UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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
of incorporation or organization) Identification 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 $17.9375 per share) held by
nonaffiliates on February 8, 2000, was approximately $184,440,048. As of March
3, 2000, there were 11,924,558 shares of Common Stock, par value $1.00 per
share, of FCNB Corp issued and outstanding.
Documents Incorporated by Reference
Portions of the 1999 Annual Report to Shareholders for the year ended December
31, 1999, and the 2000 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.
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 2 of the Company's 1999 Annual Report to Shareholders. Such
information is incorporated herein by reference to the Annual Report.
The Bank
The Bank, a state-chartered commercial bank under the laws of the State of
Maryland, was converted from a national bank in June 1993, and was originally
chartered in 1818. The Bank is engaged in a general commercial and retail
banking business serving individuals and businesses in 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,
1999, 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, 1999, the Bank had total
loans, net of unearned income, of approximately $903.07 million, total assets of
approximately $1.49 billion, total deposits of approximately $1.03 billion, and
a legal lending limit of approximately $14.91 million to any one borrower. The
deposits of the Bank are insured by the FDIC.
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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 VISA,
HONOR, 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 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
31 and 32 of the Company's 1999 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
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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.
COMMITMENTS TO SUBSIDIARY BANK. Under Federal Reserve policy, the Company is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances when it might not do so absent
such policy.
LIMITATIONS OF ACQUISITIONS OF COMMON STOCK. The Federal Change in Bank Control
Act prohibits a person or group from acquiring "control" of a bank holding
company unless the Federal Reserve has been given 60 days' prior written notice
of such proposed acquisition and within that time period the Federal Reserve has
not issued a notice disapproving the proposed acquisition or extending for up to
another 30 days the period during which such a disapproval may be issued. An
acquisition may be made prior to expiration of the disapproval period if the
Federal Reserve issues written notice of its intent not to disapprove the
action. Under a rebuttable presumption established by the Federal Reserve, the
acquisition of 10% or more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act
would, under the circumstances set forth in the presumption, constitute the
acquisition of control.
In addition, with limited exceptions, any "company" would be required to obtain
the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in
the case of an acquiror that is a bank holding company) or more of the
outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquiror registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.
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BANK REGULATION. The Bank is a commercial bank chartered by the State of
Maryland which is a member of the Federal Reserve System, and as such, is
subject to extensive regulation and examination by the Division of Financial
Regulation of the Department of Labor, Licensing and Regulation (the "Banking
Commissioner"), the FDIC, which insures its deposits to the maximum extent
permitted by law, and by the Federal Reserve. The federal laws and regulations,
which are applicable to banks, regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of collateral for
certain loans. The laws and regulations governing the Bank generally have been
promulgated to protect depositors and the deposit insurance funds and not for
the purpose of protecting shareholders.
FDIC INSURANCE PREMIUMS. Institutions are assigned to one of three capital
groups based solely on the level of the institution's capital - "well
capitalized," "adequately capitalized" and "undercapitalized" - which would be
defined in the same manner as the regulations establishing the prompt corrective
action system under Section 38 of the FDIA, as discussed below. These three
groups are then divided into three subgroups, which reflect varying levels of
supervisory concern, from those, which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates ranging from
0.00% for well capitalized, healthy institutions, to 0.27% for undercapitalized
institutions with substantial supervisory concerns.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, each federal banking
agency is required to implement a system of prompt corrective action for
institutions, which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt corrective
action established by Section 38 of the FDIA. Under the regulations, a bank
shall be deemed to be: (i) "well capitalized" if it has a Total Risk Based
Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or
more, a Leverage Capital Ratio of 5.0% or more and is not subject to any written
capital order or directive; (ii) "adequately capitalized" if it has a Total Risk
Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0%
or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
8.0%, a Tier 1 Risk Based Capital Ratio that is less than 4.0% or a Leverage
Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a Total Risk Based Capital Ratio that
is less than 6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a
Leverage Capital Ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
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An institution, which is required to submit a capital restoration plan, must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount equal
to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guarantee shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guarantee, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in conservatorship
or receivership within 90 days unless the FDIC formally determines that
forbearance from such action would better protect the deposit insurance fund.
Unless the FDIC or other appropriate federal banking regulatory agency makes
specific further findings and certifies that the institution is viable and is
not expected to fail, an institution that remains critically undercapitalized on
average during the fourth calendar quarter after the date it becomes critically
undercapitalized must be placed in receivership. The general rule is that the
FDIC will be appointed as receiver within 90 days after a bank becomes
critically undercapitalized unless extremely good cause is shown and an
extension is agreed to by the federal regulators.
Immediately upon becoming undercapitalized, an institution shall become subject
to the provisions of Section 38 of the FDIA (i) restricting payment of capital
distributions and management fees, (ii) requiring that the appropriate federal
banking agency monitor the condition of the institution and its efforts to
restore its capital, (iii) requiring submission of a capital restoration plan,
(iv) restricting the growth of the institution's assets and (v) requiring prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions are
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include: requiring
the institution to raise additional capital; restricting transactions with
affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
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
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<PAGE>
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, 1999, the Bank would be deemed to be a "well capitalized"
institution for purposes of Section 38 of the FDIA. Also at December 31, 1999,
the Company and the Bank were in compliance with all minimum federal regulatory
capital requirements, which are generally applicable to banks.
REGULATORY ENFORCEMENT AUTHORITY. The enforcement authority of federal banking
regulators includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
The foregoing references to laws and regulations which are applicable to the
Company and the Bank are brief summaries thereof which do not purport to be
complete and which are qualified in their entirety by reference to such laws and
regulations.
FCNB 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.
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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 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, 1999, the Company had approximately 610 employees of whom 14
were executive officers, 124 were other officers, 409 were full-time employees,
and 63 were part-time employees.
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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:
<TABLE>
<CAPTION>
- ---------------------------------------- --------------------------------------
Location Square footage
- ---------------------------------------- --------------------------------------
<S> <C>
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
- ---------------------------------------- --------------------------------------
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
- ---------------------------------------- --------------------------------------
</TABLE>
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The Bank leases the following properties:
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------- -----------------------------------
Location Square Footage Lease Expiration Date
- ---------------------------------------- -------------------------------------- -----------------------------------
<S> <C> <C>
Adams Morgan
1789A Columbia Road
Washington, DC 20009 6,181 12/31/2004
- ---------------------------------------- -------------------------------------- -----------------------------------
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 09/30/2001
- ---------------------------------------- -------------------------------------- -----------------------------------
Deerpath
6810 Deerpath Road
Elkridge, MD 5,718 06/30/2000
- ---------------------------------------- -------------------------------------- -----------------------------------
East Frederick Trading Center
East 8th Street
Frederick MD 3,356 12/31/2004
- ---------------------------------------- -------------------------------------- -----------------------------------
Englar Road
Route 140 & Englar Road
Westminster, MD 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
- ---------------------------------------- -------------------------------------- -----------------------------------
Fox Chapel
19801 Frederick Road
Germantown, MD 1,950 03/31/2001
- ---------------------------------------- -------------------------------------- -----------------------------------
Frederick Shopping Center
1305 West Seventh Street
Frederick, MD 1,440 12/31/2003
- ---------------------------------------- -------------------------------------- -----------------------------------
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
- ---------------------------------------- -------------------------------------- -----------------------------------
</TABLE>
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<PAGE>
Properties leased: (continued)
<TABLE>
<CAPTION>
- ------------------------------------------- -------------------------------------- --------------------------------------
Location Square Footage Lease Expiration Date
- ------------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Glen Burnie
7381 Baltimore-Annapolis Blvd.
Glen Burnie, MD
(Land lease) 2,400 (Land) 10/31/2000
- ------------------------------------------- -------------------------------------- --------------------------------------
Green Valley
11801 Fingerboard Road
Monrovia, MD 1,200 02/28/2001
- ------------------------------------------- -------------------------------------- --------------------------------------
Homewood
Crumland Farms
Frederick, MD 312 10/31/2004
- ------------------------------------------- -------------------------------------- --------------------------------------
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
Mt. Airy Shopping Center
Mt. Airy, MD 2,560 12/31/2009
- ------------------------------------------- -------------------------------------- --------------------------------------
Owings Mills
11299 Owings Mills Blvd.
Owings Mills, MD 3,800 02/28/2004
- ------------------------------------------- -------------------------------------- --------------------------------------
Patrick Center
West Patrick and Court Street
Frederick, MD 3,774 11/30/2002
- ------------------------------------------- -------------------------------------- --------------------------------------
Patrick Center- Exec. Office
West Patrick and Court Street
Frederick, MD 2,033 01/31/2006
- ------------------------------------------- -------------------------------------- --------------------------------------
Patrick Center - 3rd Floor
West Patrick and Court Street
Frederick, MD 1,765 02/28/2006
- ------------------------------------------- -------------------------------------- --------------------------------------
Pikesville
1777 Reisterstown Road
Pikesville, MD 2,560 11/30/2008
- ------------------------------------------- -------------------------------------- --------------------------------------
Poolesville
19645 Fisher Avenue
Poolesville, MD 2,380 11/30/2000
- ------------------------------------------- -------------------------------------- --------------------------------------
Reisterstown
11702 Reisterstown Road
Reisterstown, MD 2,520 02/31/2004
- ------------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
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<PAGE>
Properties leased: (continued)
<TABLE>
<CAPTION>
- ------------------------------------------- -------------------------------------- --------------------------------------
Location Square Footage Lease Expiration Date
- ------------------------------------------- --------------------------------------- -------------------------------------
<S> <C> <C>
Rockville
One Church Street
Rockville, MD 1,907 02/28/2005
- ------------------------------------------- --------------------------------------- -------------------------------------
Rockville Regional Office
One Church Street
Rockville, MD 6,888 02/28/2005
- ------------------------------------------- --------------------------------------- -------------------------------------
Rosehill Plaza
Building C, Units 3 & 4
Frederick, MD 2,434 07/31/2004
- ------------------------------------------- --------------------------------------- -------------------------------------
Rosemont
1706 Rosemont Avenue
Frederick, MD 2,000 05/31/2007
- ------------------------------------------- --------------------------------------- -------------------------------------
Route 40
1370 West Patrick Street
Frederick, MD 14,436 04/03/2006
- ------------------------------------------- --------------------------------------- -------------------------------------
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 12/31/2002
- ------------------------------------------- --------------------------------------- -------------------------------------
</TABLE>
Frederick Underwriters, Inc. lease the following properties:
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------- --------------------------------------
Location Square Footage Lease Expiration Date
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
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
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
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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.
During the third quarter of 1999, there was one matter submitted for a vote to
the shareholders. The meeting was held on August 12, 1999, to vote on the
acquisition of First Frederick Financial Corporation. The total number of votes
was 8,344,719 of which 6,842,670 were voted FOR the 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 37 of the Company's
1999 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 30 of the
Company's 1999 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.
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<PAGE>
As a depository institution, deposits of which are insured by The Federal
Deposit Insurance Corporation ("FDIC"), the Bank may not pay dividends or
distribute any of its capital assets while it remains in default on any
assessment due the FDIC. The Bank currently is not in default under any of their
obligations to the FDIC.
Item 6. Selected Financial Data.
The information required by this item is contained on page 15 of the Company's
1999 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 2 to 14 of the
Company's 1999 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 5 to 7 of the
Company's 1999 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 16
to 36 of the Company's 1999 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 3 to 5 of the
Company's 2000 Proxy Statement. Such information is incorporated herein by
reference to the Proxy Statement.
14
<PAGE>
Executive Officers of the Company.
Information concerning non-director executive officers of the Registrant is as
follows:
MARTIN S. LAPERA (age 47) is the Executive Vice President of the Company. Mr.
Lapera is the Executive Vice President, Chief Operating Officer and Chief
Lending Officer of the Bank.
CHARLES E. WELLER (age 51) 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 46) 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 62) is a Vice President of the Company and is a Senior Vice
President of the Bank.
HELEN G. HAHN (age 63) is a Vice President and Secretary of the Company. Mrs.
Hahn is a Senior Vice President and Cashier of the Bank.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is contained on page 14 of the Company's
2000 Proxy Statement. Such information is incorporated herein by reference to
the Proxy Statement.
VOTING SECURITIES
The information required by this item is contained on page 7 of the Company's
2000 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 page 5 to 6 of the
Company's 2000 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 8 to 12 of the
Company's 2000 Proxy Statement. Such information is incorporated herein by
reference to the Proxy Statement.
15
<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 1999 Annual Report to Shareholders are incorporated
herein by reference under Item 8 of this Report:
Page Number
in Annual Report
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statements of Changes
in Shareholders' Equity 18
Consolidated Statements of Cash
Flows 19-20
Notes to Consolidated Financial
Statements 21-36
Report of Independent Auditors 36
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.
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.
16
<PAGE>
Exhibit No. Item.
----------- -----
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.
12 Statement Regarding Computation of Ratios, filed
herewith.
13 The Company's 1999 Annual Report to Shareholders,
filed herewith.
21 A statement of the subsidiaries of FCNB Corp, filed
herewith.
17
<PAGE>
Exhibit No. Item.
----------- -----
23 Consent of Independent Auditor
24 Power of Attorney
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.
(b) An 8-K was filed under Item 5. Other Events on October 15, 1999
announcing the completion of the acquisition of First Frederick
Financial Corporation and its wholly-owned subsidiary First Bank
of Frederick.
