SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission file number
September 30, 2000 0-15645
FCNB Corp
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C>
MARYLAND 52-1479635
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
7200 FCNB Court, Frederick, Maryland 21703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 662-2191
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $1 par value per
share, 11,924,214 shares outstanding as of October 16, 2000.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
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<CAPTION>
FCNB CORP AND SUBSIDIARY
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Consolidated Balance Sheets (Unaudited) (Unaudited)
(dollars in thousands, except per share amounts) September 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 32,910 $ 39,323
Interest-bearing deposits in other banks 740 28,737
Federal funds sold 36,264 8,317
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Cash and cash equivalents 69,914 76,377
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Loans held for sale 704 878
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Investment securities held to maturity at amortized
cost-fair value of $18,341 in 2000 and $21,164
in 1999 18,376 21,263
Investment securities available for sale-at fair value 411,712 404,818
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Restricted stock, at cost 17,981 16,061
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Loans - net of unearned income 997,229 903,072
Less: Allowance for credit (9,178) (10,043)
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Net loans 988,051 893,029
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Bank premises and equipment 25,244 25,543
Other assets 74,886 67,827
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Total assets $ 1,606,868 $ 1,505,796
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 179,602 $ 163,581
Interest-bearing deposits 899,348 865,278
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Total deposits 1,078,950 1,028,859
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Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 67,814 59,995
Other short-term borrowings 310,507 269,268
Long-term debt:
Guaranteed preferred beneficial interests
in the Company's subordinated debenture 40,250 40,250
Accrued interest and other liabilities 15,249 17,659
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Total liabilities 1,512,770 1,416,031
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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: 11,924,214
shares in 2000 and 11,923,775 shares in 1999
issued and outstanding 11,924 11,924
Capital surplus 54,416 54,316
Retained earnings 38,004 32,581
Accumulated other comprehensive income (loss) (10,246) (9,056)
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Total shareholders' equity 94,098 89,765
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Total liabilities and shareholders' equity $ 1,606,868 $ 1,505,796
=====================================================================================================================
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2
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FCNB CORP AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income (Unaudited)
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<CAPTION>
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For the 3 months ended For the 9 months ended
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(dollars in thousands, except per share amounts) September 30, September 30, September 30, September 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $22,338 $18,898 $63,121 $55,329
Interest and dividends on investment securities:
Taxable 6,996 6,288 20,573 19,005
Tax exempt 130 131 390 421
Dividends 467 378 1,331 1,145
Interest on federal funds sold 267 299 870 647
Other interest income 10 42 124 131
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Total interest income 30,208 26,036 86,409 76,678
------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 10,763 8,686 29,934 25,187
Interest on federal funds purchased and securities
sold under agreements to repurchase 1,075 892 2,832 2,301
Interest on other short-term borrowings 4,873 3,284 13,140 9,650
Interest on long-term debt 844 844 2,533 2,533
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Total interest expense 17,555 13,706 48,439 39,671
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Net interest income 12,653 12,330 37,970 37,007
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Provision for credit losses:
Operating activities 450 390 1,400 1,278
Merger-related -- 2,900 -- 2,900
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Total provision for credit losses 450 3,290 1,400 4,178
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Net interest income after provision for credit losses 12,203 9,040 36,570 32,829
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Noninterest income:
Service fees 1,546 1,369 4,482 3,971
Insurance commissions 1,727 1,564 4,977 4,457
Net securities gains 523 159 855 805
Gain on sale of loans 39 343 132 832
Income from bank-owned life insurance 413 393 1,206 1,164
Other operating income 1,151 1,079 3,243 2,823
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Total noninterest income 5,399 4,907 14,895 14,052
------------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 6,387 6,405 19,643 19,246
Occupancy expenses 1,456 1,523 4,234 4,348
Equipment expenses 1,047 985 3,182 3,002
Merger-related expenses 21 1,516 64 1,688
Other operating expenses 2,605 2,860 7,980 8,371
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Total noninterest expenses 11,516 13,289 35,103 36,655
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Income before provision for income taxes 6,086 658 16,362 10,226
Provision for income taxes 1,931 60 5,194 3,257
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Net income 4,155 598 11,168 6,969
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Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period, net of taxes of 2,218, (1,999), (443), and 3,361 (1,971) (677) (8,971)
(6,287), respectively.
