, Jr.
- --------------------- -------------------------
Jacob R. Ramsburg, Jr., Director
Date: March 23, 1999 /s/Kenneth W. Rice
- --------------------- ------------------
Kenneth W. Rice, Director
Date: March 23, 1999 /s/Rand D. Weinberg
- --------------------- -------------------
Rand D. Weinberg, Director
Date: March 23, 1999 /s/DeWalt J. Willard, Jr.
- --------------------- ------------------------
DeWalt J. Willard, Jr., Director
Exhibit 11
Statement Regarding the Computation of Basic and Diluted Per Share Earnings
1998 1997 1996
---- ---- ----
Basic EPS weighted-average shares
outstanding 10,024,630 9,975,630 9,975,655
Effect of dilutive securities-stock
options 90,018 66,762 34,768
Diluted EPS weighted-average shares
outstanding 10,114,648 10,042,062 10,010,423
Exhibit 12
Statement Regarding the Computation of Ratios
a. The percentage ratio of net income to average total assets is calculated by
dividing the 1998 and 1997 net income of $8,061,000 and $10,096,000,
respectively, by the average total assets for 1998 and 1997 of
$1,148,886,000 and $974,020,000, respectively.
b. The percentage ratio of net income to average shareholders' equity is
calculated by dividing the 1998 and 1997 net income of $8,061,000 and
$10,096,000, respectively, by the average shareholders' equity for 1998 and
1997 of $91,575,000 and $81,748,000, respectively.
c. The percentage ratio of average shareholders' equity to average total
assets is calculated by dividing the 1998 and 1997 average shareholders'
equity of $91,575,000 and $81,748,000, respectively, by the average total
assets for 1998 and 1997 of $1,148,886,000 and $974,920,000, respectively.
d. The percentage ratio of cash dividends declared to net income is calculated
by dividing the 1998 and 1997 cash dividends declared of $4,341,000 and
$3,462,000, respectively, by the net income for 1998 and 1997 of $8,061,000
and $10,096,000, respectively.
FCNB CORP AND SUBSIDIARY
FINANCIAL REPORT
DECEMBER 31, 1998
<PAGE>
THE YEAR IN SUMMARY
FCNB CORP
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997(1) 1996(1)
---- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Net income $ 8,061 $10,096 $6,876
Net income before merger-related expenses 11,222 10,381 8,787
Per share data(2):
Basic earnings .80 1.01 .69
Diluted earnings .80 1.01 .69
Basic earnings before merger-related expenses 1.12 1.04 .88
Diluted earnings before merger-related expenses 1.11 1.03 .88
Cash dividends declared .436 .340 .301
Book value at period-end 9.01 8.81 7.86
Shares outstanding at period-end 10,060,714 9,988,312 9,969,334
Weighted average shares outstanding:
Basic 10,024,630 9,975,300 9,975,655
Diluted 10,114,648 10,042,062 10,010,407
Return on average assets .70% 1.04% .84%
Return on average assets before merger-related expenses .98 1.06 1.07
Return on average shareholders' equity 8.80 12.35 9.24
Return on average shareholders' equity before
merger-related expenses 12.25 12.70 11.81
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997(1) 1996(1)
---- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Total Assets $1,337,224 $1,083,898 $911,945
Loans, net of unearned income 727,566 674,568 583,826
Deposits 851,819 745,486 690,710
Federal funds purchased and securities sold
under agreements to repurchase 92,287 84,827 55,203
Other short-term borrowings 248,155 154,793 78,593
Long-term debt 40,250 -- --
Shareholders' equity 90,610 88,016 78,332
Banking facilities 32 25 25
</TABLE>
- --------
(1) The financial data for 1997 and 1996 has been restated to include the
effects of the acquisitions of Capital Bank, N.A. and Frederick
Underwriters, Inc. in 1998, accounted for as poolings of interests.
(2) Per share data has been restated for the effects of a four-for-three stock
split effected in the form of a 33% stock dividend declared in July 1998 and
paid in August 1998.
<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 principal 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.
Additionally, the Company's future financial performance may be adversely
impacted by the inability of the Company to cause its information,
communications and environmental systems to be capable of correctly recognizing
and processing dates after December 31, 1999 ("Y2K Compliant") as currently
anticipated, and in any event, prior to January 1, 2000. Factors which may cause
actual results to differ from current Y2K Compliance plans include increased
costs of achieving Y2K Compliance, delayed timeframes for implementing and
testing Y2K Compliance measures, and delays by the Company's vendors in becoming
Y2K Compliant, or the inability of such vendors to become Y2K Compliant prior to
January 1, 2000. Additionally, the Company's performance may be adversely
affected by the failure of its customers or governmental authorities to become
Y2K Compliant prior to January 1, 2000. Because of these uncertainties and the
assumptions on which statements in this document are based, actual future
results may differ materially from those contemplated by such statements.
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.
In June 1998, the Company assumed $44.80 million of deposit liabilities, and
purchased $126,000 of loans, $849,000 of fixed assets, and recorded $2.30
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.
In November 1998, the Company consummated the acquisition of Capital Bank,
National Association, Rockville, Maryland ("Capital"), in which Capital was
merged with and into FCNB Bank, Frederick, Maryland, the Company's wholly owned
subsidiary bank (the "Bank"), with the Bank surviving the Merger. The Company
issued 1,776,966 shares of its Common Stock in a tax-free transaction, which was
accounted for as a pooling of interests. As of November 19, 1998, the effective
date of the transaction, Capital had total assets of approximately $165.96
million, deposits of $136.07 million, and total shareholders' equity of $12.36
million. The Company incurred pretax one-time charges of approximately $1.66
million associated with this acquisition. Capital has branches located in
Rockville, Maryland, Tysons Corner,Virginia, and Friendship Heights and Farragut
Square in the District of Columbia.
In December 1998, the Company consummated the acquisition of Frederick
Underwriters, Inc. headquartered in Frederick, Maryland and its affiliated
agencies - Phillips Insurance Agency, Inc. and Carroll County Insurance Agency,
Inc. (collectively, "Frederick Underwriters"). The Company issued 413,317 shares
of FCNB Common Stock in a tax-free transaction, which was accounted for as a
pooling of interests. With 1997 revenues approaching $6 million, Frederick
Underwriters is one of the largest independent insurance agencies in the state
of Maryland.
<PAGE>
On July 20, 1998, FCNB Capital Trust, a newly-formed subsidiary the Company,
issued 1,610,000 of its 8.25% Cumulative Trust Preferred Securities (the
"Preferred Securities") in an underwritten public offering for an aggregate
price of $40.25 million. Proceeds of the Preferred Securities were invested in
the 8.25% Subordinated Debentures (the "Subordinated Debentures") of the
Company. After deducting underwriter's compensation and other expenses of the
offering, net proceeds of $38.54 million were available to the Company to
increase capital and for general corporate purposes, including use in investment
activities and the Bank's lending activities.
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
applicable fair value adjustments. However, the return on average assets, the
return on average equity, and the book value per share at period-end include the
effects of applicable fair value adjustments.
The following analysis of the Company's operating results is presented on a
consolidated basis. Net income was $8.06 million in 1998 compared to $10.10
million in 1997. Basic and diluted earnings per share were $.80 in 1998 compared
to $1.01 in 1997. Net income in 1998 was reduced by one time merger related
charges. The Company has been notified by the Internal Revenue Service (the
Service) that the Service has taken under review the company's treatment of an
income tax reserve for bad debts relating to the Company's 1996 acquisition of
Laurel Bancorp, Inc. ("Laurel") and its subsidiary thrift. As a part of its
acquisition of Laurel, the Company assumed an unrecorded deferred tax liability
of approximately $1.6 million related to the special bad debt deduction for
years before December 1, 1988 which thrifts were allowed. The Company determined
that recognition of the deferred tax liability was not required as a result of
the merger of Laurel and its subsidiary into the Company and its subsidiary
bank. The Service has raised issues related to the availability of an exemption
from recapture of the bad debt reserve. The Company is reviewing the Service's
position. The Company intends to vigorously contest the additional assessment,
but has accrued $1.75 million as a reserve against such liability, which has
been considered a merger-related expense for financial reporting purposes. In
connection with the acquisition of Capital Bank, N.A. ("Capital") in 1998,
accounted for as a pooling of interests, certain costs incurred to effect the
combination were charged to expense and deducted in determining the results of
operations. The specific one-time costs associated with this merger that were
charged to the Company's results of operations principally reflected: (1)
salaries and employee benefits associated with change-in-control payments
totaling approximately $632,000; (2) legal, accounting, financial advisor fees,
and other conversion costs of approximately $1.03 million. Net income before
these specific one-time merger-related costs was $11.22 million in 1998, while
earnings per basic share were $1.12 and per diluted share were $1.11 for 1998.
In connection with the Elkridge Bank consolidation into the Bank in 1997, the
Company incurred $460,000 of merger-related expenses. Net income in 1997 before
the one-time merger-related costs was $10.38 million, or $1.04 per basic share
and $1.03 per diluted share.
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 .70% in 1998 and 1.04% in 1997. Return on average shareholders' equity,
which measures the income earned on the capital invested, was 8.80% in 1998
compared to 12.35% in 1997. However, before the specific one-time merger-related
costs the return on average assets was .98% in 1998 and 1.06% in 1997, and the
return on average shareholders' equity was 12.25% in 1998 and 12.70% in 1997.
During 1998, the Company experienced modest loan growth that resulted in a
$53.00 million increase in loans, net of unearned income, or 7.9% over the level
at the end of 1997.
Noninterest income increased $3.14 million (25.0%) from the level in 1997 while
noninterest expenses increased $6.11 million (17.7%) during the same period.
Included in the noninterest expenses are merger-related costs of $1.94 million
in 1998 and $460,000 in 1997. If these amounts were excluded, noninterest
expenses would have risen in 1998 by $4.63 million (13.6%).
The Company routinely explores opportunities for additional growth and expansion
of its core banking business and related activities, including the acquisition
of companies engaged in banking or other related activities, and internally
generated growth. There can be no assurance, however, that the Company will be
able to grow, or if it does that any such growth or expansion will result in an
increase in the Company's earnings, dividends, book value or market value of its
securities.
<PAGE>
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 interest
paid on 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 1998 and 1997, 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 was $41.91 million in 1998, increasing
7.6% from the $38.95 million in 1997. The Company's average interest-earning
assets increased 17.6% to $1.05 billion during 1998. This increase was funded
primarily by an 18.7% increase in the Company's average interest-bearing
liabilities and by an 18.6% 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 3.98% in 1998, as compared to
4.35% in 1997. This decrease in net interest margin principally 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
1998. This spread decreased by 35 basis points in 1998. During the year, the
rate paid on average interest-bearing liabilities increased 13 basis points,
while the yield on average interest-earning assets decreased 22 basis points.
The average yield on the investment portfolio fell 6 basis points during 1998
compared to 1997. The average yield on the loan portfolio decreased by 13 basis
points, reflecting the impact of competitive pressures. The rates paid on
short-term borrowings decreased by 16 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 1998 in the Company's market area
for both loans and the funding sources needed to satisfy loan demand caused its
net interest spread to narrow. The Company's management feels that competitive
pressures 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.
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.