18
<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 21, 2000 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 21, 2000 /s/ A. Patrick Linton
- --------------------- ----------------------------------------------
A. Patrick Linton
President, Chief Executive Office and Director
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
Date: March 21, 2000 /s/Mark Severson
- --------------------- ----------------------------------------------
Mark Severson
Senior Vice President and Treasurer
Date: March 21, 2000 /s/ George B. Callan, Jr.*
- --------------------- ----------------------------------------------
George B. Callan, Jr., Director
Date: March 21, 2000 /s/ Shirley D. Collier*
- --------------------- ----------------------------------------------
Shirley D. Collier, Director
Date: March 21, 2000 /s/ Miles M. Circo*
- --------------------- ----------------------------------------------
Miles M. Circo, Director
Date: March 21, 2000 /s/Clyde C. Crum*
- --------------------- ----------------------------------------------
Clyde C. Crum, Director
Date: March 21, 2000 /s/James S. Grimes*
- --------------------- ----------------------------------------------
James S. Grimes, Director
19
<PAGE>
SIGNATURES (CONTINUED)
Date: March 21, 2000 /s/Bernard L. Grove, Jr.*
- --------------------- ----------------------------------------------
Bernard L. Grove, Jr., Director
Date: March 21, 2000 /s/Gail T. Guyton*
- --------------------- ----------------------------------------------
Gail T. Guyton, Director
Date: March 21, 2000 /s/Jacob R. Ramsburg, Jr.*
- --------------------- ----------------------------------------------
Jacob R. Ramsburg, Jr., Director
Date: March 21, 2000 /s/Kenneth W. Rice*
- --------------------- ----------------------------------------------
Kenneth W. Rice, Director
Date: March 21, 2000 /s/Rand D. Weinberg*
- --------------------- ----------------------------------------------
Rand D. Weinberg, Director
Date: March 21, 2000 /s/DeWalt J. Willard, Jr.*
- --------------------- ----------------------------------------------
DeWalt J. Willard, Jr., Director
*By A. Patrick Linton, attorney-in-fact pursuant to power of attorney.
20
Exhibit 11
Statement Regarding the Computation of Basic and Diluted Per Share Earnings
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS weighted-average shares outstanding 11,719,983 11,561,232 11,496,668
Effect of dilutive securities-stock options 233,929 309,731 241,044
- ----------------------------------------------------------------------------------------------------
Diluted EPS weighted-average shares outstanding 11,953,912 11,870,963 11,737,712
====================================================================================================
</TABLE>
Exhibit 12
Statement Regarding the Computation of Ratios
a. The percentage ratio of net income to average total assets is calculated by
dividing the 1999 and 1998 net income of $10,429,000 and $9,246,000,
respectively, by the average total assets for 1999 and 1998 of
$1,429,852,000 and $1,255,617,000, respectively.
b. The percentage ratio of net income to average shareholders' equity is
calculated by dividing the 1999 and 1998 net income of $10,429,000 and
$9,426,000, respectively, by the average shareholders' equity for 1999 and
1998 of $93,574,000 and $99,448,000, respectively.
c. The percentage ratio of average shareholders' equity to average total
assets is calculated by dividing the 1999 and 1998 average shareholders'
equity of $93,574,000 and $99,448,000, respectively, by the average total
assets for 1999 and 1998 of $1,429,852,000 and $1,255,617,000,
respectively.
d. The percentage ratio of cash dividends declared to net income is calculated
by dividing the 1999 and 1998 cash dividends declared of $6,996,000 and
$4,882,000, respectively, by the net income for 1999 and 1998 of
$10,429,000 and $9,426,000, respectively.
[FCNB LOGO OMITTED]
7200 FCNB Court
Frederick, Maryland 21703
(301 or 800) 662-2191
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
Financial Review
Table of Contents
Management's Discussion page 2
Selected Financial Data page 15
Consolidated Balance Sheets page 16
Consolidated Statements of Income page 17
Consolidated Statements of Changes in Shareholders' Equity page 18
Consolidated Statements of Cash Flows page 19
Notes to Consolidated Financial Statements page 21
Independent Auditor's Report page 36
<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 ("FCNB") 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 rea 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.
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.
On August 19, 1999, the Company consummated the previously announced
merger of First Frederick Financial Corp ("First"), the holding company for
First Bank of Frederick, with and into FCNB, and the merger of First Bank of
Frederick with and into FCNB's wholly-owned subsidiary, FCNB Bank ("the Bank"),
all headquartered in Frederick, Maryland. FCNB and First executed a definitive
agreement on March 12, 1999.
As a result of the Merger, each share of the $1.00 par value
outstanding common stock of First was converted into 1.0434 shares of the
Company's, $1.00 par value common stock; resulting in the issuance of
approximately 1,543,012 shares of FCNB common stock, subject to adjustment to
account for the elimination of fractional shares. The merger was accounted for
using the pooling-of-interests method.
As of August 19, 1999, the effective date of the transaction, First had
approximately $110 million of total assets, deposits of $97 million, and total
shareholders' equity of $9 million.
Merger related expenses of $4.05 million are included in the
consolidated statements of income and consist principally of $306,000 for
severance payments to terminated employees, $99,000 for professional fees, and
other conversion related costs of $744,000. The allowance for credit losses was
increased an additional $2.9 million in order to align the accounting
assumptions in analyzing the allowance for credit losses.
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 to the investment securities
portfolio. However, the return on average assets, the return on average equity,
and the book value per share at period-end include the effects of these fair
value adjustments.
The following analysis of the Company's operating results is presented
on a consolidated basis. Net income before merger-related expenses was $13.50
million in 1999 compared to $12.59 million in 1998. Basic earnings per share
before merger-related expenses were $1.15 in 1999 compared to $1.09 in 1998.
Diluted earnings per share before merger-related expenses were $1.13 in 1999
compared to $1.06 in 1998.
Net income was $10.43 million in 1999 compared to $9.43 million in
1998. Basic earnings per share were $.89 in 1999 compared to $.82 in 1998.
Diluted earnings per share were $.87 in 1999 compared to $.79 in 1998.
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 0.73% in 1999 and 0.75% in 1998. Return on average shareholders'
equity, which measures the income earned on the capital invested, was 11.15% in
1999 compared to 9.48% in 1998. However, before the specific one-time
merger-related costs the return on average assets was 0.95% in 1999 and 1.00% in
1998, and the return on average shareholders' equity was 14.45% in 1999 and
12.66% in 1998.
During 1999, the Company experienced modest loan growth that resulted
in an $85.01 million increase in loans, net of unearned income, or 10.39% over
the level at the end of 1998.
Noninterest income increased $1.99 million or 11.65% from the level in
1998 while noninterest expenses increased $3.61 million or 8.03% during the same
period. Included in the noninterest expenses are merger-related costs of $1.87
million in 1999 and $1.94 million in 1998. If these amounts were excluded,
noninterest expenses would have risen in 1999 by $3.68 million or 8.54%.
2
<PAGE>
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.
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 1999 and 1998, 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 $50.24 million in 1999,
increasing 6.51% from the $47.17 million in 1998. The Company's average
interest-earning assets increased 14.67% to $1.32 billion during 1999. This
increase was funded primarily by a 15.00% increase in the Company's average
interest-bearing liabilities and by an 18.90% 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 3.79% in 1999, as
compared to 4.09% in 1998. 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 1999. This spread decreased by 26 basis points in 1999. During
the year, the rate paid on average interest-bearing liabilities decreased 10
basis points, while the yield on average interest-earning assets decreased 36
basis points.
The average yield on the investment portfolio fell 18 basis points
during 1999 compared to 1998. The average yield on the loan portfolio decreased
by 36 basis points, reflecting the impact of competitive pressures. The rates
paid on short-term borrowings decreased by 18 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 1999 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.
NONINTEREST INCOME
Noninterest income increased by $1.99 million or 11.65% in 1999. Gains
realized from the sale of mortgage loans in the secondary market were $872,000
in 1999 and $751,000 million in 1998. 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. Insurance commissions increased $667,000 or 12.51% in 1999. The
increase is attributable to Frederick Underwriters' strong insurance sales
activity. Other operating income includes approximately $1.56 million in 1999
and $1.22 million in 1998 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'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 the
products or services cannot be predicted at this time.
NONINTEREST EXPENSES
Noninterest expenses increased $3.61 million in 1999. However, if the
merger related costs of $1.87 million in 1999 and $1.94 million in 1998 are
excluded from this comparison, noninterest expenses for 1999 increased $3.68
million. Total salaries and employee benefits increased $2.05 million or 8.70%
in 1999. The increase in salaries and benefits reflects general merit and
cost-of-living adjustments.
Net occupancy and equipment expenses increased $766,000 or 15.65% and $512,000
or 13.92%, respectively, compared to those incurred during 1999. The increase in
these two areas is directly attributable to the acquisition activity surrounding
the purchase of First Virginia Bank, Capital Bank and First Bank. Branch
upgrading, signage, computer and equipment upgrades in addition to extensive
leasehold improvements have resulted in increased depreciation, maintenance and
utilities expenses.
3
<PAGE>
Table 1: Comparative Statement Analysis
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
daily income(2) yield/ daily income(2) yield/ daily income(2) yield/
(dollars in thousands) balance(1) /paid rate balance(1) /paid rate balance(1) /paid(3) rate
====================================================================================================================================
ASSETS
Interest-earning assets:
Interest-bearing
deposits in other banks $ 6,282 $ 313 4.98% $ 3,341 $ 212 6.35% 2,555 $ 136 5.32%
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 20,402 1,085 5.32 28,637 1,590 5.55 22,180 1,196 5.40
- ------------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 3,918 286 7.30 3,082 168 5.45 1,105 118 10.68
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable 431,556 26,767 6.20 335,563 21,421 6.38 255,223 16,373 6.42
Nontaxable 10,265 849 8.27 7,798 671 8.60 5,872 604 10.29
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 441,821 27,616 6.25 343,361 22,092 6.43 261,095 16,977 6.50
- ------------------------------------------------------------------------------------------------------------------------------------
Loans(3), net of unearned
income 851,705 74,814 8.78 776,307 70,963 9.14 697,861 64,706 9.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,324,128 104,114 7.86 1,154,728 95,025 8.22 984,796 83,133 8.44
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 107,684 96,885 78,285
Net effect of unrealized gain
(loss) on securities
available for sale (1,960) 4,004 1,262
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,429,852 $1,255,617 $1,064,343
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW/SuperNOW accounts $ 83,294 $ 1,523 1.83% $ 83,072 $ 1,718 2.07% $ 70,019 $ 1,354 1.93%
Savings accounts 111,850 3,120 2.79 92,874 2,308 2.49 93,827 2,434 2.59
Money market accounts 172,507 6,061 3.51 140,693 4,944 3.51 115,677 3,664 3.17
Certificates of deposit
and other time deposits
less than $100,000 341,946 17,568 5.14 334,069 18,301 5.48 321,001 17,489 5.45
Certificates of deposit
and other time deposits
of $100,000 or more 111,279 6,246 5.61 102,214 5,904 5.78 78,167 4,483 5.74
Federal funds purchased and
securities sold under
agreements to repurchase 65,282 3,077 4.71 60,939 2,983 4.90 64,753 3,466 5.35
Other short-term borrowings 243,936 12,897 5.29 185,833 10,168 5.47 114,248 6,548 5.73
Long-term debt 40,250 3,378 8.39 18,069 1,527 8.45 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,170,344 53,870 4.60 1,017,763 47,853 4.70 857,692 39,438 4.59
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing
deposits 151,229 127,193 108,417
Noninterest-bearing
liabilities 14,705 11,213 8,622
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,336,278 1,156,169 974,731
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 95,534 95,444 88,350
Net effect of unrealized gain
(loss) on securities
available for sale (1,960) 4,004 1,262
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 93,574 99,448 89,612
Total liabilities and
shareholders' equity $1,429,852 $1,255,617 $1,064,343
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $50,244 $47,172 $43,695
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.26% 3.52% 3.85%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.79% 4.09% 4.44%
- ------------------------------------------------------------------------------------------------------------------------------------
(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%
(3) Nonaccruing loans, which include impaired loans, are included in the average balances. Net loan fees included in interest
income totaled $3,250,000, $1,895,000 and $1,777,000 for 1999, 1998 and 1997, respectively.