Less: reclassification adjustment for gain
(losses) included in net income, net of taxes of
207, 63, 342 and 311, respectively. 316 96 513 494
</TABLE>
3
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FCNB CORP AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income (Unaudited)
(Continued)
<S> <C> <C> <C> <C>
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Other comprehensive income (loss), net of taxes of 2,011,
(2,062), (785) and (6,598), respectively 3,045 (2,067) (1,190) (9,465)
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Comprehensive income (loss) $7,200 $(1,469) $9,978 $(2,496)
====================================================================================================================================
Net income - before merger-related expenses $4,168 $ 3,355 $11,207 $9,943
====================================================================================================================================
Basic earnings per share $0.35 $0.05 $0.94 $0.60
====================================================================================================================================
Diluted earnings per share $0.35 $0.05 $0.93 $0.58
====================================================================================================================================
</TABLE>
FCNB CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2000 and 1999
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(dollars in thousands) 2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $11,168 $ 6,969
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,735 2,638
Provision for credit losses 1,400 4,178
Provision for foreclosed properties -- 75
Deferred income taxes (benefits) (662) (437)
Net premium amortization (discount accretion) on investment securities (333) 291
Accretion of net loan origination fees (581) (1,180)
Net securities gains (855) (805)
Net (gain) loss on sale of foreclosed properties (30) (12)
Net (gain) loss on dispositions of bank premises and equipment (25) 3
Decrease (increase) in other assets (4,562) (5,406)
Decrease (increase) in loans held for sale (1) 174 2,077
Increase (decrease) in accrued interest and other liabilities (2,410) (429)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,019 7,962
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Cash flows from investing activities:
Proceeds from sales of investment securities - available for sale 12,019 14,293
Proceeds from maturities of investment securities - available for sale 47,725 112,272
Proceeds from maturities of investment securities - held to maturity 2,951 6,897
Purchases of investment securities - available for sale (69,014) (118,701)
Net decrease (increase) in loans (97,692) (58,001)
Purchases of bank premises and equipment (2,111) (1,342)
Proceeds from dispositions of bank premises and equipment 44 --
Purchase of foreclosed properties -- (60)
Proceeds from dispositions of foreclosed properties 169 795
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Net cash (used in) investing activities (105,909) (43,847)
</TABLE>
4
<PAGE>
FCNB CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2000 and 1999
Continued
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<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits, NOW accounts,
money market account and savings accounts 20,247 12,326
Net increase (decrease) in time deposits 29,844 28,678
Net increase (decrease) in short-term borrowings 49,058 (29,608)
Proceeds from sale of stock 23 174
Repurchase of common stock -- --
Dividend reinvestment plan (21) (47)
Dividends paid (5,724) (5,088)
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Net cash provided by financing activities 93,427 6,435
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Increase (decrease) in cash and cash equivalents (6,463) (29,450)
Cash and cash equivalents:
Beginning of period 76,377 92,138
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End of period $69,914 $62,688
============================================================================================================================
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FCNB CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited) continued
For the Nine Months Ended September 30, 2000 and 1999
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<CAPTION>
(dollars in thousands) 2000 1999
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<S> <C> <C>
Supplemental disclosures
Interest paid $47,211 $39,185
==============================================================================================
Income taxes paid $5,178 $4,570
==============================================================================================
Supplemental schedule of noncash investing and financing
activities:
Foreclosed properties acquired in settlement of loans $1,851 $--
Seller financed disposition of property $-- $--
Surplus from stock option transactions $78 $49
==============================================================================================
</TABLE>
(1) Loans held for sale are generally held for periods of ninety days or less.
FCNB CORP AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - The accompanying unaudited consolidated financial statements for FCNB
Corp (the "Company") have been prepared in accordance with the instructions for
Form 10-Q and, therefore, do not include all information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial statements have been prepared utilizing the interim basis
of reporting and, as such, reflect all adjustments which are normal and
recurring in nature and are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented.