<PAGE>
Table 1: Comparative Statement Analysis
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------- -----------------------------------
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) rate balance(1) /paid(2)(4) rate
---------- -------- ---- ---------- --------- ---- ---------- ----------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interestearning assets:
Interestbearing
deposits in
other banks $ 844 $ 76 9.01% $ 1,960 $ 100 5.10% $ 2,763 $ 174 6.30%
Federal funds sold 28,637 1,590 5.55 21,620 1,196 5.53 24,136 1,243 5.15
Loans held for sale 3,082 153 4.96 1,105 72 6.52 3,287 237 7.21
Investment securities:
Taxable 322,098 20,535 6.38 238,993 15,292 6.40 180,905 11,539 6.38
Nontaxable 4,840 502 10.36 4,698 517 11.00 6,664 765 11.48
Total invest-
ment securities 326,938 21,037 6.43 243,691 15,809 6.49 187,569 12,304 6.56
Loans(3), net of
unearned income 694,237 62,891 9.06 627,955 57,723 9.19 535,778 49,334 9.21
Total interest-earning
assets 1,053,738 85,747 8.14 896,331 74,900 8.36 753,533 63,292 8.40
Noninterest-earning
assets 91,244 77,061 64,412
Net effect of unrealized
gain (loss) on securities
available for sale 4,004 1,528 266
Total assets $1,148,986 $974,920 $818,211
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW/SuperNOW accounts $ 70,040 $ 1,286 1.84% $ 63,173 $ 1,198 1.90% $ 64,532 $ 1,349 2.09%
Savings accounts 80,677 1,979 2.45 82,423 2,124 2.58 86,198 2,643 3.07
Money market accounts 129,267 4,504 3.48 106,015 3,311 3.12 102,255 3,273 3.20
Certificates of deposit
and other time deposits
less than $100,000 307,207 16,725 5.44 295,839 16,022 5.42 246,671 13,021 5.28
Certificates of deposit
and other time deposits
of $100,000 or more 84,131 4,783 5.69 63,095 3,556 5.64 56,936 2,994 5.26
Federal funds purchased
and securities sold
under agreements to
repurchase 59,301 2,919 4.92 63,717 3,428 5.38 37,173 1,884 5.07
Other short-term
borrowings 184,727 10,112 5.47 111,989 6,307 5.63 47,996 2,883 6.01
Long-term debt 18,069 1,527 8.45 -- -- -- 5,901 406 6.88
Total interest-bearing ------- ------ ---- ------- ------ ---- ------- ------ ----
liabilities 933,419 43,835 4.70 786,251 35,946 4.57 647,662 28,453 4.39
------- ------ ---- ------- ------ ---- ------- ------ ----
Noninterest-bearing
deposits 113,751 95,879 86,537
Noninterest-bearing
liabilities 10,241 11,042 9,622
Total liabilities 1,057,411 893,172 743,821
Shareholders' equity 87,571 80,220 74,124
Net effect of unrealized
gain (loss) on securities
available for sale 4,004 1,528 266
Total shareholders'
equity 91,575 81,748 74,390
Total liabilities
and shareholders'
equity $1,148,986 $974,920 $818,211
Net interest income $41,912 $38,954 $34,839
Net interest spread 3.44% 3.79% 4.01%
Net interest margin 3.98% 4.35% 4.62%
</TABLE>
- ----------
(1) The average daily balances for investment securities exclude the effects of
applicable fair value adjustments.
(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 $2,253,000,
$1,663,000 and $1,344,000 for 1998, 1997 and 1996, respectively.
(4) The interest paid in 1996 includes $108,000 of capitalized construction
period interest.
<PAGE>
Table 2: Rate/Volume Analysis
<TABLE>
<CAPTION>
1998 compared to 1997 1997 compared to 1996 1996 compared to 1995
---------------------------- ------------------------------ -----------------------------
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
Interestearning assets:
Interestbearing deposits
in other banks $ (57) $ 33 $ (24) $ (51) $ (23) $ (74) $ (221) $ (16) $ (237)
Federal funds sold 388 6 394 (130) 83 (47) 427 (184) 243
Loans held for sale 129 (48) 81 (157) (8) (165) 133 22 155
Investment securities:
Taxable 5,319 (76) 5,243 3,705 48 3,753 942 (199) 743
Nontaxable(2) 16 (31) (15) (226) (22) (248) (988) (82) (1,070)
Loans(3) 6,091 (923) 5,168 8,488 (99) 8,389 5,318 (937) 4,381
Total interest
income(6) 11,886 (1,039) 10,847 11,629 (21) 11,608 5,611 (1,396) 4,215
Interest Paid
Interestbearing
liabilities:
Savings deposits(4) $ 811 $ 325 $ 1,136 $ (24)$ (608) $ (632) $ 179 $ (300) $ (121)
Time deposits 1,801 129 1,930 2,919 644 3,563 1,921 (449) 1,472
Federal funds purchased and
securities sold under
agreements to repurchase (238) (271) (509) 1,345 199 1,544 557 (174) 383
Other short-term
borrowings 4,096 (291) 3,805 3,844 (420) 3,424 849 7 856
Long-term debt 1,527 -- 1,527 (406) -- (406) (124) -- (124)
Total interest
paid(5) (6) 7,997 (108) 7,889 7,678 (185) 7,493 3,382 (916) 2,466
Net interest income $ 3,889 $ (931) $ 2,958 $ 3,951 $ 164 $ 4,115 $ 2,229 $ (480) $ 1,749
</TABLE>
- ------------
(1) The volume/rate variance is allocated entirely to changes in rates.
(2) Taxable-equivalent adjustments of $176,000 for 1998, $158,000 for 1997, and
$171,000 for 1996 are included in the calculation of nontaxable investment
securities rate variances.
(3) Taxable-equivalent adjustments of $150,000 for 1998 and $67,000 for 1997 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.
(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 $3.14 million or 25.0% in 1998. Gains realized
from the sale of mortgage loans in the secondary market were $751,000 in 1998
and $407,000 in 1997. 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 will be
highly influenced by the level and direction of future interest rate changes. In
1998 and 1997, servicing fee income totaled $311,000 and $374,000, respectively.
Servicing income on mortgage loans originated and sold however, is expected to
make a smaller contribution to noninterest income since, currently, the Company
is not retaining servicing rights on mortgages sold. The increase in other
operating income includes approximately $1.22 million in 1998 and $600,000 in
1997 attributable to the implementation of a bank-owned life insurance program
that generates tax-exempt income intended to partially offset the cost of
employee benefit programs.
The increase in service fees on deposit accounts is attributable, in part, to
price increases, but primarily to increases in account volume and activity.
The Company is adding new products and services to strengthen its 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 offers customers comprehensive financial planning as
well as investment and insurance products. In 1998, the Company acquired
Frederick Underwriters as discussed in the "General" section above, to increase
its noninterest income and to expand its revenue sources. 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 increased $6.11 million in 1998. However if the merger
related costs of $1.94 million in 1998 and $460,000 in 1997 are excluded from
this comparison, noninterest expenses for 1998 increased $4.63 million. Total
salaries and employee benefits increased $2.61 million or 13.9% in 1998. The
increase in salaries and benefits reflects general merit and cost-of-living
adjustments, plus the cost of additional staffing for the seven First Virginia
branches acquired in June 1998, additional mortgage lending staff hired in
August 1998, and the opening of the Financial Planning division in December
1997.
Net occupancy and equipment expenses increased $650,000 (18.0%) and $752,000
(30.5%), respectively, compared to those incurred during 1997. The increase in
occupancy expenses is primarily attributable to seven new branches discussed
above. The increase in equipment expenses is primarily associated with increased
depreciation and higher ATM and communication expenses.
Other operating expenses increased $615,000 (6.7%) in 1998 compared to the prior
year. See Note 13 to the consolidated financial statements for a schedule
showing a detailed breakdown of the Company's more significant other operating
expenses
<PAGE>
INCOME TAXES
Income tax expense from operating activities decreased to $5.03 million in 1998,
compared to $5.07 million in 1997, reflecting the lower level of pre-tax income
in 1998. The Company's effective tax rate from operating activities was 33.9% in
1998, compared to 33.4% in 1997. 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 its subsidiary
located in the state of Delaware that holds and manages a portion of its
investment portfolio. Note 12 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. For a
discussion related to the thrift bad debt reserve recapture, see the "General"
section.
MARKET RISK, LIQUIDITY AND INTEREST RATE SENSITIVITY
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.
The conduct of our banking business requires that we maintain adequate liquidity
to meet changes in the 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 and its customers.
The Company seeks to limit 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 repaid in a shorter time
period. Accordingly, 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. 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 is
the Company's belief that these accounts turn over at the rate of five percent
(5%) per year. The Company therefore treats them as having maturities staggered
over all periods. 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 $(391.03) million or 29.24% of total assets. Due to their
very liquid nature, the entire balance of money market accounts is assumed to be
repriced within one year.
<PAGE>
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. At December 31, 1998, the
Company had one outstanding interest rate swap instrument which is used 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, 1998, 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, 1998. This instrument matures in November 2004.
The following table, "Interest Rate Sensitivity Analysis," summarizes, as of
December 31, 1998, 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 reprice 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 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.
<PAGE>
Interest Rate Sensitivity Analysis - December 31, 1998
<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 $ 1,334 $ -- $ -- $ -- $ 1,334
Federal funds sold 47,262 -- -- -- 47,262
Loans held for sale:
Fixed rate 5,087 -- -- -- 5,087
Investment securities:(1)
Fixed rate 29,978 -- 106,224 203,731 339,933
Variable rate 36,263 39,583 -- 75,846
Loans:(2)
Fixed rate 106,312 88,565 271,365 95,272 561,514
Variable rate 159,815 -- -- -- 159,815
Total interest-earning
assets $386,051 $128,148 $377,589 $299,003 $1,190,791
INTEREST-BEARING LIABILITIES
Deposits:
NOW/SuperNOW accounts
and savings $ 2,119 $ 6,357 $ 33,903 $127,136 $169,515
Money market accounts 149,450 -- -- -- 149,450
Certificates of deposit and
other time deposits:
Fixed rate 80,795 191,087 107,634 82 379,598
Variable rate 13,936 -- -- -- 13,936
Federal funds purchased and securities
sold under agreements to repurchase 92,287 -- -- -- 92,287
Other short-term borrowings:
Fixed rate 137,155 71,000 40,000 -- 248,155
Long-term debt:
Fixed rate -- -- -- 40,250 40,250
Total interest-bearing
liabilities $475,742 $268,444 $181,537 $167,468 $1,093,191
Interest-earning assets less
interest-bearing liabilities ("Gap") $(89,691) $(140,296) $196,052 $131,535 $97,600
Cumulative Gap $(89,691) $(229,987) $ (33,935) $97,600 $97,600
Cumulative Gap as a percentage of
total assets (6.71)% (17.20)% 2.54% 7.30% 7.30%
</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.
<PAGE>
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 ramping technique to determine the effects on the
Company's net interest income, assuming a gradual increase or decrease in
interest rates. 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. The model results as of December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Change in Interest Rate Assumption +100bp +200bp +300bp -100bp -200bp -300bp
- ---------------------------------- ------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income-increase (decrease) $(1,107) $(2,319) $(3,357) $1,088 $2,070 $2,471
Net interest income- % change (2.64) (5.53) (8.00) 2.59 4.93 5.89
</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, 1998 and 1997, there were no deferred gains or losses
arising from the termination of instruments qualifying for accrual accounting
prior to maturity.
INVESTMENT PORTFOLIO
Investment securities represent the second largest component of earning assets,
at 28% of average earning assets in 1998 and 25% in 1997. 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 $326.94 million in 1998, compared to $243.69
million in 1997. The average tax-equivalent yield on the portfolio decreased 6
basis points to 6.43% in 1998. During 1998, the Company increased the investment
portfolio by approximately $64.56 million in arbitrage transactions. An
arbitrage transaction is one in which the Company borrows funds from the Federal
Home Loan Bank of Atlanta and purchases investment securities. The Company will
recognize the spread between the yield earned from the investment securities and
the rate paid on the borrowed funds. The investment portfolio also increased due
to the funds received from the Trust Preferred Securities transaction in July
1998.
As of December 31, 1998, the gross unrealized losses in the Company's investment
portfolio were $46,000 in the held-to-maturity investment portfolio and $2.17
million in the available-for-sale investment portfolio compared to $212,000 and
$235,000, respectively, as of December 31, 1997. As of December 31, 1998, the
gross unrealized gains in the Company's investment portfolio were $470,000 in
the held-to-maturity investment portfolio and $8.46 million in the
available-for-sale investment portfolio compared to $553,000 and $5.80 million,
respectively, as of December 31, 1997. The investment portfolio had an average
life of 5.6 years, with an estimated average tax-equivalent yield of 6.12%, at
December 31, 1998. 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.