</TABLE>
4
<PAGE>
TABLE 2: RATE/VOLUME ANALYSIS
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 compared to 1998 1998 compared to 1997 1997 compared to 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Increase Increase Increase
(decrease) Net (decrease) Net (decrease) Net
due to increase due to increase due to increase
----------- ----------- -----------
(dollars in thousands) Volume Rate(1) (decrease) Volume Rate(1) (decrease) Volume Rate(1) (decrease)
====================================================================================================================================
INTEREST INCOME Interest-earning assets:
Interest-bearing deposits in
other banks $ 187 $ (86) $ 101 $ 42 $ 34 $ 76 $ (137) $ (18) $ (155)
Federal funds sold (457) (48) (505) 372 (9) 363 (101) 100 (1)
Loans held for sale 46 72 118 129 (48) 81 (157) (8) (165)
Investment securities:
Taxable 6,128 (782) 5,346 5,213 (165) 5,048 3,535 241 3,776
Nontaxable(2) 212 (34) 178 123 (56) 67 (91) (70) (161)
Loans(3) 6,891 (3,040) 3,851 7,164 (907) 6,257 9,636 141 9,777
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 13,007 (3,918) 9,089 13,043 (1,151) 11,892 12,685 386 13,071
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST PAID Interest-bearing liabilities:
Savings deposits(4) $ 1,444 $ 290 $ 1,734 $ 1,020 $ 498 $ 1,518 $ 3 $ (584) $ (581)
Time deposits 936 (1,327) (391) 2,091 141 2,232 3,325 637 3,962
Federal funds purchased
and securities sold under
agreements to repurchase 159 (65) 94 (204) (279) (483) 1,374 199 1,573
Other short-term borrowings 3,256 (527) 2,729 3,918 (8) 3,910 3,796 (573) 3,223
Long-term debt 1,875 (24) 1,851 - 1,527 1,527 - (406) (406)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest paid 7,670 (1,653) 6,017 6,825 1,879 8,704 8,498 (727) 7,771
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 5,337 $(2,265) $ 3,072 $ 6,218 $(3,030) $ 3,188 $ 4,187 $ 1,113 $ 5,300
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The volume/rate variance is allocated entirely to changes in rates.
(2) Taxable-equivalent adjustments of $297,000 for 1999, $235,000 for 1998, and $206,000 for 1997 are included in the
calculation of nontaxable investment securities rate variances.
(3) Taxable-equivalent adjustments of $94,000 for 1999, $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.
</TABLE>
Other operating expenses increased $349,000 or 3.20% in 1999 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.
INCOME TAXES
Income tax expense from operating activities decreased to $4.90 million
in 1999, compared to $5.62 million in 1998, reflecting the lower level of
pre-tax income in 1999. The Company's effective tax rate from operating
activities was 31.97% in 1999, compared to 33.46% in 1998. 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. 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.
5
<PAGE>
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 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 $501.40 million or 33.30% of total assets. Due to their
very liquid nature, the entire balance of money market accounts is assumed to be
repriced within one year.
INTEREST RATE SENSITIVITY ANALYSIS - DECEMBER 31, 1999
<TABLE>
<S> <C> <C> <C> <C> <C>
Interest sensitivity period
- ------------------------------------------------------------------------------------------------------------------------------------
After 1
3 or less 4 to 12 through After 5
(dollars in thousands) months months 5 years years Total
====================================================================================================================================
INTEREST-EARNING ASSETS
Interest-bearing deposits in other banks $ 28,737 $ - $ - $ - $ 28,737
Federal funds sold 8,317 - - - 8,317
Loans held for sale:
Fixed rate 878 - - - 878
Investment securities:(1)
Fixed rate 20,022 37,878 94,958 194,730 347,588
Variable rate 60,020 - - - 60,020
Loans:(2)
Fixed rate 66,461 67,562 361,231 159,812 655,066
Variable rate 237,401 - - - 237,401
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 421,836 $ 105,440 $ 456,189 $ 354,542 $ 1,338,007
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
NOW/SuperNOW accounts and savings $ 2,472 $ 7,415 $ 39,550 $ 148,311 $ 197,748
Money market accounts 197,046 - - - 197,046
Certificates of deposit and
other time deposits:
Fixed rate 86,075 284,151 87,075 518 457,819
Variable rate 12,665 - - - 12,665
Federal funds purchased and securities
sold under agreements to repurchase 59,995 - - - 59,995
Other short-term borrowings:
Fixed rate 75,000 116,000 25,000 53,268 269,268
Long-term debt:
Fixed rate - - - 40,250 40,250
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 433,253 $ 407,566 $ 151,625 $242,347 $ 1,234,791
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities ("Gap") $ (11,417) $(302,126) $ 304,564 $112,195 $ 103,216
Cumulative Gap $ (11,417) $(313,543) $ (8,979) $103,216 $ 103,216
Cumulative Gap as a percentage of total assets (0.76)% (20.82)% (0.60)% 6.85% 6.85%
- ------------------------------------------------------------------------------------------------------------------------------------
(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.
</TABLE>
6
<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,
1999, 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, 1999, 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, 1999. This instrument matures in November 2004.
The preceding table, "Interest Rate Sensitivity Analysis," summarizes,
as of December 31, 1999, 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.
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 analyzes: (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, 1999 are
as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Change in Interest Rate Assumption
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) +100bp +200bp +300bp -100bp -200bp -300bp
====================================================================================================================================
Net interest income-increase (decrease) ($48,581) ($46,928) ($45,974) $51,617 $53,015 $53,588
Net interest income -- % change (3.08) (6.38) (8.28) 2.97 5.76 6.90
</TABLE>
7
<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, 1999 and 1998, 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 33% of average earning assets in 1999 and 30% in 1998. 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 $441.82 million in 1999, compared to $343.36
million in 1998. The average tax-equivalent yield on the portfolio decreased 18
basis points to 6.25% in 1999. During 1999, the Company increased the investment
portfolio by approximately $29.49 million in arbitrage transactions. An
arbitrage transaction is one in which the Company borrows funds primarily 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.
As of December 31, 1999, the gross unrealized losses in the Company's
investment portfolio were $279,000 in the held-to-maturity investment portfolio
and $16.37 million in the available-for-sale investment portfolio compared to
$46,000 and $2.18 million, respectively, as of December 31, 1998. As of December
31, 1999, the gross unrealized gains in the Company's investment portfolio were
$180,000 in the held-to-maturity investment portfolio and $1.54 million in the
available-for-sale investment portfolio compared to $470,000 and $8.53 million,
respectively, as of December 31, 1998. The increase in the gross unrealized
losses in the Company's investment portfolio as of December 31, 1999 was caused
by an increase in market interest rates during the last half of 1999. As
interest rates rise, the value of the investment portfolio decreases, and as
interest rates fall, the value of the investment portfolio will increase.
Restricted stock consists of Federal Reserve Stock, Federal Home Loan Bank Stock
and Atlantic Central Bankers Bank Stock. The balance of restricted stock as of
December 31, 1999 and 1998 was $16.06 million and $23.29 million, respectively.
The investment portfolio had an average life of 5.6 years, with an estimated
average tax-equivalent yield of 6.25%, at December 31, 1999. 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.
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, 1999.
8
<PAGE>
Investment Portfolio Distribution-Book Value (Amortized cost)
<TABLE>
<S> <C> <C> <C>
December 31,
- ------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999(1) 1998(1) 1997(1)
======================================================================================================
U.S. Treasury and other U.S.
government agencies and corporations $ 205,699 $ 165,444 $ 128,039
State and political subdivisions 9,836 4,021 1,198
Other securities 225,380 280,232 160,356
- ------------------------------------------------------------------------------------------------------
Total $ 440,915 $ 449,697 $ 289,593
- ------------------------------------------------------------------------------------------------------
(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.
</TABLE>
<PAGE>
Analysis of Investment Portfolio (Held-to-Maturity) - December 31,1999
<TABLE>
<CAPTION>
Maturing in:
- --------------------------------------------------------------------------------------------------------------------------------
After 1 After 5
1 year through through After 10
or less 5 years 10 years years
- --------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies and corporations $3,536 5.12% $12,647 6.23% $ 26 12.67% -- --%
State and political subdivisions(1) 355 6.62 2,278 12.01 350 8.06 2,071 7.34
- --------------------------------------------------------------------------------------------------------------------------------
Total $3,891 5.25% $14,925 7.11% $376 8.37% $2,071 7.34%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1) Yields, calculated using amortized cost book values, are presented on a
fully taxable equivalent basis using the federal statutory rate of 35%. All
of the obligations of states and political subdivisions are rated A or
higher by either Moody's Investors Service, Inc. or Standard & Poor's
Corporation.
<PAGE>
Analysis of Investment Portfolio (Available-for-Sale) - December 31, 1999
<TABLE>
<CAPTION>
Maturing in:
- ----------------------------------------------------------------------------------------------------------------------------------
After 1 After 5
1 year through through After 10
or less 5 years 10 years years
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Amount(1) Yield Amount(1)(2) Yield Amount(1)(2) Yield Amount(1)(2) Yield
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies and corporations $8,015 6.27% $84,248 6.59% $96,649 5.41% $143,407 6.56%
State and political subdivisions -- -- -- -- -- -- 4,782 6.91
Other securities -- -- 9,332 7.45 9,658 7.61 63,561 5.70
- ----------------------------------------------------------------------------------------------------------------------------------
Total $8,015 6.27% $93,580 6.68% $106,307 5.64% $211,750 6.30%
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
(2) 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 state and political subdivisions are rated A or
higher by either Moody's Investors Service, Inc. or Standard & Poor's
Corporation.
LOAN PORTFOLIO
During 1999, the Company sold $28.99 million of conforming residential mortgage
loans to Countrywide Mortgage (Countrywide) and other private investors, and
held additional loans for sale totaling $878,000 at December 31, 1999, whereas
in 1998, the Company sold loans totaling $49.54 million and held additional
loans for sale totaling $5.24 million at December 31, 1998. The average balance
of loans held for sale for 1999 was $3.92 million, and in 1998 was $3.08
million, which generated average yields of 7.30% and 5.45%, 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.
Loan Distribution
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 % 1998 % 1997 % 1996 % 1995%
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction $128,993 14% $122,445 15% $ 85,497 11% $ 64,159 10% $ 43,279 8%
Real estate-mortgage 530,255 59 466,724 57 460,210 61 415,586 64 360,019 65
Commercial and agricultural 160,047 18 147,995 18 129,307 18 102,895 16 84,426 15
Consumer 83,777 9 80,897 10 74,259 10 67,901 10 66,748 12
- ----------------------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned income 903,072 100% 818,061 100% 749,273 100% 650,541 100% 554,472 100%
Less: Allowance for
credit losses (10,043) (8,237) (7,611) (6,816) (7,102)
- ----------------------------------------------------------------------------------------------------------------------------
Net loans $893,029 $809,824 $741,662 $643,725 $547,370
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Maturity and Interest Rate Sensitivity of Loans-December 31, 1999
<TABLE>
<CAPTION>
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
(dollars in thousands) rates rates rates rates rates rates Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate - construction $ 75,758 $ 29,821 $ 18,683 $ 2,000 $ 9,216 $ -- $135,478
Real estate - mortgage(1) 38,873 83,189 222,327 54,256 126,105 693 525,443
Commercial and agricultural 9,177 70,626 55,915 8,071 13,536 302 157,627
Consumer 3,263 7,846 62,422 -- 10,993 -- 84,524
- -----------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $127,071 $191,482 $359,347 $64,327 $159,850 $995 $903,072
</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 as of
December 31, 1999.
ALLOWANCE FOR CREDIT LOSSES
The Company follows the guidance of FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by Statement No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." It requires that impaired loans, within its scope, be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. Since the Company's
allowance for credit losses was considered adequate when this Statement was
adopted, the impact on the Company's financial condition and results of
operations was not material.
Statement 114 excludes smaller balance and homogeneous loans from impairment
reporting. Therefore, the Company has designated consumer, credit card and
residential mortgage loans to be excluded for this purpose. From the remaining
loan portfolio, loans rated as doubtful, or worse, classified as nonaccrual, and
troubled debt restructurings may be evaluated to be impaired. Loans are
evaluated for nonaccrual status when principal or interest is delinquent for 90
days or more and are placed on nonaccrual status when a loan is specifically
determined to be impaired. Any unpaid interest previously accrued on those loans
is reversed from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received. Up to this point, slow payment on a loan
is considered, by the Company, to only be a minimum delay. See Note 5 to the
consolidated financial statements for selected information concerning the
Company's recorded investment in impaired loans.
The Company maintains its allowance for credit losses at a level deemed
sufficient to provide for estimated potential losses inherent in the credit
extension process. Management reviews the adequacy of the allowance each
quarter, considering factors such as current and future economic conditions and
their anticipated impact on specific borrowers and industry groups, the growth
and composition of the loan portfolio, the level of classified and problem
assets, historical loss experience, and the collectability of specific loans.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows.
The provision for credit losses is charged to income in an amount necessary to
maintain the allowance at the level management believes is appropriate.
The allowance for credit losses was $10.04 million, or 1.11% of total loans, net
of unearned income, at December 31, 1999, compared to $8.27 million, or 1.01% as
of December 31, 1998. The allowance for credit losses to nonperforming loans was
89.04% and 87.5% as of December 31, 1999 and 1998, respectively.
The Company's provision for credit losses in 1999 was $5.01 million compared to
$2.10 million in 1998. Included in the provision for 1999 is $2.90 million,
which is attributable to the acquisition of First Frederick Financial
Corporation and was recorded in order to align the accounting assumptions in
analyzing the allowance for credit losses. Also included in the 1999 net
charge-offs amount of $3.20 million are $1.50 million of charge-offs that are
attributable to First Frederick Financial Corporation. If the $2.90 million
provision and the $1.50 million charge-off were excluded from the 1999 allowance
for credit losses, net credit losses would have been less than the provision for
credit losses by $406,000 and $626,000 in 1999 and 1998, respectively.
Total nonperforming assets as of December 31, 1999 totaled $12.24 million,
reflecting a $993,000 increase from the $11.25 million in nonperforming assets
as of December 31, 1998. Total nonperforming assets, including properties
acquired through foreclosure, represent .81% and .77% of total assets as of
December 31, 1999 and 1998 respectively.