Note 2 - On July 26, 2000, the Company entered into a definitive agreement
pursuant to which it will be merged with and into BB&T Corporation ("BB&T"). The
exchange ratio is fixed at .725 BB&T share for each FCNB share. The transaction
will be accounted for as a pooling of interests.
In connection with the merger agreement, the Company also entered into a Stock
Option Agreement with BB&T. Under the Stock Option Agreement, the Company
granted BB&T an irrevocable option to purchase up to 2,370,000 shares, subject
to certain adjustments, of the Company's common stock at a price per share of
$15.00, exercisable under certain circumstances.
5
<PAGE>
The merger, which is subject to the approval of FCNB shareholders and banking
regulators, is expected to be completed in the first quarter of 2001.
Winston-Salem-based BB&T Corporation, with $55.2 billion in assets, operates 831
banking offices in the Carolinas, Virginia, Maryland, Georgia, West Virginia,
Kentucky and Washington, D.C.
On August 19, 1999, the Company consummated its 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 the Company's wholly-owned subsidiary, FCNB 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 the
Company's common stock, subject to adjustment to account for the elimination of
fractional shares.
Note 3 - Investments: Using the criteria specified in Statement 115, the Company
classifies its investments in debt and equity securities at September 30, 2000,
and December 31, 1999, into two categories: held-to-maturity and
available-for-sale.
Securities classified as held-to-maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed using the interest method over their contractual
lives.
Securities classified as available-for-sale are equity securities with readily
determinable fair values and those debt securities that the Company intends to
hold for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at fair value with any unrealized gains or losses included in
accumulated other comprehensive income, a component of shareholders' equity, net
of the related deferred tax effect.
As of September 30, 2000, the gross unrealized losses in the Company's
investment portfolio were $173,000 in the held-to-maturity investment portfolio
and $18.43 million in the available-for-sale investment portfolio compared to
$279,000 and $16.37 million, respectively, as of December 31, 1999. As of
September 30, 2000, the gross unrealized gains in the Company's investment
portfolio were $138,000 in the held-to-maturity investment portfolio and $2.06
million in the available-for-sale investment portfolio compared to $180,000 and
$1.54 million, respectively, as of December 31, 1999. Since the Company's
held-to-maturity investment portfolio includes fixed rate investment securities
that have below current market interest rates, the future operating results of
the Company would be negatively impacted in an increasing rate environment. This
reduction in net interest income would result because the cost of funding the
Company's operations increases, while the income earned on the held-to-maturity
portfolio remains constant.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at September 30, 2000, are as follows:
HELD-TO-MATURITY PORTFOLIO
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Gross Gross
September 30, 2000 Amortized Unrealized Unrealized Estimated
(dollars in thousands) Cost Gains Losses Fair Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. government
agencies and corporations $11,000 $ -- $ 68 $10,932
State and political subdivision 4,772 137 63 4,846
Mortgage-backed debt securities 2,604 1 42 2,563
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$18,376 $138 $173 $18,341
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6
<PAGE>
The amortized cost and estimated fair value of securities classified as
available-for-sale at September 30, 2000, are as follows:
AVAILABLE-FOR-SALE-PORTFOLIO
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<CAPTION>
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Gross Gross
September 30, 2000 Amortized Unrealized Unrealized Estimated
(dollars in thousands) Cost Gains Losses Fair Value
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<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. government
agencies and corporations $198,934 $177 $ 6,637 $192,474
Mortgage-backed debt securities 133,759 38 3,308 130,489
Corporate bonds 69,812 214 6,797 63,229
State and political subdivisions 4,770 -- 162 4,608
Equity securities 20,814 1,627 1,529 20,912
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$428,089 $2,056 $18,433 $411,712
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</TABLE>
The gross realized gains on securities sold from the available-for-sale
portfolio for the first nine months of 2000 and 1999 are $958,000 and $805,000,
respectively. The gross realized losses on securities sold from the
available-for-sale portfolio for the first nine months of 2000 and 1999 are
$103,000 and $-0-, respectively.