<PAGE>
INVESTMENT PORTFOLIO DISTRIBUTION-BOOK VALUE (AMORTIZED COST)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998(1) 1997(1) 1996(1)
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury and other U.S. government
agencies and corporations $338,777 $235,080 $188,855
State and political subdivisions 5,670 3,690 5,138
Other securities 100,480 34,894 23,927
Total $444,927 $273,664 $217,920
</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, 1998
<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 $10,006 6.37% $14,370 5.94% $ -- --% -- --%
State and political
subdivisions (1) 706 14.60 2,392 11.72 1,385 7.75 1,186 7.22
Total $10,712 6.92% $16,762 6.76% $1,385 7.75% $1,186 7.22%
</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.
ANALYSIS OF INVESTMENT PORTFOLIO (AVAILABLE-FOR-SALE) - DECEMBER 31, 1998
<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 $ 51,396 5.95% $111,181 5.93% $117,087 6.22% $34,738 6.66%
Other securities -- -- 10,509 6.41 35,940 6.89 54,031 5.16
Total $ 51,396 5.95% $121,690 5.97% $153,027 6.38% $88,769 5.74%
</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, 1998.
<PAGE>
LOAN PORTFOLIO
During 1998, the Company sold $49.54 million of conforming residential mortgage
loans to Countrywide Mortgage (Countrywide) and other private investors, and
held additional loans totaling $5.09 million at December 31, 1998, whereas in
1997, the Company sold loans totaling $15.10 million and held additional loans
for sale totaling $909,000 at December 31, 1997. The average balance of loans
held for sale for 1998 was $3.08 million, and in 1997 was $1.11 million, which
generated average yields of 4.96% and 6.52%, 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 typically 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.
<PAGE>
LOAN DISTRIBUTION
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1998 % 1997 % 1996 % 1995 % 1994 %
---- - ---- - ---- - ---- - ---- -
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction $ 113,321 16% $ 80,076 12% $ 56,931 10% $ 39,159 8% $ 26,652 6%
Real estate-mortgage 430,764 59 424,274 63 384,495 66 334,981 67 308,777 69
Commercial and agricultural 118,959 16 106,555 16 85,011 14 71,258 14 62,626 14
Consumer 64,522 9 63,663 9 57,389 10 55,885 11 47,759 11
Total loans, net of
unearned income 727,566 100% 674,568 100% 583,826 100% 501,283 100% 445,814 100%
Less: Allowance for
credit losses (7,198) (6,701) (5,997) (6,365) (5,953)
Net loans $ 720,368 $ 667,867 $ 577,829 $ 494,918 $ 439,861
</TABLE>
MATURITY AND INTEREST RATE SENSITIVITY OF LOANS-DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Maturing in: One year or less After 1 thru 5 years After 5 years
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Variable Fixed Variable Fixed Variable
interest interest interest interest interest interest
rates rates rates rates rates rates Total
- -----------------------------------------------------------------------------------------------------------------------------------
( dollars in thousands)
Real estate - construction $ 74,239 $ 21,086 $ 16,613 $ 537 $ 846 $ - $ 113,321
Real estate - mortgage(1) 65,135 58,062 161,835 58,918 85,960 854 $ 430,764
Commercial and agricultural 45,754 27,791 39,773 2,261 3,323 57 $ 118,959
Consumer 4,232 6,008 49,139 - 5,143 - $ 64,522
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned income $ 189,360 $ 112,947 $ 267,360 $ 61,716 $ 95,272 $ 911 $ 727,566
</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, 1998.
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.
<PAGE>
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.
The allowance for credit losses was $7.20 million, or 1.00% of total loans, net
of unearned income, at December 31, 1998, compared to $6.70 million, or .99% as
of December_31, 1997. The allowance for credit losses to nonperforming loans was
90.1% and 115.3% as of December 31, 1998 and 1997, respectively.
The Company's provision for credit losses in 1998 was $1.77 million compared to
$1.52 million in 1997. Net credit losses in 1998 were less than the provision
for credit losses by $497,000. Net credit losses in 1997 were less than the
provision for credit losses by $704,000.
Total nonperforming assets as of December 31, 1998 totaled $9.83 million,
reflecting a $411,000 increase from the $9.41 million in nonperforming assets as
of December 31, 1997. Total nonperforming assets, including properties acquired
through foreclosure, represent .73% and .87% of total assets as of December 31,
1998 and 1997 respectively.
Nonperforming assets at December 31, 1998, include $6.42 million of nonaccrual
loans, $1.57 million of loans past due 90 days or more, $1.84 million of
foreclosed properties, consisting principally of commercial properties.
<PAGE>
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,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans(1) $ 6,419 $ 4,646 $ 5,838 $ 4,396 $ 4,578
Restructured loans(2) -- 128 31 505 136
Past due loans(3) 1,571 1,039 2,531 132 615
Total nonperforming loans 7,990 5,813 8,400 5,033 5,329
Foreclosed properties(4) 1,835 3,601 3,833 3,276 2,941
Total nonperforming
assets $ 9,825 $ 9,414 $ 12,233 $ 8,309 $ 8,270
Nonperforming assets to
total loans (net of
unearned income) and foreclosed
properties at period-end 1.35% 1.39% 2.08% 1.34% 1.43%
Nonperforming assets to total
assets at period-end .73% .87% 1.35% 1.08% 1.16%
Allowance for credit losses
to nonperforming loans at
period-end 90.1% 115.3% 71.4% 126.5% 111.7%
</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.
(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 $17.33 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, 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.
<PAGE>
There were no other interest-bearing assets at December 31, 1998, classifiable
as nonaccrual, past due, restructured or problem assets.
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average total loans outstanding during year $694,237 $627,955 $535,778 $ 479,798 $412,631
Allowance at beginning
of year $ 6,701 $ 5,997 $ 6,364 $ 5,953 $ 5,401
Chargeoffs:
Real estateconstruction -- 588 -- -- --
Real estatemortgage 177 213 249 451 48
Commercial and agricultural 625 306 858 302 217
Consumer 878 292 317 174 129
Total charge-offs 1,680 1,399 1,424 927 394
Recoveries:
Real estateconstruction -- 24 -- -- --
Real estatemortgage 50 24 34 5 --
Commercial and agricultural 113 464 70 202 169
Consumer 244 67 83 51 72
Total recoveries 407 579 187 258 241
Net chargeoffs 1,273 820 1,237 669 153
Additions to allowance charged
to operating expenses 1,770 1,524 408 1,080 705
Other transfers and allowance on loans
acquired with purchased entity -- -- 462 -- --
Allowance at end of year 7,198 $6,701 $5,997 $6,364 $5,953
Ratio of net chargeoffs
to average total loans .18% .13% .23% .14% .04%
</TABLE>
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,
----------------------------------------------------------------------------------------------
1998 %(1) 1997 %(1) 1996 %(1) 1995 %(1) 1994 %(1)
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estateconstruction $ 926 16% $ 557 12% $1,059 10% $ 806 8% $ 743 6%
Real estatemortgage 3,616 59 3,216 63 2,720 66 2,921 67 2,704 69
Commercial and agricultural 1,639 16 1,270 16 1,023 14 1,502 14 1,189 14
Consumer 337 9 444 9 580 10 483 11 345 11
Unallocated 680 -- 1,214 -- 615 -- 652 -- 972 --
Total Allowance $ 7,198 100% $6,701 100% $5,997 100% $6,364 100% $5,953 100%
</TABLE>
- ------------
(1) Percent of loans in each category to total loans, net of unearned income.
<PAGE>
DEPOSITS
AVERAGE DEPOSITS AND AVERAGE RATES
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
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>
Noninterestbearing
demand deposits $113,751 --% $ 95,879 --% $ 86,537 --%
Interestbearing
demand deposits 199,307 2.91 169,188 2.66 166,787 2.77
Savings deposits 80,677 2.45 82,423 2.58 86,198 3.07
Certificates of deposit
and other time deposits 391,338 5.50 358,934 5.46 303,607 5.28
Total average deposits $785,073 3.73% $706,424 3.71% $643,129 3.62%
</TABLE>
MATURITIES OF TIME DEPOSITS-$100,000 OR MORE
December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Maturing in:
3 months or less $45,500 $29,408 $35,331
Over 3 months through 6 months 11,587 18,686 12,791
Over 6 months through 12 months 12,817 21,227 11,681
Over 12 months 15,288 18,175 13,323
$85,192 $87,496 $73,126
SHORTTERM BORROWINGS
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE(1)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Total outstanding at year-end $ 92,287 $84,827 $55,203
======== ======= =======
Average amount outstanding during the year $ 59,301 $63,717 $37,173
======== ======= =======
Maximum amount outstanding at any month-end $105,974 $86,896 $58,401
======== ======= =======
Weighted-average interest rate at year-end 4.62% 5.46% 5.12%
======== ======= =======
Weighted-average interest rate during the year 4.92% 5.38% 5.07%
======== ======= =======
</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.
<PAGE>
OTHER SHORT-TERM BORROWINGS(2)
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Total outstanding at year-end $248,155 $154,793 $78,593
===================================
Average amount outstanding during the year $184,727 $111,989 $47,996
===================================
Maximum amount outstanding at any month-end $248,155 $154,793 $78,593
===================================
Weighted-average interest rate at year-end 5.17% 5.36% 6.01%
===================================
Weighted-average interest rate during the year 5.47% 5.63% 6.01%
===================================
</TABLE>
- --------------
(2) Primarily reflects borrowings under a secured lending arrangement with the
Federal Home Loan Bank of Atlanta.
A portion of the increase in other short-term borrowings is attributable to
arbitrage transactions. For a discussion about these arbitrage transactions,
please see the "Investment Portfolio" section above.
Included in other short-term borrowings at December 31, 1998, are the following
borrowings from the Federal Home Loan Bank of Atlanta. These borrowings have
scheduled maturity dates but the majority are callable at the sole discretion of
the Federal Home Loan Bank of Atlanta within one year from the date of their
initial funding. The Company has the option to terminate the remainder of these
agreements upon the repricing date. 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, 1998
Due in Interest rate range Amount
------ ------------------- ------
(dollars in thousands)
<S> <C> <C> <C>
2000 5.28% $ 16,000
2002 5.30% 29,000
2003 5.01% - 5.26% 25,000
2004 5.36% 10,000
2007 5.03% - 5.27% 72,000
2008 4.19% - 5.37% 51,000
Total $203,000
</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 to average assets (as defined). Management
believes, as of December 31, 1998 and 1997 that the Company and the Bank meet
all capital adequacy requirements to which they are subject. See Note 14 to the
consolidated financial statements for a table depicting compliance with
regulatory capital requirements.
As of December 31, 1998, the most recent notification from the regulatory agency
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table in Note 14. There are no conditions or events since
that notification which management believes have changed the Bank's category.
For a discussion related to the Trust Preferred Securities, see Note 9,
Long-term debt.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required for this section can be located in the "Risk Management
Instruments" section, the "Market Risk" section, and the Notes to the
Consolidated Financial Statements.
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 Year 2000 problem involves computer processing problems and failures arising
from the fact that some existing computer programs use only the last two digits
to refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of "19". This section will highlight how the Company is
currently addressing its business areas which may be affected by the Year 2000
problem.
Year 2000 Readiness Planning
The Company has prepared a Year 2000 plan which includes contacting all of the
software vendors that maintain the computer programs that the Company relies
upon. As of December 31, 1998, the Company has performed risk assessments of
funds providers, funds takers, fiduciary activities and systems and has assessed
the Year 2000 preparedness of suppliers of data processing services to the
Company. The Company's primary supplier of data processing services also has
adopted a Year 2000 readiness plan and timetable to make the changes necessary
for it to provide services in the Year 2000, and has provided written assurances
to the Company of its progress. That supplier has been examined for Y2K
readiness by federal bank examiners. The Company is also monitoring the progress
of its other suppliers of data processing services.
<PAGE>
As of December 31, 1998, the Company has implemented its customer awareness
program which includes communications of Y2K readiness efforts through statement
stuffers, direct mailings, brochures, newspaper and television advertisements,
letters and our Internet site. The Company has additionally assessed the Year
2000 preparedness of its large customers and has contacted large commercial loan
and deposit customers to determine their readiness.