Nonperforming assets at December 31, 1999, include $10.61
million of nonaccrual loans, $674,000 of loans past due 90 days or more,
$962,000 of foreclosed properties, consisting principally of commercial
properties.
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.
9
<PAGE>
Problem Assets
December 31,
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans(1) $10,605 $ 7,828 $ 4,698 $ 6,382 $ 4,677
Restructured loans(2) -- -- 128 31 505
Past due loans(3) 674 1,585 2,316 3,920 2,302
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 11,279 9,413 7,142 10,333 7,484
Foreclosed properties(4) 962 1,835 3,601 3,833 3,276
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $12,241 $11,248 $10,743 $14,166 $10,760
Nonperforming assets to total loans (net of
unearned income) and foreclosed
properties at period-end 1.35% 1.37% 1.43% 2.17% 1.93%
Nonperforming assets to total
assets at period-end 0.81% 0.77% 0.91% 1.41% 1.27%
Allowance for credit losses to
nonperforming loans at period-end 89.04% 87.5% 106.6% 66.0% 94.9%
- ----------------------------------------------------------------------------------------------------------------------------
</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 $32.41 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.
As of December 31, 1999, the Company had a significant concentration of credit
risk in the real estate loan portfolio of 14%. While this exceeded the 10%
threshold, we do not consider this to be an adverse risk. An industry for this
purpose is defined as a group of counterparties that are engaged in similar
activities and have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in
economic or other conditions.
There were no other interest-bearing assets at December 31, 1999, classifiable
as nonaccrual, past due, restructured or problem assets.
Allowance for Credit Losses
<TABLE>
<CAPTION>
Years ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average total loans outstanding during year $851,705 $776,307 $697,861 $601,023 $531,312
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance at beginning of year $ 8,237 $ 7,611 $ 6,816 $ 7,102 $ 6,486
Charge-offs:
Real estate-construction -- -- 588 -- --
Real estate-mortgage 702 177 213 299 467
Commercial and agricultural 2,619 786 472 969 304
Consumer 519 947 356 379 231
- -----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 3,840 1,910 1,629 1,647 1,002
Recoveries:
Real estate-construction -- -- 24 -- --
Real estate-mortgage 179 50 24 49 6
Commercial and agricultural 318 130 475 70 202
Consumer 141 259 92 97 85
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 638 439 615 216 293
Net charge-offs 3,202 1,471 1,014 1,431 709
Additions to allowance charged to operating expenses 5,008 2,097 1,809 683 1,325
Other transfers and allowance on loans
acquired with purchased entity -- -- -- 462 --
Allowance at end of year $ 10,043 $ 8,237 $ 7,611 $ 6,816 $ 7,102
Ratio of net charge-offs to average total loans 0.38% 0.19% 0.15% 0.24% 0.13%
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
10
<PAGE>
Allocation of Allowance for Credit Losses
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 %(1) 1998 %(1) 1997 %(1) 1996 %(1) 1995 %(1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-construction $ 1,145 14% $ 949 15% $ 586 11% $1,116 10% $ 858 8%
Real estate-mortgage 3,583 59 3,920 57 3,603 61 3,113 64 3,275 65
Commercial and agricultural 3,440 18 2,122 18 1,720 18 1,277 16 1,731 15
Consumer 1,412 9 396 10 488 10 695 10 586 12
Unallocated 463 -- 850 -- 1,214 -- 615 -- 652 --
- -------------------------------------------------------------------------------------------------------------------------------
Total Allowance $10,043 $8,237 $7,611 $6,816 $7,102
</TABLE>
(1) Percent of loans in each category to total loans, net of unearned income.
DEPOSITS
Average Deposits and Average Rates
<TABLE>
<CAPTION>
Years ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average
daily Average daily Average daily Average
(dollars in thousands) balance Rate balance Rate balanceRate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $151,229 --% $127,193 --% $108,417 --%
Interest-bearing demand deposits:
NOW/SuperNOW 83,294 1.83 83,072 2.07 70,019 1.93
Money Market 172,507 3.51 140,693 3.51 115,677 3.17
Savings deposits 111,850 2.79 92,874 2.49 93,827 2.59
Certificates of deposits:
Less than $100,000 341,946 5.14 334,069 5.48 321,001 5.45
Greater than $100,000 111,279 5.61 102,214 5.78 78,167 5.74
Total average deposits $972,105 3.55% $880,115 3.77% $787,108 3.74%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Maturities of Time Deposits-$100,000 or More
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maturing in:
3 months or less $ 5,972 $ 50,028 $ 30,625
Over 3 months through 6 months 21,049 18,803 24,167
Over 6 months through 12 months 69,483 15,440 23,809
Over 12 months 25,328 20,096 25,513
- ----------------------------------------------------------------------------------------------------------------------
$121,832 $104,367 $104,114
</TABLE>
11
<PAGE>
SHORT-TERM BORROWINGS
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase(1)
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total outstanding at year-end $ 59,995 $ 94,117 $ 86,035
- -----------------------------------------------------------------------------------------------------------------------
Average amount outstanding during the year $ 65,282 $ 60,939 $ 64,753
Maximum amount outstanding at any month-end $ 80,141 $110,779 $ 88,494
Weighted-average interest rate at year-end 4.66% 4.61% 5.43%
- -----------------------------------------------------------------------------------------------------------------------
Weighted-average interest rate during the year 4.71% 4.90% 5.35%
</TABLE>
(1) Includes securities sold under agreements to repurchase with various
counterparties. Repurchase agreements mature primarily within 60 days and
are collateralized with certain debt securities.
Other Short-term Borrowings(2)
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total outstanding at year-end $269,268 $248,719 $155,767
- -----------------------------------------------------------------------------------------------------------------------
Average amount outstanding during the year $243,936 $185,833 $114,248
- -----------------------------------------------------------------------------------------------------------------------
Maximum amount outstanding at any month-end $269,268 $252,855 $162,126
- -----------------------------------------------------------------------------------------------------------------------
Weighted-average interest rate at year-end 5.55% 5.17% 5.36%
- -----------------------------------------------------------------------------------------------------------------------
Weighted-average interest rate during the year 5.29% 5.47% 5.48%
</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, 1999, 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, 1999 Due in Interest rate range Amount
- -----------------------------------------------------------
(dollars
in thousands)
<S> <C> <C>
2000 5.35 - 6.19% $191,000
2003 5.37% 25,000
2006 5.17% 10,000
2007 5.27% 24,000
2009 4.96% 19,000
Thereafter 2.00% 268
- -----------------------------------------------------------
Total $269,268
</TABLE>
12
<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, 1999 and 1998 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, 1999, 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 notifications 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
Instructions" section the "Market Risk" section, and the Notes to the
Consolidated Financial Statements.
INFLATION
The effect of changing prices on financial instructions 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.
13
<PAGE>
YEAR 2000
The Company successfully processed transactions affecting all mission critical
and non-mission critical systems. All systems functioned as expected with no
adverse impact to overall bank operations. The company expended $171,000 for the
year end December 31, 1999 and expects to incur another $169,000 in costs for
the year ended December 31, 2000 to address Year 2000 related issues.
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.
FINANCIAL ANALYSIS 1998-1997
Earnings Summary
Net income was $9.43 million in 1998 compared to $11.17 million for 1997. Basic
and diluted earnings per share were $0.82 and $.079 in 1998 compared to $0.97
and $0.95 for 1997. Net income before merger-related expenses was $12.59 million
in 1998 and $11.45 million in 1997, while basic earnings per share were $1.09 in
1998, diluted earnings per share were $1.06 in 1998 and basic and diluted
earnings per share were $0.97 and $0.95, respectively for 1997.
Return on average assets was 75% in 1998 compared to 1.05% for 1997. Return on
average shareholders' equity was 9.48% in 1998 compared to 12.46% in 1997.
However, before merger-related expenses the return on average assets was 1.00%
in 1998 and 1.08% in 1997, and the return on average shareholders equity was
12.66% and 12.78% and 1977, respectively.
Net Interest Income
On a Fully taxable-equivalent basis, net interest income increased $5.48 million
or 7.96% in 1998 and $4.26 million or 10.89% in 1997.
In 1998, the net interest margin on average total interest-earning assets
decreased to 4.09% from 4.44% in 1997. 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 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 $4.11 million or 31/69% in 1998 and by 1.60
million or 14.10% in 1997.
The increased service fees on deposit accounts are attributed to increases in
both account volume and activity, since service charges per account and per
transaction remained relatively constant between the periods
Noninterest Expenses
Noninterest expenses increased $7.27 million, but excluding merger-related costs
of 1.94 million in 1998 and $460,000 in 1997 would have increased $5.79 million.
Income Taxes:
Income tax expense from operating activities decreased to $5.62 million in 1998,
compared to $5.71 million in 1997.
14
<PAGE>
FINANCIAL ANALYSIS 1998-1997
Earnings Summary:
Net income was $9.43 million in 1998 compared to $11.17
million for 1997. Basic and diluted earnings per share were $0.82 and $0.79 in
1998 compared to $0.97 and $0.95 for 1997. Net income before merger-related
expenses was $12.59 million in 1998 and $11.45 million in 1997, while basic
earnings per share were $1.09 in 1998, diluted earnings per share were $1.06 in
1998 and basic and diluted earnings per share were $0.97 and $0.95,
respectively, for 1997.
Return on average assets was .75% in 1998 compared to 1.05% for 1997. Return on
average shareholders' equity was 9.48% in 1998 compared to 12.46% in 1997.
However, before merger-related expenses the return on average assets was 1.00%
in 1998 and 1.08% in 1997, and the return on average shareholders equity was
12.66% and 12.78% in 1998 and 1997, respectively.
Net Interest Income:
On a fully taxable-equivalent basis, net interest income increased $3.48 million
or 7.96% in 1998 and $4.26 million or 10.89% in 1997.
In 1998, the net interest margin on average total interest-earning assets
decreased to 4.09% from 4.44% in 1997. 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 $4.11 million or 31.69% in 1998 and by $1.60
million or 14.10% in 1997.
The increased service fees on deposit accounts are attributed to increases in
both account volume and activity, since service charges per account and per
transaction remained relatively constant between the periods.
Noninterest Expenses:
Noninterest expenses increased $7.27 million, but excluding merger-related costs
of $1.94 million in 1998 and $460,000 in 1997 would have increased $5.79
million.
Income Taxes:
Income tax expense from operating activities decreased to $5.62 million in 1998,
compared to $5.71 million in 1997.