The amortized cost and estimated fair value of securities classified as
held-to-maturity and available-for-sale at September 30, 2000, summarized by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
----------------------------------------------------------------------------------------------------------------
September 30, 2000 Amortized Estimated Fair Amortized Estimated Fair
(dollars in thousands) Cost Value Cost Value
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<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 2,010 $ 2,001
Due after one through five years 13,351 13,415 115,399 113,824
Due after five through ten years 548 546 89,085 84,766
Due after ten years 1,873 1,817 67,022 59,720
Mortgage-backed debt securities 2,604 2,563 133,759 130,489
Equity securities -- -- 20,814 20,912
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$18,376 $18,341 $428,089 $411,712
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</TABLE>
Actual maturities may differ from the contractual maturities reflected in the
preceding table because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Mortgage-backed securities
have no stated maturity and primarily reflect investments in various
Pass-through and Participation Certificates issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation,
respectively. Repayment of mortgage-backed securities is dependent on the
contractual repayment terms of the underlying mortgages collateralizing these
obligations and the current level of interest rates.
The amortized cost and estimated fair value of securities classified as
held-to-maturity at December 31, 1999, are as follows:
HELD-TO-MATURITY PORTFOLIO
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Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
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<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
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$21,263 $180 $279 $21,164
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7
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The amortized cost and estimated fair value of securities available-for-sale at
December 31, 1999, are as follows:
AVAILABLE-FOR-SALE-PORTFOLIO
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<CAPTION>
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Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
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<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>
Note 4 - 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 period as follows:
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<CAPTION>
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For the 3 months ended For the 9 months ended
September 30 September 30
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Basic EPS weighted-average shares outstanding 11,924,443 11,752,285 11,924,492 11,655,706
Effect of dilutive securities - stock options 56,950 184,954 36,112 260,139
----------------------------------------------------------------------------------------------------------------
Diluted EPS weighted-average shares outstanding 11,981,393 11,937,239 11,960,604 11,915,845
================================================================================================================
</TABLE>
Note 5 - Risk Management Instruments: Interest rate swaps used to achieve
interest rate risk management objectives are accounted for in a manner
consistent with the accounting basis of the related asset or liability. An
instrument designated to hedge an asset or liability carried at historical cost
is accounted for on an accrual basis, whereby the interest income or expense of
the related asset or liability is adjusted for the net amount of any interest
receivable or payable generated by the hedging instrument during the reporting
period. For such instruments, no amounts other than any accrued interest
receivable or payable are included in the accompanying consolidated balance
sheets.
Interest rate swaps involve the exchange of payments between counterparties
based on the interest differential between a fixed and a variable interest rate
applied to a notional balance. Under accrual accounting, this interest
differential is recognized as an adjustment to the interest income or expense of
the related asset or liability in the accompanying statements of income.
Upon early termination of derivative instruments accounted for under the accrual
method, the net proceeds received or paid are deferred, if material, in the
accompanying consolidated balance sheets and amortized to the interest income or
expense of the related asset or liability over the lesser of the remaining
contractual life of the instrument or the maturity of the related asset or
liability. At September 30, 2000, there were $374,000 of gains in the
accompanying consolidated income statement arising from the termination of
instruments qualifying for accrual accounting prior to maturity, but no gains
recognized as of September 30, 1999.
Note 6 - Comprehensive Income: The Company adheres to the provisions of
Statement of Financial Accounting Standards Board ("FASB") No. 130, "Reporting
Comprehensive Income." Comprehensive income, as defined by Statement 130, is the
change in equity of a business enterprise during a reporting period from
transactions and other events and circumstances from non-owner sources. In
addition to an enterprise's net income, change in equity components under
comprehensive income reporting would also include such items as the net change
in unrealized gain or loss on available-for-sale securities and foreign currency
translation adjustments. Statement 130 requires disclosure of comprehensive
income and its components with the same prominence as the Company's other
financial statements.
The following tables summarize the related tax effect of unrealized gains
(losses) on securities available for sale included in other comprehensive income
shown in the consolidated statements of income and comprehensive income.