As of December 31, 1998, the Company was in the process of testing and
implementing necessary changes in hardware and software. At this time, most of
these changes in hardware and software have been tested. The Company will
continue to evaluate its systems throughout the remainder of 1999.
Additional steps must be taken to achieve Y2K compliance.
The Company is in the banking industry, which is heavily regulated. The
Company's primary regulator is the Federal Reserve Bank. The Company is on track
to be in compliance with all Federal Reserve regulations related to the Year
2000 issue.
Year 2000 Related Costs
Since many of the programs used by the Company are "off-the-shelf" as compared
to "highly customized", the cost to address Year 2000 related issues for these
programs will not be as high as the costs for other companies that rely more on
"highly customized" software. The Company has a budget for software, hardware
and consulting costs of approximately $500,000. As of December 31, 1998, the
Company has expended $142,000 for these costs. The Company estimates it will
incur $250,000 in costs in 1999. The Company estimates these costs will be made
up of hardware and software upgrades, consultant fees, human resources, and
testing fees. This area is changing very rapidly and the actual costs incurred
by the Company may differ from what has been anticipated.
Year 2000 Related Risks
An estimation of the efforts of the Company in addressing the Year 2000 issue in
a successful and timely manner depends to a large extent, in addition to the
Company's own effort, on the efforts of the Company's data processing service
provider as well as the technology and services of other service providers. The
failure of the Company, its principal data processing provider, its customers,
or of other service providers, including utilities and government agencies, to
be Year 2000 compliant in a timely manner could have a negative impact on the
Company's business, including but not limited to an inability to provide
accurate processing of customer transactions, and delays in loan collection
practices. The Company's belief that it, and its primary suppliers of data
processing services, will achieve Year 2000 compliance, are based on a number of
assumptions and on statements made by third parties, involve events and actions
which may be beyond the control of the Company, and are subject to uncertainty.
While the Company has been making efforts to prepare those items under its
control, it is not able to predict the effects, if any, of the public's reaction
to the Year 2000 on the Company, financial markets or society in general.
Contingency Planning
The Company has in place a Disaster Recovery Plan for its computer operations
facility and a business resumption plan for its various departments. This
Disaster Recovery Plan provides for mission-critical and support operations to
be conducted at our off-site disaster recovery facility. The mission-critical
systems will have been tested at the Disaster Recovery site; therefore, in the
event the Company cannot perform its own core business processes, the existing
FCNB Bank Disaster Recovery Plan would be followed in order to continue
operations.
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 1997-1996
EARNINGS SUMMARY:
Net income was $10.10 million in 1997 compared to $6.88 million for 1996. Basic
and diluted earnings per share were $1.01 in 1997 compared to $0.69 for 1996.
Net income before merger-related expenses was $10.38 million in 1997 and $8.79
million in 1996, while basic earnings per share were $1.04 in 1997, diluted
earnings per share were $1.03 in 1998 and basic and diluted earnings per share
were $0.88 for 1996.
Return on average assets was 1.04% in 1997 compared to .84% for 1996. Return on
average shareholders' equity was 12.35% in 1997 compared to 9.24% in 1996.
However, before merger-related expenses the return on average assets was 1.06%
in 1997 and 1.07% in 1996, and the return on average shareholders equity was
12.70% and 11.81% in 1997 and 1996, respectively.
NET INTEREST INCOME: On a fully taxable-equivalent basis, net interest income
increased $4.12 million or 11.8% in 1997 and $1.75 million or 5.3% in 1996.
In 1997, the net interest margin on average total interest-earning assets
decreased to 4.35% from 4.62% in 1996. 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 $1.58 million or 14.4% in
1997 and by $333,000 or 3.1% in 1996.
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 $407,000 from the sale of conforming mortgage loans and
generated $374,000 in related servicing fees in 1997. During 1996, the Company
realized gains from loan sales and servicing fee income of $305,000 and
$490,000, 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 decreased $319,000, but excluding
merger-related costs of $460,000 in 1997 and $2.87 million in 1996 would have
increased $2.09 million.
Increases in salaries and employee benefits of $813,000 or 4.5% in 1997 and
$785,000 or 4.6% in 1996, primarily reflect the effects of an increase in the
number of Company personnel during these periods.
Net occupancy and equipment expenses in 1997 increased $91,000 (2.6%) and
$466,000 (23.3%), respectively, compared to those incurred in 1996. 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 increased $716,000 or 8.5% in 1997, but decreased
$93,000 or 1.1% in 1996. See Note 13 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 increased to $5.07 million in 1997, compared to
$3.89 million in 1996.
<PAGE>
SELECTED FINANCIAL DATA
The following table for the years 1997, 1996, 1995 and 1994 has been restated to
include the effects of the acquisitions of Capital and Frederick Underwriters in
1998, accounted for as poolings of interests and 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>
====================================================================================================================================
Year ended December 31, 1998 1997 1996 1995 1994
====================================================================================================================================
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Total interest income $85,421 $74,675 $63,802 $58,463 $50,123
Total interest expense (1) 43,835 35,978 28,725 25,721 19,132
====================================================================================================================================
Net interest income 41,586 38,697 35,077 32,742 30,991
Provision for credit losses 1,770 1,524 408 1,080 705
====================================================================================================================================
Net interest income after
provision for credit losses 39,816 37,173 34,669 31,662 30,286
Net securities gains (losses) 1,481 733 440 123 393
Noninterest income (excluding
net securities gains (losses)) 14,184 11,797 10,514 10,498 9,049
Noninterest expenses 40,644 34,537 34,856 30,604 28,603
====================================================================================================================================
Income before provision for income taxes 14,837 15,166 10,767 11,679 11,125
====================================================================================================================================
Provision for income taxes:
Operating activities 5,026 5,070 3,891 3,198 3,054
Thrift bad debt reserve recapture 1,750 -- -- -- --
====================================================================================================================================
Income tax expense 6,776 5,070 3,891 3,198 3,054
====================================================================================================================================
Net income 8,061 10,096 6,876 8,481 8,071
Other comprehensive income (loss),
net of taxes 212 2,919 (34) 2,875 (3,359)
====================================================================================================================================
Comprehensive income $ 8,273 $13,015 $6,842 $11,356 $4,712
- ------------------------------------------------------------------------------------------------------------------------------------
Net income before merger-related expenses $11,222 $10,381 $8,787 $8,784 $8,298
====================================================================================================================================
Per Share Data: (2)
Basic earnings $0.80 $1.01 $0.69 $0.86 $0.83
Diluted earnings $0.80 $1.01 $0.69 $0.86 $0.83
Basic earnings before merger-related
expenses $1.12 $1.04 $0.88 $0.90 $0.86
Diluted earnings before merger-related
expenses $1.11 $1.03 $0.88 $0.89 $0.85
Cash dividends declared $0.436 $0.340 $0.301 $0.301 $0.269
Book value at period-end $9.01 $8.81 $7.86 $7.56 $6.76
Shares outstanding at period-end 10,060,714 9,988,312 9,969,334 9,844,735 9,516,361
Weighted average shares outstanding:
Basic 10,024,630 9,975,300 9,975,655 9,813,797 9,691,289
Diluted 10,114,648 10,042,062 10,010,423 9,839,105 9,712,245
Other Data (At Year-End):
Total loans, net of unearned income $727,566 $674,568 $583,826 $501,283 $445,814
Total assets 1,083,898 911,945 771,038 716,609
1,337,224
Total deposits 851,819 745,486 690,710 615,084 576,052
Federal funds purchased and securities
sold under agreement to repurchase 92,287 84,827 55,203 32,251 29,896
Other short-term borrowings 248,155 154,793 78,593 34,253 30,953
Long-term debt 40,250 5,680 7,000
Total shareholders' equity 90,610 88,016 78,332 74,382 64,350
Consolidated Ratios:
Return on average total assets 0.70% 1.04% 0.84% 1.15% 1.19%
Return on average total assets before
merger-related expenses 0.98% 1.06% 1.07% 1.19% 1.22%
Return on average shareholders' equity 8.80% 12.35% 9.24% 12.25% 12.97%
Return on average shareholders' equity
before merger-related expenses 12.25% 12.70% 11.81% 12.69% 13.34%
Average equity to average assets 7.97% 8.39% 9.09% 9.40% 9.16%
Cash dividends declared to net income 54.45% 34.29% 43.00% 34.82% 31.11%
</TABLE>
- ----------
(1) Net of $108,000 and $300,000 of capitalized construction period interest in
1996 and 1995, respectively.
(2) Per share data for 1997, 1996, 1995, and 1994 has been restated for the
effects of a four-for-three stock split effected in the form of a 33% stock
dividend paid in August 1998.