15
<PAGE>
SELECTED FINANCIAL DATA
The following table for the years 1998, 1997, 1996, and 1995 has been restated
to include the effects of the acquisition of First Frederick Financial
Corporation in 1999, accounted for as a pooling 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,
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Total interest income $ 103,723 $ 94,640 $ 82,860 $ 70,808 $ 64,479
Total interest expense (1) 53,870 47,853 39,438 31,649 28,480
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 49,853 46,787 43,422 39,159 35,999
Provision for credit losses 5,008 2,097 1,809 683 1,325
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 44,845 44,690 41,613 38,476 34,674
Net securities gains (losses) 926 1,520 669 420 109
Noninterest income (excluding net securities
gains (losses)) 18,158 15,572 12,310 10,955 10,869
Noninterest expenses 48,598 44,986 37,717 37,762 33,196
- ---------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 15,331 16,796 16,875 12,089 12,456
Provision for income taxes:
Operating activities 4,902 5,620 5,707 4,356 3,508
Thrift bad debt reserve recapture -- 1,750 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Income tax expense 4,902 7,370 5,707 4,356 3,508
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 10,429 9,426 11,168 7,733 8,948
Other comprehensive income (loss), net of taxes (12,961) 240 3,058 (47) 3,182
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ (2,532) $ 9,666 $ 14,226 $ 7,686 $ 12,130
- ---------------------------------------------------------------------------------------------------------------------------------
Net income before merger-related expenses $13,520 $ 12,587 $ 11,453 $ 9,644 $ 9,251
- ---------------------------------------------------------------------------------------------------------------------------------
Per Share Data:
Basic earnings $ 0.89 $ 0.82 $ 0.97 $ 0.67 $ 0.79
Diluted earnings $ 0.87 $ 0.79 $ 0.95 $ 0.66 $ 0.78
Basic earnings before merger-related expenses $ 1.15 $ 1.09 $ 0.99 $ 0.84 $ 0.81
Diluted earnings before merger-related expenses $ 1.13 $ 1.06 $ 0.97 $ 0.82 $ 0.80
Cash dividends declared $ 0.598 $ 0.427 $ 0.330 $ 0.269 $ 0.259
Book value at period-end $ 7.53 $ 8.52 $ 8.32 $ 7.43 $ 7.11
Shares outstanding at period-end 11,923,775 11,598,626 11,571,907 11,522,063 11,388,074
Weighted average shares outstanding:
Basic 11,719,983 11,561,232 11,496,668 11,544,004 11,386,558
Diluted 11,953,912 11,870,963 11,737,712 11,729,575 11,539,881
Other Data (At Year-End):
Total loans, net of unearned income $ 903,072 $ 818,061 $ 749,273 $649,639 $ 553,357
Total assets 1,505,796 1,459,720 1,179,435 1,002,010 849,928
Total deposits 1,028,859 962,799 830,326 766,911 686,309
Federal funds purchased and securities
sold under agreement to repurchase 59,995 94,117 86,035 55,446 32,796
Other short-term borrowings 269,268 248,719 155,767 84,416 34,328
Long-term debt 40,250 40,250 -- -- 5,680
Total shareholders' equity 89,765 98,855 96,236 85,612 80,917
Consolidated Ratios:
Return on average total assets 0.73% 0.75% 1.05% 0.86% 1.10%
Return on average total assets before
merger-related expenses 0.95% 1.00% 1.08% 1.07% 1.13%
Return on average shareholders' equity 11.15% 9.48% 12.46% 9.51% 11.82%
Return on average shareholders' equity
before merger-related expenses 14.45% 12.66% 12.78% 11.87% 12.22%
Average equity to average assets 6.54% 7.92% 8.42% 9.01% 9.25%
Cash dividends declared to net income 67.09% 51.79% 34.13% 40.17% 33.00%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of $108,000 and $300,000 of capitalized construction period interest in
1996 and 1995, respectively. FCNB Corp and Subsidiary
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- -------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 39,323 $ 35,518
Interest-bearing deposits in other banks 28,737 9,358
Federal funds sold 8,317 47,262
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 76,377 92,138
Loans held for sale 878 5,236
Investment securities held to maturity-- fair value
of $21,164 in 1999 and $30,469 in 1998 21,263 30,045
Investment securities available for sale-- at fair value 404,818 414,386
Restricted stock, at cost 16,061 23,298
Loans 903,080 818,084
Less: Allowance for credit losses (10,043) (8,237)
Unearned income (8) (23)
- -------------------------------------------------------------------------------------------------------------------
Net loans 893,029 809,824
- -------------------------------------------------------------------------------------------------------------------
Bank premises and equipment 25,543 26,902
Other assets 67,827 57,891
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,505,796 $1,459,720
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Noninterest-bearing deposits $ 163,581 $ 154,774
Interest-bearing deposits 865,278 808,025
- -------------------------------------------------------------------------------------------------------------------
Total deposits 1,028,859 962,799
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 59,995 94,117
Other short-term borrowings 269,268 248,719
Long term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 40,250 40,250
Accrued interest and other liabilities 17,659 14,980
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,416,031 1,360,865
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;
50,000,000 shares authorized; 11,923,775 in 1999
and 11,598,626 in 1998 shares issued and outstanding 11,924 11,599
Capital surplus 54,316 54,147
Retained earnings 32,581 29,204
Accumulated other comprehensive income (loss) (9,056) 3,905
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 89,765 98,855
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,505,796 $1,459,720
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
FCNB Corp and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 75,006 $70,981 $64,757
Interest and dividends on investment securities:
Taxable 25,217 20,352 15,755
Tax exempt 552 436 398
Dividends 1,550 1,069 618
Interest on federal funds sold 1,085 1,590 1,196
Other interest income 313 212 136
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 103,723 94,640 82,860
Interest expense:
Interest on deposits 34,518 33,175 29,424
Interest on federal funds purchased and
securities sold under agreements to repurchase 3,077 2,983 3,466
Interest on other short-term borrowings 12,897 10,168 6,291
Interest on long-term debt 3,378 1,527 257
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 53,870 47,853 39,438
Net interest income 49,853 46,787 43,422
Provision for credit losses 5,008 2,097 1,809
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 44,845 44,690 41,613
Noninterest income:
Service fees 5,544 4,617 3,763
Insurance commissions 5,999 5,332 5,668
Net securities gains 926 1,520 669
Gain on sale of loans 872 751 407
Income from bank-owned life insurance 1,562 1,222 605
Other operating income 4,181 3,650 1,867
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 19,084 17,092 12,979
Noninterest expenses:
Salaries and employee benefits 25,603 23,553 20,353
Occupancy expenses 5,661 4,895 4,117
Equipment expenses 4,191 3,679 2,855
Merger-related expenses 1,871 1,936 460
Other operating expenses 11,272 10,923 9,932
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 48,598 44,986 37,717
Income before provision for income taxes 15,331 16,796 16,875
Provision for income taxes:
Operating activities 4,902 5,620 5,707
Thrift bad debt reserve recapture -- 1,750 --
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense 4,902 7,370 5,707
Net income 10,429 9,426 11,168
Basic earnings per share $ 0.89 $ 0.82 $ 0.97
Diluted earnings per share $ 0.87 $ 0.79 $ 0.95
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
FCNB Corp and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the years ended December 31, 1999, 1998 and 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Compre- Total
(dollars in thousands, Shares Common Capital Retained hensive Shareholders'
except per share amounts) Outstanding Stock Surplus Earnings Income Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 7,465,700 $ 7,466 $33,183 $36,944 $ 739 $ 78,332
- ----------------------------------------------------------------------------------------------------------------------------------
Effects of pooled entities 499,744 500 5,428 923 (132) 6,719
- ----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 11,168 -- 11,168
- ----------------------------------------------------------------------------------------------------------------------------------
Changes in net unrealized gains (losses)
on securities, net of reclassification
adjustment and tax effects -- -- -- -- 3,058 3,058
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME 14,226
- ----------------------------------------------------------------------------------------------------------------------------------
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) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Shares issued with stock split effected in the
form of a stock dividend 249,085 249 -- (249) -- --
Repurchase of common stock (15,217) (15) (273) (60) -- (348)
- ----------------------------------------------------------------------------------------------------------------------------------
Stock option and warrants transactions 42,657 43 508 -- -- 551
- ----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared -- -- -- (3,812) -- (3,812)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 8,782,426 8,783 55,501 27,727 3,665 95,676
- ----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 9,426 -- 9,426
- ----------------------------------------------------------------------------------------------------------------------------------
Changes in net unrealized gains (losses)
on securities, net of reclassification
adjustment and tax effects -- -- -- -- 240 240
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME 9,666
- ----------------------------------------------------------------------------------------------------------------------------------
Dividend reinvestment and stock purchase plan -- -- -- (29) -- (29)
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 3,898 4 81 -- -- 85
- ----------------------------------------------------------------------------------------------------------------------------------
Shares issued with stock split effected in the
form of a stock dividend 2,741,549 2,741 -- (2,741) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase of common stock (129,620) (130) (2,501) (297) -- (2,928)
- ----------------------------------------------------------------------------------------------------------------------------------
Stock option and warrants transactions 200,373 201 1,066 -- -- 1,267
- ----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared -- -- -- (4,882) -- (4,882)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 11,598,626 11,599 54,147 29,204 3,905 98,855
- ----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS):
- ----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 10,429 -- 10,429
- ----------------------------------------------------------------------------------------------------------------------------------
Changes in net unrealized gains (losses)
on securities, net of reclassification
adjustment and tax effects -- -- -- -- (12,961) (12,961)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS): (2,532)
- ----------------------------------------------------------------------------------------------------------------------------------
Dividend reinvestment and stock purchase plan -- -- -- (56) -- (56)
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 13,100 13 223 -- -- 236
- ----------------------------------------------------------------------------------------------------------------------------------
Stock option transactions 312,049 312 (54) -- -- 258
- ----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared -- -- -- (6,996) -- (6,996)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 11,923,775 $11,924 $54,316 $32,581 $(9,056) $ 89,765
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
FCNB Corp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,429 $ 9,426 $ 11,168
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,591 3,241 2,582
Provisions for credit losses and foreclosed properties 5,083 2,149 1,844
Deferred income taxes (benefits) (982) (106) 1,092
Net discount accretion/premium amortization
on investment securities 278 85 (109)
Noncash charitable contribution -- -- 98
Accretion of net loan origination fees (1,445) (1,149) (775)
Net securities gains (926) (1,520) (669)
Net (gain) loss on sales of property (9) 107 193
Decrease (increase) in other assets (1,751) (1,514) (1,490)
Decrease (increase) in loans held for sale 4,358 (4,093) 2,410
Increase (decrease) in accrued interest and other liabilities 2,679 2,489 1,843
Other operating activities -- 525 (234)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,305 9,640 17,953
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities
available for sale 76,263 65,757 72,617
Proceeds from maturities of investment securities
available for sale 130,246 146,240 67,829
Proceeds from maturities of investment securities
held to maturity 7,316 9,991 12,257
Purchases of investment securities available for sale (208,772) (390,767) (187,013)
Purchases of investment securities held to maturity -- (2,070) (18,031)
Net increase in loans (86,768) (69,425) (99,970)
Decrease (increase) in interest-bearing deposits in other banks -- (93) 273
Purchases of bank premises and equipment (1,749) (2,823) (2,583)
Proceeds from dispositions of property 795 1,444 939
Purchase of foreclosed properties (60) (26) (159)
Purchases of investments in bank-owned life insurance -- (15,000) (13,540)
Acquisition of business, net of cash acquired -- 41,836 --
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (82,729) (214,936) (167,381)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
20
<PAGE>
FCNB Corp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
<TABLE>
<CAPTION>
For the years ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in NOW, money market accounts,
and savings accounts in noninterest-bearing deposits $ 37,134 $ 67,674 $ 7,503
Net increase in time deposits 28,926 19,998 55,913
Net increase (decrease) in short-term borrowings (13,573) 101,034 102,179
Proceeds from long-term debt -- 40,250 1,833
Repayments of long-term debt -- -- (2,181)
Debt issuance costs -- (1,710) --
Dividend reinvestment and stock purchase plan (56) (29) (18)
Proceeds from issuance of common stock 228 1,218 425
Repurchase of common stock -- (2,928) (348)
Dividend paid (6,996) (4,882) (3,812)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 45,663 220,625 $ 161,494
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (15,761) 15,329 12,066
Cash and cash equivalents-- beginning of year 92,138 76,809 64,743
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents-- end of year $ 76,377 $ 92,138 $ 76,809
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Interest paid $ 53,384 $ 43,181 $ 35,125
Income taxes paid $ 5,545 $ 7,309 $ 3,365
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing and
financing activities:
Foreclosed properties acquired in settlement of loans -- $ 440 $ 589
Surplus from stock options transactions $ 30 135 152
Acquisition of entity through issuance of common stock $ 236 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Details of acquisitions:
Fair value of assets acquired -- $ 2,096 --
Fair value of liabilities assumed -- (45,090) --
Purchase price in excess of the net assets acquired -- 2,273 --
- ----------------------------------------------------------------------------------------------------------------------------
Cash paid (received) -- (40,721) --
Less cash acquired -- 1,115 --
- ----------------------------------------------------------------------------------------------------------------------------
Net cash paid (received) for acquisition -- $ (41,836) --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
21
<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:
The Company follows Financial Accounting Standards Board ("FASB") Statement No.
130, "Reporting Comprehensive Income" (Statement 130) for reporting
comprehensive income. Comprehensive income, as defined by Statement 130, is the
change in equity of a business enterprise during a reporting period from
transactions and other events and circumstances from non-owner sources. In
addition to the Company's net income, change in equity components under
comprehensive income reporting include the net change in unrealized gain or loss
on securities available-for-sale.
The following table summarizes the related tax effect of unrealized
gains(losses) on securities available-for-sale included in other comprehensive
income shown in the consolidated statements of changes in shareholders' equity.
For the year ended December 31, 1999:
<TABLE>
<CAPTION>
Tax
Pre-tax Expense Net
Amounts (Benefits) Amount
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses)
arising during period $(20,959) $(8,564) $(12,395)
Less: reclassification adjustment
for gains (losses) included in
net income 926 360 566
- -----------------------------------------------------------------------
Net unrealized gains (losses)
on securities $(21,885) $(8,924) $(12,961)
- -----------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1998:
<TABLE>
<CAPTION>
Tax
Pre-tax Expense Net
Amounts (Benefits) Amount
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses)
arising during period $1,911 $743 $1,168
Less: reclassification adjustment
for gains (losses) included in
net income 1,520 592 928
- -----------------------------------------------------------------------
Net unrealized gains (losses)
on securities $ 391 $151 $ 240
- -----------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1997:
<TABLE>
<CAPTION>
Tax
Pre-tax Expense Net
Amounts (Benefits) Amount
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses)
arising during period $5,650 $2,181 $3,469
Less: reclassification adjustment
for gains (losses) included in
net income 669 258 411
- -----------------------------------------------------------------------
Net unrealized gains (losses)
on securities $4,981 $1,923 $3,058
- -----------------------------------------------------------------------
</TABLE>
22
<PAGE>
PRESENTATION OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks (including cash items in process of clearing) with
a maturity of 90 days or less, and federal funds sold. Generally, federal funds
are sold for one day periods.
INVESTMENT SECURITIES:
Securities classified as held-to-maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost, adjusted for amortization of premium and
accretion of discount computed using the interest method over their contractual
lives.
Securities classified as available-for-sale are equity securities with readily
determinable fair values and those debt securities that the Company intends to
hold for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at estimated fair value, with any unrealized gains or losses
reported in shareholders' equity, net of the related deferred tax effect.
Dividend and interest income, including amortization of premium and accretion of
discount arising at acquisition, from all categories of investment securities
are included in interest income in the consolidated statements of income. Gains
and losses realized on sales of investment securities, determined using the
adjusted cost basis of the specific securities sold, are included in noninterest
income in the consolidated statements of income. Additionally, declines in the
estimated fair value of individual investment securities below their cost that
are other than temporary are reflected as realized losses in the consolidated
statements of income.
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 real estate construction
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.