8
<PAGE>
For the three months ended September 30, 2000:
<TABLE>
<CAPTION>
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Tax Expense
Pre-tax Amounts (Benefits) Net Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during period $5,579 $2,218 $3,361
Less: reclassification adjustment for
gains (losses) included in net income 523 207 316
----------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $5,056 $2,011 $3,045
----------------------------------------------------------------------------------------------------------------
</TABLE>
For the three months ended September 30, 1999:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Tax Expense
Pre-tax Amounts (Benefits) Net Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during period $(3,970) $(1,999) $(1,971)
Less: reclassification adjustment for
gains (losses) included in net income 159 63 96
----------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $(4,129) $(2,062) $(2,067)
----------------------------------------------------------------------------------------------------------------
</TABLE>
For the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Tax Expense
Pre-tax Amounts (Benefits) Net Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during period $(1,120) $(443) $ (677)
Less: reclassification adjustment for
gains (losses) included in net income 855 342 513
----------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $(1,975) $(785) $(1,190)
----------------------------------------------------------------------------------------------------------------
</TABLE>
For the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Tax Expense
Pre-tax Amounts (Benefits) Net Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during period $(15,258) $(6,287) $(8,971)
Less: reclassification adjustment for
gains (losses) included in net income 805 311 494
----------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $(16,063) $(6,598) $(9,465)
----------------------------------------------------------------------------------------------------------------
</TABLE>
Note 7 - Long-Term Debt: The guaranteed preferred beneficial interests in the
Company's subordinated debentures represent interests in 8.25% subordinated
debentures ("Subordinated Debentures"), due July 31, 2028, issued by the Company
to its subsidiary, FCNB Capital Trust, in connection with FCNB Capital's
Cumulative Trust Preferred Securities (the "Preferred Securities"). The
Subordinated Debentures and related payments are FCNB Capital's only assets.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
This section of the report contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to the Company's beliefs, expectations, anticipations and
plans regarding, among other things, general economic trends, interest rates,
product expansions and other matters. Such statements are subject to numerous
uncertainties, such as federal monetary policy, inflation, employment,
profitability and consumer confidence levels, both nationally and in the
Company's market area, the health of the real estate and construction market in
the Company's market area, the Company's ability to develop and market new
products and to enter new markets, competitive challenges in the Company's
market, legislative changes and other factors, and as such, there can be no
assurance that future events will develop in accordance with the forward looking
statements contained herein.
9
<PAGE>
The following discussion and related financial data for the Company provides an
overview of the financial condition and results of operations of the Company and
its wholly-owned subsidiaries, which is presented on a consolidated basis. The
principal subsidiary of the Company is FCNB Bank. For the first nine months of
2000, the Company reported earnings of $11.17 million, an increase of 60.3%,
compared to earnings of $6.97 million in the first nine months of 1999. However,
net income before specific one-time merger related costs ("core earnings") was
$11.21 million in the first nine months of 2000, an increase of 12.7%, compared
to $9.94 million for the same period in 1999. For the third quarter, the Company
had core earnings of $4.17 million and earnings after one-time merger related
charges of $4.16 million in 2000, and in 1999 had core earnings of $3.36 million
and earnings after one-time merger related charges of $598,000.
Return on average assets and return on average equity are key measures of
earnings performance. Return on average assets measures the ability of a bank to
utilize its assets in generating income. Annualized return on average assets for
the nine months ended September 30, 2000 was .97%, and was .94% for the nine
months ended September 30, 1999, in each case before specific one-time merger
related costs. Annualized return on average assets for the nine months ended
September 30, 2000 was .97% and was .66% for the nine months ended September 30,
1999, in each case after specific one-time merger related costs. The annualized
return on average shareholders' equity, which measures the income earned on the
capital invested, for the nine months ended September 30, 2000 was 17.17%, as
compared to 13.94% for the nine months ended September 30, 1999, in each case
before specific one-time merger related costs. Annualized return on average
shareholder's equity for the nine months ended September 30, 2000 was 17.11% and
was 9.77% for the nine months ended September 30, 1999 in each case after
specific one-time merger related costs.
Annualized return on average assets for the quarter ended September 30, 2000 was
1.05%, as compared to .95% for the same period in 1999, in each case before
specific one-time merger related costs. Annualized return on average assets for
the quarter ended September 30, 2000 was 1.05% as compared to .17% for the same
period in 1999, in each case after specific one-time merger related costs. The
annualized return on average shareholders' equity for the three months ended
September 30, 2000 was 18.62%, as compared to 15.02% for the same period in
1999, in each case before specific one-time merger related costs. Annualized
return on average shareholder's equity for the quarter ended September 30, 2000
was 18.56% as compared to 2.68% for the same period in 1999, in each case after
specific one-time merger related costs.