<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
---- ----
(dollars in thousands, except per share amounts)
<S> <C> <C>
ASSETS
Cash and due from banks $ 30,500 $ 32,136
Interest-bearing deposits in other banks 1,334 755
Federal funds sold 47,262 41,031
Cash and cash equivalents 79,096 73,922
Loans held for sale 5,087 909
Investment securities held to maturity - fair value
of $30,469 in 1998 and $49,230 in 1997 30,045 48,889
Investment securities available for sale - at fair value 421,176 230,293
Loans 727,589 674,944
Less: Allowance for credit losses (7,198) (6,701)
Unearned income (23) (376)
Net loans 720,368 667,867
Bank premises and equipment 25,280 24,665
Other assets 56,172 37,353
Total assets $1,337,224 $1,083,898
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 139,320 $110,646
Interest-bearing deposits 712,499 634,840
Total deposits 851,819 745,486
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 92,287 84,827
Other short-term borrowings 248,155 154,793
Long term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 40,250 -
Accrued interest and other liabilities 14,103 10,776
Total liabilities 1,246,614 995,882
COMMITMENTS AND CONTINGENCIES (Notes 10 & 17)
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; 10,060,714 in 1998
and 8,017,378 in 1997 shares issued
and outstanding 10,061 8,017
Capital surplus 46,597 49,950
Retained earnings 30,082 26,391
Accumulated other comprehensive income 3,870 3,658
Total shareholders' equity 90,610 88,016
Total liabilities and shareholders' equity $1,337,224 $1,083,898
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
FCNB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $62,894 $57,728 $50,232
Interest and dividends on investment
securities:
Taxable 19,466 14,692 11,089
Tax exempt 326 341 505
Dividends 1,069 618 539
Interest on federal funds sold 1,590 1,196 1,263
Other interest income 76 100 174
Total interest income 85,421 74,675 63,802
Interest expense:
Interest on deposits 29,277 26,211 23,556
Interest on federal funds purchased and
securities sold under agreements
to repurchase 2,919 3,428 1,884
Interest on other short-term
borrowings 10,112 6,082 2,783
Interest on long-term debt 1,527 257 502
Total interest expense 43,835 35,978 28,725
Net interest income 41,586 38,697 35,077
Provision for credit losses 1,770 1,524 408
Net interest income after provision
for credit losses 39,816 37,173 34,669
Noninterest income:
Service fees 4,154 3,403 2,931
Insurance commissions 5,332 5,668 5,631
Net securities gains 1,481 733 440
Gain on sale of loans 751 407 305
Income from bank-owned life insurance 1,222 605 --
Other operating income 2,725 1,714 1,647
Total noninterest income 15,665 12,530 10,954
Noninterest expenses:
Salaries and employee benefits 21,464 18,850 18,037
Occupancy expenses, net 4,267 3,617 3,526
Equipment expenses 3,218 2,466 2,000
Merger-related expenses 1,936 460 2,865
Other operating expenses 9,759 9,144 8,428
Total noninterest expenses 40,644 34,537 34,856
Income before provision for income taxes 14,837 15,166 10,767
Provision for income taxes:
Operating activities 5,026 5,070 3,891
Thrift bad debt reserve recapture 1,750 -- --
Income tax expense 6,776 5,070 3,891
Net income 8,061 10,096 6,876
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period, net of taxes
of $711, $2,118, and $149 1,117 3,369 236
Less: reclassification adjustment for gains
included in net income, net of taxes of $576, $283, and $170 905 450 270
Other comprehensive income (loss), net of tax 212 2,919 (34)
Comprehensive income $ 8,273 $13,015 $ 6,842
------- ------- -------
Basic and diluted earnings per share $0.80 $1.01 $0.69
</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, 1998, 1997 and 1996
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Other Total
Shares Common Capital Retained Comprehensive Shareholders'
outstanding stock Surplus Earnings Income Equity
----------- ----- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,298,361 $ 5,298 $26,733 $33,658 $ 530 $66,219
Effects of pooled entities 2,073,633 2,074 6,428 (582) 243 8,163
Net income -- -- -- 6,876 -- 6,876
Dividend reinvestment and stock purchase plan -- -- -- (11) -- (11)
Issuance of common stock 27,507 27 103 -- -- 130
Repurchase of common stock (30,000) (30) (550) -- -- (580)
Stock option transactions 96,199 97 469 -- -- 566
Cash dividends declared ($0.301 per share) -- -- -- (2,997) -- (2,997)
Change in fair value of securities available for
sale, net -- -- -- -- (34) (34)
========= ======= ======= ======= ====== =======
Balance at December 31, 1996 7,465,700 7,466 33,183 36,944 739 78,332
Net income -- -- -- 10,096 -- 10,096
Dividend reinvestment and stock purchase plan -- -- -- (18) -- (18)
Issuance of common stock 3,954 4 22 -- -- 26
Shares issued with stock dividend 536,503 536 16,633 (17,169) -- --
Repurchase of common stock (10,000) (10) (203) -- -- (213)
Stock option transactions 21,221 21 315 -- -- 336
Cash dividends declared($0.340 per share) -- -- -- (3,462) -- (3,462)
Change in fair value of securities available for
sale, net -- -- -- -- 2,919 2,919
========= ======= ======= ======= ====== =======
Balance at December 31, 1997 8,017,378 8,017 49,950 26,391 3,658 88,016
Net income -- -- -- 8,061 -- 8,061
Dividend reinvestment and stock purchase plan -- -- -- (29) -- (29)
Issuance of common stock 3,899 4 81 -- -- 85
Shares issued with stock split effected in the form
of a stock dividend 1,973,335 1,973 (1,973) -- -- --
Repurchase of common stock (92,500) (92) (2,016) -- -- (2,108)
Stock option transactions 158,602 159 555 -- -- 714
Cash dividends declared($0.436 per share) -- -- -- (4,341) -- (4,341)
Change in fair value of securities available for
sale, net -- -- -- -- 212 212
Balance at December 31, 1998 10,060,714 $10,061 $46,597 $30,082 $3,870 $90,610
</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,
--------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,061 $ 10,096 $ 6,876
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,812 2,288 1,933
Provisions for credit losses and foreclosed properties 1,822 1,559 439
Deferred income taxes (benefits) (164) 1,101 (70)
Accretion of net loan origination fees (1,209) (781) (496)
Net securities gains (1,481) (733) (440)
Net (gain) loss on sales of property 101 204 (241)
Increase (decrease) in other assets (1,399) (1,106) 266
Decrease (increase) in loans held for sale (4,178) 2,253 (800)
Increase (decrease) in accrued interest and other liabilities 3,039 1,856 (1,164)
Other operating activities (14) (457) (250)
Net cash provided by operating activities 7,390 16,280 6,553
Cash flows from investing activities:
Proceeds from sales of investment securities
available for sale 53,933 62,068 33,434
Proceeds from maturities of investment securities
available for sale 144,467 66,678 37,788
Proceeds from maturities of investment securities
held to maturity 9,991 12,257 25,286
Purchases of investment securities available for sale (376,134) (177,896) (122,467)
Purchases of investment securities held to maturity (2,070) (18,031) (22,708)
Net increase in loans (53,377) (91,371) (55,341)
Purchases of bank premises and equipment (2,359) (1,957) (5,498)
Proceeds from dispositions of property 1,444 939 2,166
Purchase of foreclosed properties (26) (159) (128)
Purchases of investments in bank-owned life insurance (15,000) (13,540) --
Acquisition of business, net of cash acquired 41,836 -- (2,981)
Net cash (used in) investing activities (197,295) (161,012) (110,449)
Cash flows from financing activities:
Net increase in noninterest-
bearing deposits, NOW accounts, money
market accounts, and savings accounts $ 47,406 $ 5,766 $ 26,552
Net increase in time deposits 14,125 49,011 20,064
Net increase in short-term borrowings 100,822 106,064 65,634
Proceeds from long-term debt 40,250 1,833 --
Payments on long-term debt -- (2,181) (5,680)
Debt issuance costs 1,710 -- --
Dividend reinvestment and stock purchase plan (29) (18) (11)
Proceeds from issuance of common stock 664 210 578
Repurchase of common stock (2,108) (213) (580)
Dividends paid (4,341) (3,462) (2,997)
Net cash provided by financing activities 195,079 157,010 103,560
Net increase (decrease)in cash and cash equivalents 5,174 12,278 (336)
Cash and cash equivalents-beginning of year 73,922 61,644 61,980
Cash and cash equivalents-end of year $ 79,096 $ 73,922 $61,644
Supplemental cash flow information:
Noncash investing and financing activities:
Foreclosed properties acquired in settlement of loans $440 $589 $720
Transfers from foreclosed properties to loans -- -- $1,165
Bank premises transferred to other assets -- -- $1,190
Surplus from stock option transactions $135 $152 $118
Details of acquisition:
Fair value of assets acquired $ 2,096 -- $35,130
Fair value of liabilities assumed (45,090) -- (31,616)
Purchase price in excess of the net assets acquired 2,273 -- 3,212
Cash paid (received) (40,721) -- 6,726
Less cash acquired 1,115 -- 3,745
Net cash paid (received) for acquisition $ (41,836) -- $2,981
</TABLE>
The Company paid interest of $43,062, $34,878 and $28,846 in 1998, 1997 and
1996, respectively. Income taxes paid by the Company were $6,714, $2,728 and
$4,323 in 1998, 1997 and 1996 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 that provides its
customers with banking and non-banking financial services through its principal
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. Its principal market
areas encompass Frederick, Baltimore, Carroll, Howard, Prince George's, Anne
Arundel and Montgomery counties in Maryland, Washington, D.C., and Fairfax
County, Virginia. 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.
Comprehensive income:
On January 1, 1998, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 130, "Reporting Comprehensive Income (Statement 130)."
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 the Company's net
income, change in equity components under comprehensive income reporting include
the net change in unrealized gain or loss on available-for-sale securities.
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.
<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 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.
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 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.
<PAGE>
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. 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.
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:
Earnings per share ("EPS") are disclosed as basic and diluted. 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic EPS weighted-average shares outstanding 10,024,630 9,975,300 9,975,655
Effect of dilutive securities-stock options 90,018 66,762 34,768
Diluted EPS weighted-average shares outstanding 10,114,648 10,042,062 10,010,423
</TABLE>
<PAGE>
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, 1998 and 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.
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 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:
In June 1998, the Company assumed $44.80 million of deposit liabilities, and
purchased $126,000 of loans, $849,000 of fixed assets, and recorded $2.30
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. The
acquisition of these branches has been accounted for under the purchase method
of accounting.
<PAGE>
In November 1998, the Company consummated the acquisition of Capital Bank,
National Association, Rockville, Maryland ("Capital"), in which Capital was
merged with and into FCNB Bank, Frederick, Maryland, the Company's wholly owned
subsidiary bank (the "Bank"), with the Bank surviving the Merger. The Company
issued 1,776,966 shares FCNB Common Stock in a tax-free transaction, which was
accounted for as a pooling of interests. As of November 19, 1998, the effective
date of the transaction, Capital had total assets of approximately $165.96
million, deposits of $136.07 million, and total shareholders' equity of $12.36
million. The Company's 1998 consolidated statements of income include total
income and net income of Capital for the period during 1998 prior to its
acquisition totaling $12.17 million and $1.08 million, respectively. The Company
incurred pretax one-time charges of approximately $1.66 million. Capital has
branches located in Rockville, Maryland, Tysons Corner,Virginia, and Friendship
Heights and Farraguat Square in the District of Columbia.
In December 1998, the Company consummated the acquisition of Frederick
Underwriters, Inc. headquartered in Frederick, Maryland and its affiliated
agencies - Phillips Insurance Agency, Inc. and Carroll County Insurance Agency,
Inc. (collectively, "Frederick Underwriters"). The Company issued approximately
413,317 shares of FCNB Common Stock in a tax-free transaction, which was
accounted for as a pooling of interests. The Company's 1998 consolidated
statements of income include total income and net (loss) of Frederick
Underwriters for the period during 1998 prior to its acquisition totaling
$5,850,000 and $(88,200), 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.
The following tables present the combined and separate results of operations for
Capital, Frederick Underwriters and the Company for the periods preceding the
acquisitions and also reflect the unaudited pro forma consolidated results of
operations of the Company and Harbor Investment Corporation as if its
acquisition in April 1996 had occurred on January 1, 1996.
Year ended December 31, 1996
-------------------------------------------
Total Net Basic and diluted
income income earnings per share
------ ------ ------------------
(dollars in thousands, except per share data)
Company $58,914 $ 5,867 $0.74
Capital 9,835 931
Combined 68,749 6,798 0.71
Underwriters 6,007 78
Combined 74,756 6,876 0.69
Harbor 1,037 81
Pro forma (unaudited) $75,793 $ 6,957 $0.70
Year ended December 31, 1997
--------------------------------------------
Total Net Basic and diluted
income income earnings per share
------ ------ ------------------
(dollars in thousands, except per share data)
Company $69,311 $8,803 $1.12
Capital 12,282 1,223
Combined 81,593 10,026 $1.05
Underwriters 5,612 70
Combined $87,205 $10,096 $1.01
<PAGE>
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, 1996, 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 and other conversion costs.
NOTE 3. COMPENSATING BALANCES:
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 $45,000 at December
31, 1998 and $40,000 at December 31, 1997. In addition, for the reserve
maintenance period in effect at December 31, 1998 and 1997, the Bank was
required to maintain average daily balances totaling $2,341,000 and $7,323,000,
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, 1998 and 1997 are as follows:
HELD-TO-MATURITY PORTFOLIO
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- ----------------- ---- ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $16,006 $ 48 $ -- $16,054
State and political subdivisions 5,670 357 -- 6,027
Mortgage-backed debt securities 8,369 65 46 8,388
$30,045 $470 $ 46 $30,469
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ----------------- ---- ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $26,023 $ 16 $ 29 $26,010
State and political subdivisions 3,690 387 -- 4,077
Mortgage-backed debt securities 19,176 150 183 19,143
$48,889 $553 $212 $49,230
</TABLE>
<PAGE>
The amortized cost and estimated fair value of securities available for sale at
December 31, 1998 and 1997 are as follows:
AVAILABLE-FOR-SALE PORTFOLIO
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- ----------------- ---- ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $141,965 $1,125 $249 $142,841
Mortgage-backed debt securities 172,437 1,190 407 173,220
Corporate bonds 69,398 1,377 1,102 69,673
Equity securities 31,082 4,771 411 35,442
$414,882 $8,463 $2,169 $421,176
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ----------------- ---- ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $ 96,772 $ 617 $ 11 $ 97,378
Mortgage-backed debt securities 93,063 1,532 216 94,379
Corporate bonds 15,074 238 3 15,309
Equity securities 19,820 3,412 5 23,227
$224,729 $5,799 $235 $230,293
</TABLE>
<PAGE>
The amortized cost and estimated fair value of securities being held to maturity
and those available for sale at December 31, 1998 by contractual maturity, are
as follows:
<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 $ 10,712 $ 10,751 $ 61,575 $ 58,850
Due after one through five years 8,393 8,714 44,734 47,673
Due after five years through ten years 1,385 1,422 81,602 83,256
Due after ten years 1,186 1,194 23,452 22,735
Mortgage-backed debt securities 8,369 8,388 172,437 173,220
Equity securities -- -- 31,082 35,442
$30,045 $30,469 $414,882 $421,176
</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, 1998 and 1997, are
securities carried at $269,315,000 and $150,778,000 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:
Years ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Realized gains $1,520 $ 9183 $770
Realized (losses) $ (39) $ (185) $(330)
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES:
December 31,
----------------------------
1998 1997
---- ----
(dollars in thousands)
Loans are as follows:
Real estate loans:
Construction and land development $ 113,321 $ 80,075
Mortgage loans:
Secured by farmland 3,182 2,752
Secured by 1 to 4 family residential
properties 216,362 217,236
Secured by multi-family (5 or more)
residential properties 4,817 5,859
Secured by commercial properties 206,403 198,428
Total mortgage loans 430,764 424,275
Total loans secured by real estate 544,085 504,350
Commercial and industrial loans 111,730 101,288
Industrial revenue bonds 6,666 4,457
Loans to farmers 563 810
Loans to individuals for household, family
and other personal expenditures 64,545 64,039
$727,589 $674,944
<PAGE>
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 $70,000,000 and $94,000,000 at December 31, 1998 and
1997, respectively.