23
<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>
1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share $0.89 $0.82 $0.97
Diluted earnings per share $0.87 $0.79 $0.95
Basic earnings per share--
before merger-related expenses $1.15 $1.09 $0.99
Diluted earnings per share--
before merger-related expenses $1.13 $1.06 $0.97
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS weighted-average
shares outstanding 11,719,983 11,561,232 11,496,668
Effect of dilutive
securities-stock options 233,929 309,731 241,044
- ------------------------------------------------------------------
Diluted EPS weighted-average
shares outstanding 11,953,912 11,870,963 11,737,712
- ------------------------------------------------------------------
</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 consolidated 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, 1999 and 1998, 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.
24
<PAGE>
NOTE 2. ACQUISITIONS:
On August 19, 1999, the Parent Company consummated the previously announced
merger of First Frederick Financial Corp ("First"), the holding company for
First Bank of Frederick, with and into the Parent Company, and the merger of
First Bank of Frederick with and into the Parent Company's wholly-owned
subsidiary, FCNB Bank, all headquartered in Frederick, Maryland.
As a result of the Merger, each share of the $1.00 par value outstanding common
stock of First was converted into 1.0434 shares of the Company's, $1.00 par
value common stock of the Parent Company resulting in the issuance of
approximately 1,543,012 shares of FCNB Corp common stock, subject to adjustment
to account for the elimination of fractional shares. The merger was accounted
for using the pooling-of-interests method.
As of August 19, 1999, the effective date of the transaction, First had
approximately $110 million of total assets, deposits of $97 million, and total
shareholders' equity of $9 million. The Company's 1999 consolidated statements
of income include total income and net income of First for the period during
1999 prior to its acquisition totalling $7.16 million and $260,000 respectively.
Merger related expenses of $4.05 million are included in the consolidated
statements of income and consist principally of $306,000 for severance payments
to terminated employees, $99,000 for professional fees, and other conversion
related costs of $744,000. Additionally, the allowance for credit losses was
increased an additional $2.9 million in order to align the accounting
assumptions in analyzing the allowance for credit losses.
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.
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 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, 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 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.
The following tables represent the combined and separate results of First and
the Company for the periods preceeding the acquisitions.
<TABLE>
<CAPTION>
Basic Diluted
(dollars in thousands, Total Net earnings earnings
except per share data) income income per share per share
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Company $87,205 $10,096 $1.01 $1.01
First 8,634 1,072 -- --
- ----------------------------------------------------------------------
Combined $95,839 $11,168 $0.97 $0.95
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Basic Diluted
(dollars in thousands, Total Net earnings earnings
except per share data) income income per share per share
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Company $101,086 $8,061 $0.80 $0.80
First 10,646 1,365 -- --
- ----------------------------------------------------------------------
Combined $111,732 $9,426 $0.82 $0.79
- ----------------------------------------------------------------------
</TABLE>
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.
25
<PAGE>
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, 1999 and $173,000 at December 31, 1998. In addition, for the reserve
maintenance period in effect at December 31, 1999 and 1998, the Bank was
required to maintain average daily balances totaling $1,287,000 and $2,341,000,
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, 1999 and 1998 are as follows:
Held-to-maturity portfolio
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999
U.S. Treasury and other U.S.
government agencies and
corporations $11,000 $ -- $ 41 $10,959
State and political
subdivisions 5,054 178 149 5,083
Mortgage-backed debt
securities 5,209 2 89 5,122
- -------------------------------------------------------------------------------
$21,263 $180 $279 $21,164
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
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>
The amortized cost and estimated fair value of securities available for sale at
December 31, 1999 and 1998 are as follows:
Available-for-sale portfolio
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999
U.S. Treasury and other U.S.
government agencies and
corporations $194,699 $ 94 $ 6,745 $188,048
Mortgage-backed debt
securities 137,620 28 3,700 133,948
Corporate bonds 63,714 81 3,942 59,853
State and political subdivisions 4,782 -- 286 4,496
Equity securities 18,837 1,333 1,697 18,473
- -------------------------------------------------------------------------------
$419,652 $1,536 $16,370 $404,818
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury and other U.S.
government agencies and
corporations $149,438 $ 1,144 $ 252 $150,330
Mortgage-backed debt
securities 177,138 1,203 414 177,927
Corporate bonds 69,398 1,377 1,102 69,673
State and political subdivisions 4,021 39 5 4,055
Equity securities 8,041 4,771 411 12,401
- -------------------------------------------------------------------------------
$408,036 $8,534 $2,184 $414,386
- -------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of securities being held to maturity
and those available for sale at December 31, 1999 by contractual maturity, are
as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
- -------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
(dollars in thousands) Cost Value Costs Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 355 $ 355 $ 5,976 $ 5,968
Due after one through
five years 13,278 13,413 85,925 85,470
Due after five years
through ten years 350 352 103,541 97,686
Due after ten years 2,071 1,922 67,753 63,273
Mortgage-backed
debt securities 5,209 5,122 137,620 133,948
Equity securities -- -- 18,837 18,473
- -------------------------------------------------------------------------------
$21,263 $21,164 $419,652 $404,818
- -------------------------------------------------------------------------------
</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, 1999 and 1998, are
securities carried at $315,255,000 and $278,177,000 respectively, which are
pledged to secure public deposits, securities sold under agreements to
repurchase and for other purposes as required and permitted by law.
Gross realized gains and losses from the sale of securities available for sale
were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Realized gains $1,201 $1,559 $ 918
- -------------------------------------------------------------
Realized (losses) $(275) $ (39) $(249)
- -------------------------------------------------------------
</TABLE>
26
<PAGE>
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES:
Loans are as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Real estate loans:
Construction and land development $128,993 $ 122,445
- --------------------------------------------------------------------
Mortgage loans:
Secured by farmland 3,044 3,874
Secured by 1 to 4 family residential
properties 233,946 230,271
Secured by multi-family (5 or more)
residential properties 2,517 4,817
Secured by commercial properties 290,748 227,762
- --------------------------------------------------------------------
Total mortgage loans 530,255 466,724
- --------------------------------------------------------------------
Total loans secured by real estate 659,248 589,169
Commercial and industrial loans 153,959 140,765
Industrial revenue bonds 5,518 6,667
Loans to farmers 570 563
Loans to individuals for household, family
and other personal expenditures 83,785 80,920
- --------------------------------------------------------------------
$903,080 $818,084
- --------------------------------------------------------------------
</TABLE>
As of December 31, 1999, the Company had a significant concentration of credit
risk in the real estate loan portfolio of 14%. This consists of a loan
concentration in real estate loans with SIC codes 6512 through 6553 with a total
loan value of $208,800,000. While this exceeded the 10% threshold, we do not
consider this to be an adverse risk.
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 $54,201,000 and $70,000,000 at December 31, 1999 and
1998, respectively.
Transactions in the allowance for credit losses are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
- --------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 8,237 $ 7,611 $ 6,816
Provision for credit losses 5,008 2,097 1,809
Recoveries 638 439 615
Total 13,883 10,147 9,240
- --------------------------------------------------------------
Credits charged-off (3,840) (1,910) (1,629)
- --------------------------------------------------------------
Balance at end of year $10,043 $ 8,237 $ 7,611
- --------------------------------------------------------------
</TABLE>
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
- -----------------------------------------------------------------
(dollars in thousands) 1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Impaired loans with specific allocation
of allowance for credit losses $6,918 $2,239
Specific allocation of allowance
for credit losses 1,976 793
Other impaired loans 3,687 5,022
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
- ------------------------------------------------------------------------
(dollars in thousands) 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Average recorded investment in impaired loans $10,966 $6,034
Interest income recognized on impaired
loans based on cash payments received 169 103
- ------------------------------------------------------------------------
</TABLE>
Additional information concerning the Company's recorded investment in
nonaccrual loans, for which specific reserve had not been recognized are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
- -----------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $3,582 $1,976 $749
Interest income not recognized due
to loans in nonaccrual status 60 219 100
- -----------------------------------------------------------------------
</TABLE>
NOTE 6. BANK PREMISES AND EQUIPMENT:
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
Years ended December 31,
- ------------------------------------------------------------------
(dollars in thousands) 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Bank premises and leasehold improvements $25,656 $25,588
Equipment 16,913 15,431
42,569 41,019
Less accumulated depreciation and
amortization 17,026 14,117
- ------------------------------------------------------------------
$25,543 $26,902
- ------------------------------------------------------------------
</TABLE>
Depreciation and amortization charged to operations amounted to $3,638,000 for
1999, $2,829,000 for 1998 and $2,300,000 for 1997.
27
<PAGE>
NOTE 7. DEPOSITS:
Certificates of deposit and other time deposits issued in denominations of
$100,000 or more totaled $121,832,000 and $104,367,000 at December 31, 1999 and
1998, respectively, and are included in interest-bearing deposits in the
consolidated balance sheets.
At December 31, 1999, the maturity distribution of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Certificates of Deposit
- -------------------------------------------------------------
<S> <C>
Maturing:
2000 $444,153
2001 15,252
2002 5,960
2003 4,603
2004 8
Thereafter 508
- -------------------------------------------------------------
$470,484
- -------------------------------------------------------------
</TABLE>
Interest on deposits consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW and Super NOW accounts $ 1,523 $ 1,718 $ 1,354
Savings accounts 3,120 2,308 2,434
Money market accounts 6,061 4,944 3,663
Certificates of deposit and other time deposits less than $100,000 17,568 18,301 17,489
Certificates of deposit and other time deposits of $100,000 or more 6,246 5,904 4,484
- -----------------------------------------------------------------------------------------------------------------------
$34,518 $33,175 $29,424
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8. SHORT-TERM BORROWINGS:
The Company purchases federal funds and enters into sales of securities under
agreements to repurchase the same securities, which generally mature within one
to ninety days from the transaction date. Securities pledged as collateral for
securities sold under agreements to repurchase include various debt securities
having aggregate amortized cost book values of $71,850,000 and $54,121,000 at
December 31, 1999 and 1998, 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,
1999 various debt securities having aggregate amortized cost book values of
$211,396,000 were pledged to secure these borrowings.
The Company's unused lines of credit for short-term borrowings totaled
$247,858,314 at December 31, 1999.
Selected information on short-term borrowings is as follows:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and securities sold under agreement to repurchase:
Total outstanding at year-end $ 59,995 $ 94,117
- -------------------------------------------------------------------------------------------------------------------------
Average amount outstanding during year $ 65,282 $ 60,939
Maximum amount outstanding at any month-end $ 80,141 $110,779
Weighted-average interest rate at year-end 4.66% 4.61%
- -------------------------------------------------------------------------------------------------------------------------
Weighted-average interest rate for the year 4.71% 4.90%
Other short-term borrowings:
Total outstanding at year-end $269,268 $248,719
- -------------------------------------------------------------------------------------------------------------------------
Average amount outstanding during year $243,936 $185,833
- -------------------------------------------------------------------------------------------------------------------------
Maximum amount outstanding at any month-end $269,268 $252,855
- -------------------------------------------------------------------------------------------------------------------------
Weighted-average interest rate at year-end 5.55% 5.17%
- -------------------------------------------------------------------------------------------------------------------------
Weighted-average interest rate for the year 5.29% 5.47%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the other short-term borrowings schedule above at December 31, 1999
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
either monthly, quarterly, semi-annually, or annually, until the first call date
and then are repriced quarterly, thereafter.
<TABLE>
<CAPTION>
December 31, 1999 Due in Interest rate range Amount
- --------------------------------------------------------------------
<S> <C> <C>
(dollars
in thousands)
2000 5.35% - 6.19% $191,000
2003 5.37% 25,000
2006 5.17% 10,000
2007 5.27% 24,000
2009 4.96% 19,000
Thereafter 2.00% 268
- --------------------------------------------------------------------
Total $269,268
</TABLE>
28
<PAGE>
NOTE 9. LONG-TERM DEBT:
On July 20, 1998, FCNB Capital Trust, a newly-formed subsidiary of the Company,
issued 1,610,000 shares 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, 1999, $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 noncancelable 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, 1999 is outlined below:
<TABLE>
<CAPTION>
Years ending December 31 (dollars in thousands)
- -----------------------------------------------------------------
<S> <C>
2000 $ 1,711
2001 1,612
2002 1,582
2003 1,519
2004 1,508
Later years 12,192
- -----------------------------------------------------------------
20,124
Less: Sublease income 843
- -----------------------------------------------------------------
$19,281
- -----------------------------------------------------------------
</TABLE>
Rent expense included in occupancy expenses amounted to $2,225,000 for 1999,
$1,889,000 for 1998, and $1,469,000 for 1997.
Sublease income amounted to $181,000, $89,000, and $79,000 for 1999, 1998, and
1997, respectively.
29
<PAGE>
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 $871,000 in 1999, $704,000
in 1998 and $619,000 in 1997.
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 $412,000, $355,000 and $211,000 for 1999, 1998,
and 1997, respectively.
STOCK OPTION PLAN:
On December 31, 1999, 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, 1999 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, 1999, 1998, and 1997 totaled $63,000, $68,000 and $65,000,
respectively.
The 1997 Plan requires the Company to issue options to each non-employee
Director on the day after each annual meeting of the Company's shareholders.