Transactions in the allowance for credit losses are summarized as follows:
Years ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Balance at beginning of year $6,701 $5,997 $6,364
Provision for credit losses 1,770 1,524 408
Recoveries 407 579 187
Other transfers and allowance on loans
acquired with purchased entity -- -- 462
8,878 8,100 7,421
Credits charged-off (1,680) (1,399) (1,424)
Balance at end of year $7,198 $6,701 $5,997
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
Years ended December 31,
---------------------------
1998 1997
---- ----
(dollars in thousands)
Impaired loans with specific allocation of
allowance for credit losses $2,239 $2,488
Specific allocation of allowance for
credit losses 793 801
Other impaired loans 3,613 1,460
Years ended December 31,
---------------------------
1998 1997
---- ----
(dollars in thousands)
Average recorded investment in impaired loans $5,284 $4,162
Interest income recognized on impaired loans
based on cash payments received 80 33
<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,
------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans $567 $697 $731
Interest income not recognized due to loans in nonaccrual status 61 94 73
</TABLE>
NOTE 6. BANK PREMISES AND EQUIPMENT:
Bank premises and equipment consist of the following:
December 31,
------------------------
1998 1997
---- ----
(dollars in thousands)
Bank premises and leasehold improvements $24,958 $24,678
Equipment 13,367 10,749
38,325 35,429
Less accumulated depreciation and amortization 13,045 10,762
$25,280 $24,665
Depreciation and amortization charged to operations amounted to $2,535,000 for
1998, $2,087,000 for 1997 and $1,854,000 for 1996.
NOTE 7. DEPOSITS:
Certificates of deposit and other time deposits issued in denominations of
$100,000 or more totaled $85,192,000 and $87,496,000 at December 31, 1998 and
1997, respectively, and are included in interest-bearing deposits in the
consolidated balance sheets.
At December 31, 1998, the maturity distribution of certificates of deposit are
as follows:
Certificates of Deposit
- ------------------------------------------
(dollars in thousands)
Maturing:
1999 $277,839
2000 79,270
2001 28,885
2002 2,852
2003 4,440
Thereafter 33
$393,319
Interest on deposits consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
NOW and Super NOW accounts $ 1,286 $ 1,198 $ 1,376
Savings accounts 1,979 2,124 2,679
Money market accounts 4,504 3,311 3,309
Certificates of deposit and other time
deposits less than $100,000 16,725 16,022 13,205
Certificates of deposit and other time
deposits of $100,000 or more 4,783 3,556 3,029
29,277 26,211 23,598
Less capitalized construction period interest -- -- 42
$29,277 $26,211 $23,556
</TABLE>
<PAGE>
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 $51,961,000 and $78,807,000 at
December 31, 1998 and 1997, respectively.
Other short-term borrowings primarily reflect amounts borrowed under secured
lending arrangements 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, 1998 various
debt securities having aggregate amortized cost book values of $196,134,000 were
pledged to secure these borrowings.
The Company's unused lines of credit for short-term borrowings totaled
$13,277,000 at December 31, 1998.
Selected information on short-term borrowings is as follows:
December 31,
-------------------------
1998 1997
---- ----
(dollars in thousands)
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER AGREEMENT TO REPURCHASE:
Total outstanding at year-end $ 92,287 $84,827
========= =======
Average amount outstanding during year $ 59,301 $63,717
========= =======
Maximum amount outstanding at any month-end $105,974 $86,896
========= =======
Weighted-average interest rate at year-end 4.62% 5.46%
========= =======
Weighted-average interest rate for the year 4.92% 5.38%
========= ========
OTHER SHORT-TERM BORROWINGS:
Total outstanding at year-end $248,155 $154,793
========= =======
Average amount outstanding during year $184,727 $111,989
========= =======
Maximum amount outstanding at any month-end $248,155 $152,138
========= =======
Weighted-average interest rate at year-end 5.17% 5.36%
========= =======
Weighted-average interest rate for the year 5.47% 5.63%
========= =======
Included in the other short-term borrowings schedule above at December 31, 1998
are the following borrowings from the Federal Home Loan Bank of Atlanta. These
borrowings have scheduled maturity dates but the majority are callable at the
sole discretion of the Federal Home Loan Bank of Atlanta, one year from the date
of their initial funding. The Company has the option to terminate the remainder
of these agreements upon the repricing date. All of these borrowings re-price
monthly, quarterly, semi-annually, or annually, until the first call date and
then are repriced quarterly, thereafter.
December 31, 1998
----------------------------------------------------------
Due in Interest rate range Amount
------ ------------------- ------
(dollars in thousands)
2000 5.28% $ 16,000
2002 5.30% 29,000
2003 5.01% - 5.26% 25,000
2004 5.36% 10,000
2007 5.03% - 5.27% 72,000
2008 4.19% - 5.37% 51,000
Total $203,000
<PAGE>
NOTE 9. LONG-TERM DEBT:
On July 20, 1998, FCNB Capital Trust, a newly-formed subsidiary of the Company,
issued 1,610,000 of its 8.25% Cumulative Trust Preferred Securities (the
"Preferred Securities") in an underwritten public offering for an aggregate
price of $40,250,000. Proceeds of the Preferred Securities were invested in the
8.25% Subordinated Debentures (the "Subordinated Debentures") of the Company.
After deducting underwriter's compensation and other expenses of the offering,
the net proceeds were available to the Company to increase capital and for
general corporate purposes, including use in investment activities and the
Bank's lending activities.
The Preferred Securities and the Subordinated Debentures each mature on July 31,
2028. If certain conditions are met, the maturity dates of the Preferred
Securities and the subordinated Debentures may be shortened to a date not
earlier than July 31, 2003. The Preferred Securities and Subordinated Debentures
also may be redeemed prior to maturity if certain events occur. The Preferred
Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Subordinated Debentures at maturity, or the deferral of
dividend payments on the Preferred Securities, at any time or from time to time,
for a period not to exceed 20 consecutive quarters in a deferral period.
The Company and FCNB Capital Trust believe that, taken together, the obligations
of the Company under the Preferred Securities Guarantee Agreement, the Amended
and Restated Trust Agreement, the Subordinated Debentures, the Indenture and the
Agreement As To Expenses and Liabilities, entered into in connection with the
offering of the Preferred Securities and the Subordinated Debentures, in the
aggregate constitute a full and unconditional guarantee by the Company of the
obligations of FCNB Capital Trust under the Preferred Securities.
FCNB Capital Trust is a Delaware business trust created for the purpose of
issuing the Preferred Securities and purchasing the Subordinated Debentures,
which are its sole assets. The Company owns all of the 49,800 outstanding common
securities, liquidation value $25 per share, (the "Common Securities") of FCNB
Capital Trust.
The Preferred Securities meet the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Preferred
Securities and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital. At December 31, 1998, $27,136,000 of the Preferred Securities
were included in Tier I Capital.
For financial statement purposes, the Preferred Securities are presented on the
Consolidated Balance Sheets as a separate category of long-term debt entitled
"Guaranteed Preferred Beneficial Interests in the Company's Subordinated
Debentures".
NOTE 10. 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, 1998 is outlined below:
(dollars in thousands)
Years ending December 31,
1999 $ 1,258
2000 1,276
2001 1,177
2002 1,154
2003 1,101
Later years 10,237
16,203
Less: Sublease income 638
$15,565
Rent expense included in occupancy expenses amounted to $1,520,000 for 1998,
$1,177,000 for 1997, and $1,218,000 for 1996.
Sublease income amounted to $89,000, $79,000, and $87,000 for 1998, 1997, and
1996 respectively.
NOTE 11. 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 $686,000 in 1998, $609,000
in 1997 and $489,000 in 1996.
<PAGE>
DEFERRED COMPENSATION PLANS:
The Company maintains deferred compensation plans for certain key executives and
its directors, and a supplemental executive retirement plan (SERP), for certain
key officers. The Plans provide for supplemental retirement income for the
Plan's participants. Amounts to be paid by the Company under the deferred
compensation plans will be recovered through life insurance policies purchased
on the lives of the participants. Amounts to be paid by the Company under the
SERP will be funded by the General Assets of the Company. The expense for these
plans is included in the consolidated statements of income and totaled $355,000,
$211,000 and $175,000 for 1998, 1997, and 1996, respectively.
STOCK OPTION PLAN:
On December 31, 1998, 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.
In connection with the stock options granted under the 1992 Plan, additional
restricted stock grants for 21,077 shares at December 31, 1998 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, certain participants under the 1992 Plan 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 are satisfied. 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. 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, 1998, 1997, and 1996 totaled $68,000, $65,000, and $52,000,
respectively.
<PAGE>
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 are
satisfied.
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:
Years ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
Net income:
As reported $8,061 $10,096 $6,876
Pro forma $7,386 $9,385 $6,653
Basic and diluted earnings per share:
As reported $0.80 $1.01 $0.69
Pro forma $0.74 $0.95 $0.67
The 1992 Plan provides that 606,376 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, 1998, reserved shares remaining
for future grants under this Plan totaled 255,553. The 1997 Plan provides that
333,333 shares of the Company's common stock will be reserved for the granting
of NQSO's to purchase these shares. At December 31, 1998, reserved shares
remaining for future grants under this Plan totaled 274,424. 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.
<PAGE>
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:
Years ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
Dividend yield 2.5% 2.5% 2.5%
Expected volatility 36.53% 40.71% 49.66%
Risk free interest rate 4.650% 5.740% 6.420%
Expected life, in years 10 10 10
Weighted-average fair value of
options granted during the year $9.47 $9.42 $7.07
The following is a summary of transactions for both Plans during the three years
ended December 31, 1998, 199 and 1996.
Options Issued Weighted-Average
and Outstanding Exercise Price
--------------- --------------
Balance at December 31, 1995 325,639 5.90
Exercised (158,474) 3.33
Terminated (13,572) 5.05
Granted 75,031 8.59
Balance at December 31, 1996 228,624 8.62
Exercised (27,519) 7.30
Terminated (4,037) 7.44
Granted 100,130 16.89
Balance at December 31, 1997 297,198 11.52
Exercise (164,784) 7.85
Terminated (22,291) 7.73
Granted 162,078 19.90
Balance at December 31, 1998 272,201 $19.34
At December 31, 1998, the 272,201 options issued and outstanding had exercise
prices ranging from $4.17 to $24.47 and had a weighted-average remaining
contractual life of 98 months.
December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
Exercisable options:
Options outstanding 272,201 297,198 197.396
Weighted-average price $19.34 $11.52 $7.77
<PAGE>
NOTE 12. INCOME TAXES:
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
-------------------------
1998 1997
---- ----
(dollars in thousands)
Deferred tax assets:
Provision for credit losses $2,061 $1,999
Net securities losses 173 169
Deferred compensation 570 459
Postretirement benefits 257 253
Provision for foreclosed properties 21 150
Deferred Fees 276 430
Other 858 538
Total deferred tax assets 4,216 3,998
Valuation allowance for deferred tax assets -- (9)
Deferred tax assets after valuation allowance 4,216 3,989
Deferred tax liabilities:
Unrealized gain on securities available for sale 2,424 2,205
Depreciation 541 532
Other 331 224
Total deferred tax liabilities 3,296 2,961
Net deferred tax assets $ 920 $1,028
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>
December 31,
------------------------------
1998 1997 1998
---- ---- ------
(dollars in thousands)
<S> <C> <C> <C>
Income before income tax $14,837 $15,166 $10,767
Tax rate 35% 35% 35%
Income tax at statutory rate 5,193 5,308 3,768
Increases (decreases)
in tax resulting from:
Tax-exempt interest income (184) (149) (160)
Insurance cash values (429) (217) (3)
Thrift bad debt reserve recapture 1,750 -- --
State income taxes, net of federal
income tax benefit 165 426 418
Benefit of income taxed at lower rate (100) (100) (82)
Other 381 (198) (50)
$ 6,776 $5,070 $ 3,891
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
---- ---- ------
(dollars in thousands)
<S> <C> <C> <C>
Taxes currently payable $ 5,190 $ 3,969 $ 3,961
Deferred tax liabilities (benefits) (164) 1,101 (70)
Operating activities 5,026 5,070 3,891
Thrift bad debt reserve recapture 1,750 -- --
Total $6,776 $5,070 $3,891
</TABLE>
Included in the above amounts are income taxes of $576,000 in 1998, $283,000 in
1997, and $170,000 in 1996 related to net security gains.
<PAGE>
NOTE 13. OTHER OPERATING EXPENSES:
Other operating expenses in the consolidated statements of income include the
following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997 1998
---- ---- ------
(dollars in thousands)
<S> <C> <C> <C>
FDIC and general insurance $ 644 $ 369 $ 540
Professional and directors fees 2,801 3,005 1,943
Advertising and public relations 1,712 1,294 1,208
Credit and collection expense 298 302 299
Postage and supplies 1,503 1,244 1,241
Net loss on foreclosed properties 187 195 88
Other 2,614 2,735 3,109
$9,759 $9,144 $8,428
</TABLE>
Changes in the allowance for foreclosed properties are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997 1998
---- ---- -----
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $410 $533 $646
Provision charged to income 52 35 31
Losses charged to the allowance (266) (158) (32)
Other transfers net of allowance on properties
acquired with purchased entity -- -- (112)
Balance at end of year $196 $410 $533
</TABLE>
NOTE 14. 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 1998 aggregated $13,193,000.
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 no material loans or advances outstanding at
December 31, 1998.
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.
<PAGE>
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 met all capital adequacy requirements to which it is subject as of
December 31, 1998.
As of December 31, 1998, 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>
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------- -------------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $130,814 14.15% $73,949 8.0% N/A N/A
FCNB Bank $100,679 11.08% $72,697 8.0% $90,872 10.0%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $108,545 11.74% $36,974 4.0% N/A N/A
FCNB Bank $ 93,292 10.27% $36,349 4.0% $54,523 6.0%
Tier I Capital
(To Average Assets):
FCNB Corp $108,545 8.70% $37,431 3.0% N/A N/A
FCNB Bank $ 93,292 7.59% $36,871 3.0% $61,452 5.0%
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $ 88,099 11.79% $59,915 8.0% N/A N/A
FCNB Bank(1) $ 73,879 9.99% $59,188 8.0% $73,986 10.0%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $ 81,398 10.88% $29,957 4.0% N/A N/A
FCNB Bank(1) $ 67,178 9.09% $29,594 4.0% $44,391 6.0%
Tier I Capital
(To Average Assets):
FCNB Corp $ 81,398 7.96% $32,309 3.0% N/A N/A
FCNB Bank(1) $ 67,178 6.60% $32,121 3.0% $50,986 5.0%
</TABLE>
- ------------
N/A = Not applicable
<PAGE>
Dividend reinvestment plan:
The Company maintains a Dividend Reinvestment and Stock Purchase Plan for all
shareholders of the Company. This Plan provides that 509,217 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, 1998, reserved shares
remaining for future issuance under this plan totaled 235,064. The terms of this
Plan allow 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 are 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.
NOTE 15. 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, 1998 December 31, 1996
------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 79,096 $ 79,096 $ 73,922 $ 73,922
Loans held for sale 5,087 5,087 909 909
Investment securities 451,221 451,645 279,182 279,523
Net loans 720,368 725,704 667,867 671,493
Total financial assets $1,256,042 $1,261,532 $1,021,880 $1,025,847
FINANCIAL LIABILITIES
Deposits $ 851,819 $ 854,510 $ 745,486 $ 747,027
Short-term borrowings 340,442 340,273 239,620 239,703
Long-term debt 40,250 39,165 -- --
Total financial liabilities $1,232,511 $1,233,948 $ 985,106 $ 986,730
</TABLE>
<PAGE>
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments as of December 31, 1998 and 1997:
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.
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.
<PAGE>
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.
Long-term borrowings:
The fair value of long-term debt 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, 1998 and 1997. The carrying value of
such instruments, if any, includes any accrued interest receivable and/or
payable balances
NOTE 16. 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 1998 is as follows:
(dollars in thousands)
----------------------
Balance at December 31, 1997 $ 11,229
New loans 1,575
Repayments (4,367)
Balance at December 31, 1998 $8,437
<PAGE>
NOTE 17. COMMITMENTS AND CONTINGENCIES:
In addition, Note 2 contains detailed information relating to the acquisition of
Frederick Underwriters during 1998. Prior to the merger, a director of the
Company was the principal shareholder of Frederick Underwriters.
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 a 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:
December 31,
--------------------------
1998 1997
--------- ---------
Contract/ Contract/
Notional Notional
Amount Amount
------ ------
(dollars in thousands)
Financial instruments whose notional or
contract amounts represent credit risk:
Commitments to extend credit $199,739 $147,015
Standby letters of credit 12,550 11,707
Total $212,289 $158,722
Financial instruments whose notional or
contract amounts exceeded maximum
credit risk:
For interest rate risk management:
Interest rate swaps $10,000 $10,000
Total $10,000 $10,000
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, 1998 and 1997 to convert fixed rate
loans to variable rates.
<PAGE>
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.
Tax liability:
The Company has been notified by the Internal Revenue Service (the Service) that
the Service has taken under review the Company's treatment of an income tax
reserve for bad debts relating to the Company's 1996 acquisition of Laurel and
its subsidiary thrift. As a part of its acquisition of Laurel, the Company
assumed an unrecorded deferred tax liability of approximately $1.6 million
related to the special bad debt deduction for years before December 1, 1988,
which thrifts were allowed. The Company determined that recognition of the
deferred tax liability was not required as a result of the merger of Laurel and
its subsidiary into the company and its subsidiary bank. The Service has raised
issues related to the availability of an exemption from recapture of the bad
debt reserve. The Company is reviewing the Service's position. The Company
intends to vigorously contest the additional assessment, but has accrued $1.75
million as a reserve against such liability, which has been considered a
merger-related expense for financial reporting purposes.
NOTE 18. FCNB CORP (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION:
FCNB CORP (PARENT COMPANY)
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash $10,889 $ 4,042
Receivable from subsidiaries 1,838 1,103
Investment securities available for sale-at fair value 16,477 10,845
Investment in subsidiaries 101,350 71,882
Other assets 3,112 1,346
Total assets $133,666 $89,218
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Long-term debt $41,495 $ --
Other liabilities 1,561 1,202
Total liabilities 43,056 1,202
Common stock 10,061 8,017
Surplus 46,597 49,950
Retained earnings 30,082 26,391
Net unrealized gain on securities available for sale 3,870 3,658
Total shareholders' equity 90,610 88,016
Total liabilities and shareholders' equity $133,666 $89,218
</TABLE>
<PAGE>
FCNB CORP (PARENT COMPANY)
Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $ 3,576 $3,842 $10,710
Net securities gains 554 173 82
Other income, principally interest 653 278 189
Total income 4,783 4,293 10,981
Expenses 1,941 344 843
Income before provision for income taxes
and equity in undistributed
(excess distributions of) earnings of subsidiaries 2,842 3,949 10,138
Provision for income taxes (benefits) (263) (7) (141)
Income before equity in undistributed
(excess distributions of) earnings of subsidiaries 3,105 3,956 10,279
Equity in undistributed (excess distributions of) earnings
of subsidiaries 4,956 6,140 (3,403)
Net income $ 8,061 $10,096 $6,876)
Other Comprehensive income (loss), net of tax 212 2,919 (34)
Comprehensive income $ 8,273 $13,015 $6,842
</TABLE>
FCNB CORP (PARENT COMPANY)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,061 $10,096 $6,876
Adjustments to reconcile net income to
net cash provided by operating activities:
(Equity in undistributed) excess distribution of
earnings of subsidiary (4,956) (6,140) 3,403
Noncash charitable contribution -- 98 64
Net securities gains (554) (173) (82)
Decrease (increase) in receivable from
subsidiaries (735) (746) 93
Decrease (increase) in other assets (1,631) (1,184) (9)
Increase (decrease) in other liabilities -- (590) 306
Net cash provided by operating activities 185 1,361 10,651
Cash flows from investing activities:
Proceeds from sale of investment securities
available for sale 1,612 510 140
Purchase of investment securities
available for sale (5,856) (6,330) (1,360)
Investment in subsidiary (24,775) 5,496 (1,490)
Net cash (used in) investing activities (29,019) (324) (2,710)
Cash flows from financing activities:
Proceeds from long-term debt 41,495 -- --
Dividend reinvestment plan (29) (18) (11)
Proceeds from issuance of common stock 664 210 578
Repurchase of common stock (2,108) (213) (580)
Cash dividends paid (4,341) (3,462) (2,997)
Net cash provided by (used in) financing activities 35,681 (3,483) (3,010)
Net increase (decrease) in cash 6,847 (2,446) 4,931
Beginning cash 4,042 6,488 1,557
Ending cash $10,889 $4,042 $6,488
Supplemental schedule of noncash investing and financing activities:
Surplus from stock options granted $135 $152 $118
</TABLE>
<PAGE>
NOTE 19. CURRENT ACCOUNTING DEVELOPMENTS:
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 recognizes 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.
NOTE 20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following is a summary of the Company's unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
December 31(3) September 30 (1) June 30(1)(2) March 31(1)(2)
-------------- ---------------- ------------- --------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income $23,079 $21,762 $20,660 $19,920
Net interest income 10,976 10,368 10,330 9,912
Provision for credit losses 815 385 400 170
Net securities gains 508 286 535 152
Income before income taxes 2,424 4,089 4,271 4,053
Net income (loss) (252) 2,729 2,864 2,720
Net income before merger-related expense 2,798 2,806 2,898 2,720
Basic earnings per share (.03) .27 .29 .27
Diluted earnings per share (.03) .27 .29 .27
Basic earnings per share before merger-related expenses .28 .28 .29 .27
Diluted earnings per share before merger-related expenses .27 .28 .29 .27
</TABLE>
<TABLE>
<CAPTION>
1997 (1)(2)
-------------------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ -------- ---------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income $19,766 $19,263 $18,245 $17,401
Net interest income 9,846 9,826 9,660 9,365
Provision for credit losses 455 512 276 281
Net securities gains 213 221 57 89
Income before income taxes 3,912 4,159 3,977 3,118
Net income 2,657 2,748 2,541 2,150
Basic earnings per share .28 .28 .26 .22
Diluted earnings per share .27 .28 .26 .22
</TABLE>
- -------------
(1) The financial data for 1998 and 1997 has been restated to include the
effects of the acquisitions of Capital Bank, N.A. and Frederick
Underwriters, Inc. in 1998, accounted for as pooling of interests.
(2) Per share data has been restated for the effects of a four-for-three stock
split effected in the form of a 33% stock dividend declared in July 1998 and
paid in August 1998.
(3) During the quarter ended December 31, 1998, the Company recognized a current
period income tax provision, totaling $1,750,000, for the tax effects of
certain pre-1988 tax reserves for bad debts required to be recaptured.