Participants under this Plan will receive reload options upon the exercise of
options issued under this Plan, provided the options are exercised within three
years from the date of the original grant and certain other conditions 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:
<TABLE>
<CAPTION>
Years ended December 31,
- ---------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $10,429 $9,426 $11,168
Pro forma 9,783 8,751 10,457
Basic earnings per share:
As reported $0.89 $0.82 $0.97
Pro forma 0.83 0.76 0.91
Diluted earnings per share:
As reported $0.87 $0.79 $0.95
Pro forma 0.82 0.74 0.89
- ---------------------------------------------------------------
</TABLE>
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, 1999, there were no shares
reserved for future grants under this Plan. The Company intends to obtain
shareholder approval at the annual shareholders meeting, to be held April 18,
2000, for additional shares to be reserved under the Plan. 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. Future grants under this Plan
will be approved by the Board of Directors. Under both Plans, the exercise price
per share shall not be less than the fair market value of a share of common
stock on the date on which such options were granted, subject to adjustments for
the effects of any stock splits or stock dividends, and may be exercised
immediately upon being granted.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 4.34% 2.5% 2.5%
Expected volatility 33.18% 36.53% 40.71%
Risk free interest rate 6.435% 4.650% 5.740%
Expected life, in years 10 10 10
- -------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $4.48 $9.47 $9.42
- -------------------------------------------------------------------
</TABLE>
30
<PAGE>
The following is a summary of transactions for both Plans during the three years
ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Options Issued Weighted-Average
and Outstanding Exercise Price
- ----------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1996 396,152 $ 6.91
- ----------------------------------------------------------------------
Exercised (38,792) 6.42
Terminated (4,037) 7.44
Granted 139,258 14.32
- ----------------------------------------------------------------------
Balance at December 31, 1997 492,581 9.03
- ----------------------------------------------------------------------
Exercised (240,511) 6.75
Terminated (34,466) 6.55
Granted 162,078 19.90
- ----------------------------------------------------------------------
Balance at December 31, 1998 379,682 15.55
- ----------------------------------------------------------------------
Exercised (122,694) 10.39
Terminated (7,093) 21.25
Granted 208,604 15.08
- ----------------------------------------------------------------------
Balance at December 31, 1999 458,499 $17.18
- ----------------------------------------------------------------------
</TABLE>
At December 31, 1999, the 458,499 options issued and outstanding had exercise
prices ranging from $4.75 to $22.86 and had a weighted-average remaining
contractual life of 106 months.
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Exercisable options:
Options outstanding 458,499 272,201 297,198
Weighted-average price $ 17.18 $ 19.34 $ 11.52
- --------------------------------------------------------------
</TABLE>
NOTE: 12. INCOME TAXES:
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------
(dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Provision for credit losses $ 3,640 $2,378
Net securities losses -- 173
Unrealized loss on securities available for sale 5,779 --
Deferred compensation 745 570
Postretirement benefits 256 257
Provision for foreclosed properties 20 21
Deferred Fees 253 276
Other 808 983
- ----------------------------------------------------------------------------
Total deferred tax assets 11,501 4,658
- ----------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities available for sale -- 2,446
Depreciation 691 629
Other 352 331
- ----------------------------------------------------------------------------
Total deferred tax liabilities 1,043 3,406
- ----------------------------------------------------------------------------
Net deferred tax assets $10,458 $1,252
- ----------------------------------------------------------------------------
</TABLE>
A reconciliation of the maximum statutory income tax to the provision for income
taxes attributable to continuing operations included in the consolidated
statements of income, is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Income before income tax $15,331 $16,796 $16,875
Tax rate 35% 35% 35%
- -------------------------------------------------------------------
Income tax at statutory rate 5,366 5,879 5,906
Increase (decrease)
in tax resulting from:
Tax-exempt interest income (220) (219) (166)
Insurance cash values (531) (429) (217)
Thrift bad debt reserve recapture -- 1,750 --
State income taxes, net
federal benefit 116 251 502
Benefit of federal surtax exemption (100) (100) (100)
Other 271 238 (218)
- -------------------------------------------------------------------
$ 4,902 $ 7,370 $ 5,707
- -------------------------------------------------------------------
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Taxes currently payable $5,884 $5,726 $4,615
Deferred tax liabilities (benefits) (982) (106) 1,092
- -------------------------------------------------------------------
Operating activities 4,902 5,620 5,707
Thrift bad debt reserve recapture -- 1,750 --
- -------------------------------------------------------------------
Total $4,902 $7,370 $5,707
- -------------------------------------------------------------------
</TABLE>
Included in the above amounts are income taxes of $361,000 in 1999, $591,000 in
1998, and $258,000 in 1997 related to net security gains.
NOTE 13. OTHER OPERATING EXPENSES:
Other operating expenses in the consolidated statements of income include the
following:
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
FDIC and general insurance $ 387 $ 690 $ 403
Professional and directors fees 2,761 3,152 3,343
Advertising and public relations 2,053 1,818 1,372
Credit and collection expense 732 314 320
Postage and supplies 1,727 1,644 1,364
Net loss on foreclosed properties 181 187 195
Other 3,431 3,118 2,935
- -------------------------------------------------------------------
$11,272 $10,923 $9,932
</TABLE>
Changes in the allowance for foreclosed properties are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 196 $ 410 $ 533
Provision charged to income 75 52 35
Losses charged to the allowance (116) (266) (158)
- -------------------------------------------------------------------
Balance at end of year $ 155 $ 196 $ 410
- -------------------------------------------------------------------
</TABLE>
31
<PAGE>
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 1999 aggregated $15,990,000.
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, 1999.
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.
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 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, 1999.
As of December 31, 1999, 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
Action Provisions: For Capital Prompt Corrective Actual Adequacy Purposes:
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $143,684 13.04% $88,136 8.00% N/A N/A
FCNB Bank $116,787 10.79% $86,566 8.00% $108,207 10.00%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $126,331 11.47% $44,068 4.00% N/A N/A
FCNB Bank $106,683 9.86% $43,283 4.00% $ 64,924 6.00%
Tier I Capital
(To Average Assets):
FCNB Corp $126,331 8.59% $58,846 4.00% N/A N/A
FCNB Bank $106,683 7.35% $58,053 4.00% $ 72,567 5.00%
As of December 31, 1998:
- ------------------------------------------------------------------------------------------------------------------------------
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $140,659 13.91% $81,327 8.00% N/A N/A
FCNB Bank $109,402 10.96% $80,025 8.00% $100,032 10.00%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $117,351 11.58% $40,663 4.00% N/A N/A
FCNB Bank $100,976 10.13% $40,012 4.00% $ 60,019 6.00%
Tier I Capital
(To Average Assets):
FCNB Corp $117,351 8.61% $42,127 4.00% N/A N/A
FCNB Bank $100,976 7.51% $41,541 4.00% $ 67,290 5.00%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A = Not applicable
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, 1999, reserved shares
remaining for future issuance under this Plan totaled 165,052. 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.
32
<PAGE>
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, 1999 December31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(dollars in thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 76,377 $ 76,377 $ 92,138 $ 92,138
Loans held for sale 878 878 5,236 5,236
Investment securities 442,142 442,043 467,729 468,153
Net loans 893,029 890,927 809,824 815,020
- ----------------------------------------------------------------------------------------------------------------------------
Total financial assets $1,412,426 $1,410,225 $1,374,927 $1,380,547
- ----------------------------------------------------------------------------------------------------------------------------
Financial Liabilities
Deposits $1,028,859 $1,032,009 $ 962,799 $ 966,164
Short-term borrowings 329,263 321,826 342,836 342,668
Long-term debt 40,250 35,319 40,250 39,165
- ----------------------------------------------------------------------------------------------------------------------------
Total financial liabilities $1,398,372 $1,389,154 $1,345,885 $1,347,997
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments as of December 31, 1999 and 1998:
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.
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, 1999 and 1998. The carrying value of
such instruments, if any, includes any accrued interest receivable and/or
payable balances.
33
<PAGE>
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 1999 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
- ---------------------------------------------------------
<S> <C>
Balance at December 31, 1998 $ 11,277
- ---------------------------------------------------------
New loans 13,618
Repayments (10,898)
- ---------------------------------------------------------
Balance at December 31, 1999 $ 13,997
- ---------------------------------------------------------
</TABLE>
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.
NOTE 17. COMMITMENTS AND CONTINGENCIES:
FINANCIAL INSTRUMENTS:
In the normal course of business, there are outstanding commitments, contingent
liabilities and other financial instruments that are not reflected in the
accompanying consolidated financial statements. These include commitments to
extend credit, standby letters of credit and interest rate swaps, which are some
of the instruments used by the Company to meet the financing needs of its
customers and to manage its own interest rate risk. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the consolidated balance sheets.
Any losses which may result from these transactions are not expected to have a
material effect on the accompanying consolidated financial statements. Notional
principal amounts often are used to express the volume of 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:
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------
Contract/ Contract/
Notional Notional
(dollars in thousands) Amount Amount
- --------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose notional or
contract amounts represent credit risk:
Commitments to extend credit $240,063 $222,833
Standby letters of credit 17,202 15,006
- --------------------------------------------------------------------
Total $257,265 $237,839
- --------------------------------------------------------------------
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
- --------------------------------------------------------------------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Certain
commitments have fixed expiration dates, or other termination clauses, and may
require payment of a fee. Many of the commitments are expected to expire without
being drawn upon, accordingly, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral or other
security obtained, if deemed necessary by the Company upon extension of credit,
is based on management's credit evaluation. Collateral held varies but may
include deposits held in financial institutions; U.S. Treasury securities; other
marketable securities; accounts receivable; inventory; property and equipment;
personal residences; income-producing commercial properties and land under
development. Personal guarantees are also obtained to provide added security for
certain commitments.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to guarantee the installation of real property improvements and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company holds collateral and obtains personal guarantees supporting those
commitments for which collateral or other security is deemed necessary.
As a financial institution, the Company assumes interest rate risk as a provider
of banking services to its customers. This risk can be managed through
derivative interest rate contracts, such as interest rate swaps. Changes in the
fair value of such derivatives are generally offset by changes in the fair value
of the underlying hedged asset or liability. For interest rate risk management
purposes, the Company was using interest rate (pay-fixed) swaps with notional
balances of $10,000,000 at December 31, 1999 and 1998 to convert fixed rate
loans to variable rates.
LEGAL PROCEEDINGS:
The Company is subject to various legal proceedings which are incidental to the
ordinary course of business. In the opinion of the management of the Company,
there are no material pending legal proceedings to which the Company is a party
or which involves any of its property.
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 Bancorp, Inc., 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.
34
<PAGE>
NOTE 18. FCNB CORP (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION:
Balance Sheets
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------
(dollars in thousands) 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 7,080 $ 11,716
Receivable from subsidiaries 641 1,838
Investment securities available
for sale-at fair value 16,036 15,989
Investment in subsidiaries 104,604 109,468
Other assets 3,092 3,722
- ------------------------------------------------------------
Total assets $131,453 $142,733
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------
(dollars in thousands) 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Liabilities
- ------------------------------------------------------------
Long-term debt $ 41,495 $ 41,915
Other liabilities 193 1,963
- ------------------------------------------------------------
Total liabilities 41,688 43,878
Common stock 11,924 11,599
Surplus 54,316 54,147
Retained earnings 32,581 29,204
Accumulated other comprehensive
income (loss) (9,056) 3,905
- ------------------------------------------------------------
Total shareholders' equity 89,765 98,855
- ------------------------------------------------------------
Total liabilities and
shareholders' equity $131,453 $142,733
- ------------------------------------------------------------
</TABLE>
Statements of Income
<TABLE>
<CAPTION>
For the years ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $ 7,913 $4,842 $ 4,328
Net securities gains 627 554 173
Other income, principally interest 882 695 301
- -----------------------------------------------------------------------------------------------------------------------------
Total income 9,422 6,091 4,802
Expenses 4,024 2,040 399
- -----------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and equity in undistributed
earnings of subsidiaries 5,398 4,051 4,403
Provision for income taxes (benefits) (876) (283) (18)
- -----------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of subsidiaries 6,274 4,334 4,421
Equity in undistributed earnings of subsidiaries 4,155 5,092 6,747
- -----------------------------------------------------------------------------------------------------------------------------
Net income $10,429 $9,426 $11,168
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $10,429 $ 9,426 $11,168
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (4,155) (5,092) (6,747)
Noncash charitable contribution -- -- 98
Net securities gains (627) (554) (173)
Decrease (increase) in receivable from subsidiaries 1,225 (469) (906)
Decrease (increase) in other assets 829 (2,104) (579)
Increase (decrease) in other liabilities (209) 402 (590)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,492 1,609 2,271
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale 2,005 1,612 510
Purchase of investment securities available for sale (5,872) (5,856) (6,330)
Investment in subsidiary (1,017) (24,916) 4,726
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (4,884) (29,160) (1,094)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (repayment of) long-term debt (420) 41,915 --
Dividend reinvestment plan (56) (29) (18)
Proceeds from issuance of common stock 228 664 210
Repurchase of common stock -- (2,910) (599)
Cash dividends paid (6,996) (4,583) (3,048)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (7,244) 35,057 (3,455)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (4,636) 7,506 (2,278)
Beginning cash 11,716 4,210 6,488
- ---------------------------------------------------------------------------------------------------------------------------------
Ending cash $ 7,080 $ 11,716 $ 4,210
Supplemental schedule of noncash investing and financing activities:
Surplus from stock options granted -- $ 135 $ 152
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<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, 2000. 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:
1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) December 31 September 30 June 30(1) March 31(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $27,045 $26,036 $25,460 $25,182
Net interest income 12,846 12,330 12,548 12,129
Provision for credit losses 830 3,290 390 498
Net securities gains 121 159 264 382
Income before income taxes 5,105 658 4,699 4,869
Net income (loss) 3,460 598 3,095 3,276
Net income before merger-related expense 3,577 3,355 3,227 3,361
Basic earnings per share 0.29 0.06 0.26 0.28
Diluted earnings per share 0.29 0.05 0.26 0.27
Basic earnings per share before merger-related expenses 0.30 0.29 0.28 0.28
Diluted earnings per share before merger-related expenses 0.30 0.28 0.27 0.28
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1998(1)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) December 31(2) September 30 June 30 March 31
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $25,266 $24,306 $22,964 $22,104
Net interest income 12,092 11,889 11,663 11,143
Provision for credit losses 1,024 450 428 195
Net securities gains 528 282 184 526
Income before income taxes 2,780 4,701 4,781 4,534
Net income 115 3,116 3,175 3,020
Net income before merger-related expenses 3,202 3,156 3,209 3,020
Basic earnings per share 0.02 0.27 0.27 0.26
Diluted earnings per share 0.01 0.26 0.26 0.26
Basic earnings per share before merger-related expenses 0.29 0.27 0.27 0.26
Diluted earnings per share before merger-related expenses 0.27 0.27 0.26 0.26
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The financial data for the first two quarters of 1999 and for all of 1998
has been restated to include the effect of the acquisition of First
Frederick Financial Corporation in 1999, accounted for as a pooling of
interests..