<PAGE>
Market For Registrant's Common Equity And Related Stockholder Matters
Quarterly stock prices and dividends(1)
<TABLE>
<CAPTION>
1998
---------------------------------------
Price Range
------------------- Dividend
High Low Declared
---- --- --------
<S> <C> <C> <C>
First Quarter $24.38 $20.81 $.101
Second Quarter 24.94 24.44 .106
Third Quarter 26.81 23.88 .112
Fourth Quarter 24.50 23.00 .117
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------
Price Range
------------------- Dividend
High Low Declared
---- --- --------
<S> <C> <C> <C>
First Quarter $15.34 $13.64 $.081
Second Quarter 15.00 13.64 .081
Third Quarter 23.87 13.98 .086
Fourth Quarter 23.69 20.80 .092
</TABLE>
- -----------
(1) The quarterly stock prices and dividends have been restated for the effects
of a four-for-three stock split effected in the form of a 33% stock
dividend, declared in August 1998.
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, as of December 31,1998: 3,954
PRINCIPAL AFFILIATE
Balance Sheet
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS LIABILITIES AND EQUITY
------ ----------------------
<S> <C> <C>
FCNB Bank Cash and due from banks $ 30,500 Total deposits $862,708
7200 FCNB Court Earning assets 1,215,993 Short-term borrowings 340,442
Frederick, MD 21703 Accrued interest and
(301) 662-2191 other liabilities 15,942
32 Offices Allowance for credit losses (7,198)
Other Assets 79,902 Shareholders' equity 100,105
Total liabilities
Total assets $1,319,197 and shareholders' equity $1,319,197
Net income $8,532
</TABLE>
<PAGE>
Annual Meeting of Shareholders
Tuesday, April 20, 1999 - 7:00 p.m.
FSK Holiday Inn
Frederick, Maryland 21703
TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone (800) 937-5449
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 Shareholder Relations Officer
Phone (301 or 800) 662-2191 or (301) 624-2306 Direct
AVAILABILITY OF 10-K REPORT
The annual report on Form 10K 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, Washington, D.C., and Fairfax County located in Virginia. The
deposits of the Bank are insured by the FDIC. FCNB Corp trades on the NASDAQ
Stock market under the symbol "FCNB".
<PAGE>
The following brokers are registered as market makers of FCNB Corp Common Stock:
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, 3 Parkway
Suite 1420 Philadelphia, PA 19102
Philadelphia, PA 19102 (800) 342-2325
(215) 563-8500
Janney Montgomery Scott, Inc. Sandler O'Neill & Partners, L.P.
1801 Market Street Two World Trade Center
Philadelphia, PA 1910 104th Floor
(215) 665-6000 New York, NY 10048
(800) 635-6860
Friedman, Billings, Ramsey & Co., Inc. Wheat First Securities, Inc.
1001 Nineteenth Street North 18 West Patrick Street
Arlington, VA 22209-1722 Frederick, MD 21701
(703) 312-9500 (301) 662-0002
(800) 456-7801
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
Frederick Underwriters, Inc. (MD)**
1201 East Street
Frederick, MD 21701
(301) 662-1147
* The Bank is the principal subsidiary of FCNB Corp as of December 31, 1998. The
voting securities of the Bank are owned entirely by FCNB Corp.
**The Insurance Agency is the principal subsidiary of FCNB Bank as of December
31, 1998. The voting securities of the Agency are owned entirely by FCNB Bank.
Exhibit 23.1
Keller Bruner & Company, L.L.P.
Certified Public Accountants
The Board of Directors
FCNB Corp
We consent to incorporation by reference of our report dated January 28, 1999,
relating to the consolidated balance sheets of FCNB Corp and its subsidiaries of
December 31, 1998 and 1997, and the related consolidated statements of income
and comprehensive income, changes in shareholders' equity and cash flows for the
years in the three-year period ended December 31, 1998, which report appears on
page 48 of the 1998 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, Number 33-55040 on Form S-3, Number 333-49329 on Form S-3, and Number
333-52997 on Form S-8.
/s/Keller Bruner & Company, L.L.P.
- ----------------------------------
Keller Bruner & Company, L.L.P.
Frederick, Maryland
March 19, 1999
EXHIBIT 23.2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
FCNB Corp
Frederick, Maryland
We have audited the accompanying consolidated balance sheets of FCNB Corp and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income and comprehensive income, changes in shareholders' equity,
and cash flows for each of the years in the three year period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. With respect to information as of and for the
years ended December 31, 1997 and 1996, we did not audit the consolidated
financial statements of Capital Bank, N.A. and subsidiary, which statements
reflect total assets constituting 17.6% in 1997 and total revenues constituting
17.7% and 16.7% in 1997 and 1996, respectively, of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to the amounts included
for Capital Bank, N.A. and subsidiary, is based solely upon the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of FCNB Corp and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KELLER BRUNER & COMPANY, LLP
Frederick, Maryland
January 28, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<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> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 30,500
<INT-BEARING-DEPOSITS> 1,334
<FED-FUNDS-SOLD> 47,262
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 421,176
<INVESTMENTS-CARRYING> 30,045
<INVESTMENTS-MARKET> 30,469
<LOANS> 727,566
<ALLOWANCE> 7,198
<TOTAL-ASSETS> 1,337,224
<DEPOSITS> 851,819
<SHORT-TERM> 340,442
<LIABILITIES-OTHER> 14,103
<LONG-TERM> 40,250
0
0
<COMMON> 10,061
<OTHER-SE> 80,549
<TOTAL-LIABILITIES-AND-EQUITY> 1,337,224
<INTEREST-LOAN> 62,894
<INTEREST-INVEST> 20,861
<INTEREST-OTHER> 1,666
<INTEREST-TOTAL> 85,421
<INTEREST-DEPOSIT> 29,277
<INTEREST-EXPENSE> 43,835
<INTEREST-INCOME-NET> 41,586
<LOAN-LOSSES> 1,770
<SECURITIES-GAINS> 1,481
<EXPENSE-OTHER> 40,644
<INCOME-PRETAX> 14,837
<INCOME-PRE-EXTRAORDINARY> 14,837
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,061
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 8.14
<LOANS-NON> 6,419
<LOANS-PAST> 1,571
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 17,330
<ALLOWANCE-OPEN> 6,701
<CHARGE-OFFS> 1,680
<RECOVERIES> 407
<ALLOWANCE-CLOSE> 7,198
<ALLOWANCE-DOMESTIC> 7,198
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 680
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998
<EXCHANGE-RATE> 1 1 1
<CASH> 37,604 31,932 35,057
<INT-BEARING-DEPOSITS> 811 840 559
<FED-FUNDS-SOLD> 31,996 50,587 49,701
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 233,563 309,342 351,136
<INVESTMENTS-CARRYING> 44,810 38,294 30,986
<INVESTMENTS-MARKET> 45,233 38,646 31,500
<LOANS> 677,382 692,979 704,711
<ALLOWANCE> 6,778 6,855 7,034
<TOTAL-ASSETS> 1,083,281 1,188,818 1,245,759
<DEPOSITS> 760,963 816,813 842,787
<SHORT-TERM> 224,303 271,285 258,199
<LIABILITIES-OTHER> 7,232 8,008 9,273
<LONG-TERM> 0 0 40,250
0 0 0
0 0 0
<COMMON> 10,008 10,038 10,059
<OTHER-SE> 80,775 82,674 85,191
<TOTAL-LIABILITIES-AND-EQUITY> 1,083,281 1,188,818 1,245,759
<INTEREST-LOAN> 15,144 30,716 46,607
<INTEREST-INVEST> 4,348 9,076 14,327
<INTEREST-OTHER> 428 778 1,408
<INTEREST-TOTAL> 19,920 40,580 62,342
<INTEREST-DEPOSIT> 6,871 13,923 21,659
<INTEREST-EXPENSE> 10,080 20,338 31,732
<INTEREST-INCOME-NET> 9,912 20,242 30,610
<LOAN-LOSSES> 170 570 955
<SECURITIES-GAINS> 152 687 973
<EXPENSE-OTHER> 9,726 18,848 28,893
<INCOME-PRETAX> 4,053 8,324 12,413
<INCOME-PRE-EXTRAORDINARY> 4,053 8,324 12,413
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,720 5,584 8,313
<EPS-PRIMARY> 0.27 0.56 0.83
<EPS-DILUTED> 0.27 0.56 0.83
<YIELD-ACTUAL> 8.14 8.17 8.14
<LOANS-NON> 5,590 5,755 6,271
<LOANS-PAST> 1,103 2,930 4,785
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 15,560 16,820 15,440
<ALLOWANCE-OPEN> 6,701 6,701 6,701
<CHARGE-OFFS> 164 538 864
<RECOVERIES> 71 122 242
<ALLOWANCE-CLOSE> 6,778 6,855 7,034
<ALLOWANCE-DOMESTIC> 6,778 6,855 7,034
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 485 636 704
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<EXCHANGE-RATE> 1 1 1 1 1
<CASH> 36,316 28,019 36,904 31,511 32,136
<INT-BEARING-DEPOSITS> 1,065 3,632 828 9,803 755
<FED-FUNDS-SOLD> 24,038 26,085 30,618 34,193 41,031
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 181,709 188,297 203,354 197,109 230,293
<INVESTMENTS-CARRYING> 37,025 35,743 43,447 55,536 48,889
<INVESTMENTS-MARKET> 68,685 35,769 43,609 55,876 49,230
<LOANS> 583,796 600,780 626,459 656,584 674,568
<ALLOWANCE> 5,997 6,457 6,456 6,294 6,701
<TOTAL-ASSETS> 907,603 937,891 990,102 1,041,101 1,083,898
<DEPOSITS> 690,710 702,964 727,858 725,007 745,486
<SHORT-TERM> 132,149 149,232 174,536 223,518 239,620
<LIABILITIES-OTHER> 6,177 7,090 5,601 6,817 10,776
<LONG-TERM> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 7,466 7,461 7,463 8,015 8,017
<OTHER-SE> 70,866 71,145 74,645 77,745 79,999
<TOTAL-LIABILITIES-AND-EQUITY> 907,603 937,891 990,102 1,041,101 1,083,898
<INTEREST-LOAN> 50,232 13,541 27,640 42,511 57,728
<INTEREST-INVEST> 12,133 3,543 7,389 11,478 15,651
<INTEREST-OTHER> 1,437 317 617 920 1,296
<INTEREST-TOTAL> 63,802 17,401 35,646 54,909 74,675
<INTEREST-DEPOSIT> 23,556 6,115 12,585 19,263 26,211
<INTEREST-EXPENSE> 28,725 8,036 16,621 26,058 35,978
<INTEREST-INCOME-NET> 35,077 9,365 19,025 28,851 38,697
<LOAN-LOSSES> 408 281 557 1,069 1,524
<SECURITIES-GAINS> 440 89 146 367 733
<EXPENSE-OTHER> 34,856 8,864 17,155 25,673 34,537
<INCOME-PRETAX> 10,767 3,118 7,095 11,254 15,166
<INCOME-PRE-EXTRAORDINARY> 10,767 3,118 7,095 11,254 15,166
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 6,876 2,150 4,691 7,439 10,096
<EPS-PRIMARY> 0.69 0.22 0.48 0.74 1.01
<EPS-DILUTED> 0.69 0.22 0.48 0.74 1.01
<YIELD-ACTUAL> 8.36 8.24 8.31 8.34 8.36
<LOANS-NON> 5,838 4,195 4,078 3,101 4,646
<LOANS-PAST> 2,531 2,807 2,983 1,044 1,039
<LOANS-TROUBLED> 31 0 0 0 128
<LOANS-PROBLEM> 16,880 14,780 14,680 16,610 15,350
<ALLOWANCE-OPEN> 6,364 5,997 5,997 5,997 5,997
<CHARGE-OFFS> 1,424 113 491 1,192 1,399
<RECOVERIES> 187 292 393 420 579
<ALLOWANCE-CLOSE> 5,997 6,457 6,456 6,294 6,701
<ALLOWANCE-DOMESTIC> 5,997 6,457 6,456 6,294 6,701
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 615 571 1,285 923 1,214
</TABLE>