(2) 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.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
1999
<TABLE>
<CAPTION>
Price Range
----------- Dividend
Quarterly stock prices and dividends High Low Declared
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $22.50 $18.88 $0.147
Second Quarter 22.44 18.50 0.152
Third Quarter 21.88 17.63 0.139
Fourth Quarter 20.00 14.50 0.160
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1998
<TABLE>
<CAPTION>
Price Range
----------- Dividend
Quarterly stock prices and dividends High Low Declared
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $24.38 $20.81 $0.101
Second Quarter 24.94 24.44 0.103
Third Quarter 26.81 23.88 0.108
Fourth Quarter 24.50 23.00 0.115
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1999: 3,073
PRINCIPAL AFFILIATE
Balance Sheet
<TABLE>
<CAPTION>
December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Assets Liabilities and Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FCNB Bank Cash and due from banks $ 47,640 Total deposits $1,035,939
7200 FCNB Court Earning assets 1,358,793 Short-term borrowings 329,263
Frederick, MD 21703 Accrued interest and
(301) 662-2191 other liabilities 17,909
34 Offices Allowance for credit losses (10,043)
Other assets 90,080 Shareholders' equity 103,359
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
Total assets $1,486,470 shareholders' equity $1,486,470
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 12,067
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
Exhibit 21
Statement of the subsidiaries of FCNB Corp
<TABLE>
<CAPTION>
Ownership
Legal Name Percentage
----------- ----------
<S> <C>
FCNB Corp, Frederick, MD 100.00%
FCNB Capital Trust, Wilmington, DE 100.00%
FCNB Bank, Frederick, MD 100.00%
FCNB Investments Holdings, Inc., Wilmington, DE 100.00%
Frederick Underwriters Inc., Middletown, MD 100.00%
Monocacy Management Company, Frederick, MD 100.00%
FCNB Mortgage Company, Owings Mills, MD (Inactive) 100.00%
First Bank Mortgage Company, Frederick, MD (Inactive) 100.00%
Maryland Title Center-West, LLC, Annapolis, MD 16.13%
Capital Asset Recovery, Inc. (Inactive) 100.00%
</TABLE>
Exhibit 23
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 26, 2000,
relating to the consolidated balance sheets of FCNB Corp and its subsidiaries as
of December 31, 1999 and 1998, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the years in the
three-year period ended December 31, 1999, which report appears on page 36 of
the 1999 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 21, 2000
POWER OF ATTORNEY
We, the undersigned directors of the Registrant, hereby severally constitute and
appoint A. Patrick Linton and Mark A. Severson, or either of them, our true and
lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said person may deem necessary or advisable to
enable the Registrant to comply with the Securities Exchange Act of 1934, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the annual report on Form 10-K for the
year ended December 31, 1999, including specifically, but not limited to, power
and authority to sign for us in our names in the capacities indicated below the
annual report and any amendments thereto; and we hereby approve, ratify and
confirm all that said person shall do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ George B. Callan, Jr. Director March 14, 2000
- ------------------------------------
George B. Callan, Jr.
/s/ Miles M. Circo Director March 14, 2000
- ------------------------------------
Miles M. Circo
/s/ Shirley D. Collier Director March 14, 2000
- ------------------------------------
Shirley D. Collier
/s/ Clyde C. Crum Chairman of the Board of Directors March 14, 2000
- ------------------------------------
Clyde C. Crum
/s/ James S. Grimes Director March 14, 2000
- ------------------------------------
James S. Grimes
/s/ Bernard L. Grove, Jr. Director March 14, 2000
- ------------------------------------
Bernard L. Grove, Jr.
/s/ Gail T. Guyton Director March 14, 2000
- ------------------------------------
Gail T. Guyton
Director March 14, 2000
- ------------------------------------
Frank L. Hewitt, III
/s/ Jacob R. Ramsburg, Jr. Director March 14, 2000
- ------------------------------------
Jacob R. Ramsburg, Jr.
/s/ Kenneth W. Rice Director March 14, 2000
- ------------------------------------
Kenneth W. Rice
</TABLE>
Page 1 of 2
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Rand D. Weinberg Director March 14, 2000
- ------------------------------------
Rand D. Weinberg
/s/ DeWalt J. Willard, Jr. Director March 14, 2000
- ------------------------------------
DeWalt J. Willard, Jr.
</TABLE>
Page 2 of 2
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 000803644
<NAME> FCNB CORP
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 39,232
<INT-BEARING-DEPOSITS> 28,737
<FED-FUNDS-SOLD> 8,317
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 404,818
<INVESTMENTS-CARRYING> 21,263
<INVESTMENTS-MARKET> 21,164
<LOANS> 903,072
<ALLOWANCE> 10,043
<TOTAL-ASSETS> 1,505,796
<DEPOSITS> 1,028,859
<SHORT-TERM> 329,263
<LIABILITIES-OTHER> 17,659
<LONG-TERM> 40,250
0
0
<COMMON> 11,924
<OTHER-SE> 77,841
<TOTAL-LIABILITIES-AND-EQUITY> 1,505,796
<INTEREST-LOAN> 75,006
<INTEREST-INVEST> 27,319
<INTEREST-OTHER> 1,398
<INTEREST-TOTAL> 103,723
<INTEREST-DEPOSIT> 34,518
<INTEREST-EXPENSE> 53,870
<INTEREST-INCOME-NET> 49,853
<LOAN-LOSSES> 5,008
<SECURITIES-GAINS> 926
<EXPENSE-OTHER> 48,598
<INCOME-PRETAX> 15,331
<INCOME-PRE-EXTRAORDINARY> 15,331
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,429
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 7.86
<LOANS-NON> 10,605
<LOANS-PAST> 674
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 32,410
<ALLOWANCE-OPEN> 8,237
<CHARGE-OFFS> 3,840
<RECOVERIES> 638
<ALLOWANCE-CLOSE> 10,043
<ALLOWANCE-DOMESTIC> 10,043
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 463
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<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-31-1999 DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999 JAN-01-1999
<PERIOD-END> MAR-31-1999 JUN-30-1999 SEP-30-1999
<EXCHANGE-RATE> 1 1 1
<CASH> 36,118 33,963 32,601
<INT-BEARING-DEPOSITS> 4,416 3,555 4,045
<FED-FUNDS-SOLD> 13,141 28,739 26,042
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 427,018 416,325 416,251
<INVESTMENTS-CARRYING> 24,453 23,764 21,768
<INVESTMENTS-MARKET> 24,837 23,834 21,734
<LOANS> 829,230 853,174 874,475
<ALLOWANCE> 8,508 8,798 9,648
<TOTAL-ASSETS> 1,414,471 1,443,620 1,463,251
<DEPOSITS> 942,101 968,366 1,003,803
<SHORT-TERM> 314,362 326,808 313,228
<LIABILITIES-OTHER> 19,058 13,150 14,551
<LONG-TERM> 40,250 40,250 40,250
0 0 0
0 0 0
<COMMON> 11,597 11,603 11,904
<OTHER-SE> 87,103 83,443 79,515
<TOTAL-LIABILITIES-AND-EQUITY> 1,414,471 1,443,620 1,463,251
<INTEREST-LOAN> 17,936 36,431 55,329
<INTEREST-INVEST> 7,050 13,774 20,571
<INTEREST-OTHER> 196 437 778
<INTEREST-TOTAL> 25,182 50,642 76,678
<INTEREST-DEPOSIT> 8,229 16,501 25,187
<INTEREST-EXPENSE> 13,053 25,965 39,671
<INTEREST-INCOME-NET> 12,129 24,677 37,007
<LOAN-LOSSES> 498 888 4,178
<SECURITIES-GAINS> 382 646 805
<EXPENSE-OTHER> 11,351 23,366 36,655
<INCOME-PRETAX> 4,869 9,568 10,226
<INCOME-PRE-EXTRAORDINARY> 4,869 9,568 10,226
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,276 6,371 6,969
<EPS-BASIC> 0.28 0.54 0.60
<EPS-DILUTED> 0.27 0.53 0.58
<YIELD-ACTUAL> 7.80 7.82 7.83
<LOANS-NON> 9,778 7,090 8,546
<LOANS-PAST> 2,384 2,697 1,220
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 12,400 14,180 37,210
<ALLOWANCE-OPEN> 8,237 8,237 8,237
<CHARGE-OFFS> 306 575 3,249
<RECOVERIES> 79 248 482
<ALLOWANCE-CLOSE> 8,508 8,798 9,648
<ALLOWANCE-DOMESTIC> 8,508 8,798 9,648
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 1,039 1,448 442
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<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-31-1997 DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998
<EXCHANGE-RATE> 1 1 1 1 1
<CASH> 35,023 41,186 34,769 40,067 35,518
<INT-BEARING-DEPOSITS> 848 5,316 1,447 1,898 9,358
<FED-FUNDS-SOLD> 41,031 31,996 50,587 49,701 47,262
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 246,280 250,639 326,079 368,494 414,386
<INVESTMENTS-CARRYING> 48,889 44,810 38,294 30,986 23,298
<INVESTMENTS-MARKET> 49,230 45,233 38,646 31,500 30,469
<LOANS> 749,273 753,599 774,199 790,880 818,061
<ALLOWANCE> 7,611 7,608 7,638 7,864 8,237
<TOTAL-ASSETS> 1,179,435 1,189,973 1,295,184 1,361,259 1,459,720
<DEPOSITS> 830,326 855,973 910,570 942,211 962,799
<SHORT-TERM> 241,802 227,398 273,840 263,182 342,836
<LIABILITIES-OTHER> 11,071 9,042 9,683 11,780 14,980
<LONG-TERM> 0 0 0 40,250 40,250
0 0 0 0 0
0 0 0 0 0
<COMMON> 11,525 11,544 11,575 11,595 11,599
<OTHER-SE> 84,711 86,016 89,516 92,241 87,256
<TOTAL-LIABILITIES-AND-EQUITY> 1,179,435 1,189,973 1,295,184 1,361,259 1,459,720
<INTEREST-LOAN> 64,757 17,020 34,594 52,760 70,981
<INTEREST-INVEST> 16,807 4,632 9,610 15,116 21,857
<INTEREST-OTHER> 1,296 449 861 1,495 1,802
<INTEREST-TOTAL> 82,860 22,101 45,065 69,371 94,640
<INTEREST-DEPOSIT> 29,425 7,789 15,805 24,511 33,175
<INTEREST-EXPENSE> 39,438 10,958 22,259 34,676 47,853
<INTEREST-INCOME-NET> 43,422 11,143 22,806 34,695 46,787
<LOAN-LOSSES> 1,809 195 623 1,073 2,097
<SECURITIES-GAINS> 669 526 712 992 1,520
<EXPENSE-OTHER> 37,717 10,076 20,319 31,470 44,986
<INCOME-PRETAX> 16,875 4,534 9,315 14,016 16,796
<INCOME-PRE-EXTRAORDINARY> 16,875 4,534 9,315 14,016 16,796
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 11,168 3,020 6,195 9,311 9,426
<EPS-BASIC> 0.97 0.26 0.53 0.80 0.82
<EPS-DILUTED> 0.95 0.26 0.52 0.78 0.79
<YIELD-ACTUAL> 8.44 8.11 8.19 8.29 8.22
<LOANS-NON> 4,698 4,656 6,444 6,524 7,828
<LOANS-PAST> 2,316 2,981 3,777 5,486 1,585
<LOANS-TROUBLED> 128 0 0 0 0
<LOANS-PROBLEM> 16,880 15,560 16,800 15,440 17,330
<ALLOWANCE-OPEN> 6,816 7,611 7,611 7,611 7,611
<CHARGE-OFFS> 1,628 266 796 1,092 1,910
<RECOVERIES> 615 68 200 272 439
<ALLOWANCE-CLOSE> 7,611 7,608 7,638 7,864 8,237
<ALLOWANCE-DOMESTIC> 7,611 7,608 7,638 7,864 8,237
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 1,214 485 636 704 850
</TABLE>