On July 26, 2000, the Company entered into a definitive agreement with BB&T
Corporation, pursuant to which the Company would be merged with and into BB&T.
Pursuant to the merger agreement, each outstanding share of the Company's common
stock will be converted into 0.725 shares of BB&T common stock, and each
outstanding option to purchase the Company's common stock will be converted into
a proportionately adjusted option to purchase BB&T common stock. The merger,
which is expected to be accounted for as a pooling of interests, is subject to
the satisfaction of a number of conditions, including approval by the Company's
shareholders and regulatory approval, is expected to be completed early in the
first quarter of 2001.
NET INTEREST INCOME
Net interest income represents the Company's gross profit from lending and
investment activities, and is the most significant component of the Company's
earnings. Net interest income is the difference between interest and related fee
income on earning assets (primarily loans and investment securities) and the
cost of funds (primarily deposits and short-term borrowings) supporting them. To
facilitate the analysis of net interest income, the table on page 15 is
presented on a taxable equivalent basis to adjust for the tax-exempt status of
certain loans and investment securities. This adjustment, based on the statutory
federal income tax rate of 35%, increases the tax-exempt income to an amount
representing an estimate of what would have been earned if that income were
fully taxable.
Taxable equivalent net interest income for the first nine months of 2000 totaled
$38.22 million, increasing 2.18% from the $37.41 million recorded for the same
period in 1999. The Company's average interest-earning assets increased 10.13%
to $1.44 billion from September 30, 1999. This increase was primarily funded
with a 9.77% increase in the Company's average interest-bearing liabilities.
For the three months ended, the taxable equivalent net interest income increased
by $279,000 (2.24%) to $12.74 million in 2000 from the same period in 1999.
The Company's net interest margin (taxable equivalent net interest income as a
percent of average interest-earning assets) was 3.53% and 3.81% for the first
nine months of 2000 and 1999, respectively. The net interest margin is impacted
by the change in the spread between yields on earning assets and rates paid on
interest-bearing liabilities. The net interest spread decreased by 34 basis
points in the first nine months of 2000 when compared to the same period in the
prior year. The yield on earning assets increased 17 basis points to 8.01% from
7.84%, while the rates paid on interest-bearing liabilities increased by 51
basis points to 5.08%.
For the third quarter of 2000 the net interest margin was 3.44% compared to
3.74% in the third quarter of 1999. The spread during the period decreased by 41
basis points, primarily as a result of the 73 basis points increase in the rates
paid on interest-bearing liabilities, which substantially exceeded the 32 basis
points increase in the yield on earnings assets.
10
<PAGE>
The rate of interest earned on interest-earning assets and the rate paid on
interest-bearing liabilities, while significantly affected by the actions taken
by the Federal Reserve to control economic growth, are influenced by competitive
factors within the Company's market. Competitive pressures during early 2000 and
late 1999 for both loans and the funding sources needed to satisfy loan demand
within the Company's market area caused its net interest spread to narrow. The
management of the Company feels that the competitive pressures in this market
will cause the net interest spread to continue to be under pressure during 2000.
There is currently proposed legislation, which would permit the payment of
interest on business checking accounts. The exact nature of any legislation,
which may ultimately be approved, is uncertain. The impact of the payment of
interest on the checking accounts would likely be negative on net interest
income and other indicators of financial performance for the Company, as we
expect it would be for many other financial institutions.
NONINTEREST INCOME
Noninterest income increased $843,000 (6.00%) for the nine months ended
September 30, 2000, when compared to the same period in 1999. This increase was
due to an increase in service fee income of $511,000, and the increase in
insurance commissions of $520,000. Loan sale gains decreased by $700,000. Income
relating to the Company's bank-owned life insurance program, which generates
tax-exempt income to partially offset the cost of employee benefit programs,
increased by $42,000 during the nine months ended September 30, 2000 over the
amount reported for the nine month period ended September 30, 1999.
For the third quarter of 2000, noninterest income increased $492,000. This
increase was primarily caused by increased service fee income of $177,000,
additional insurance commissions of $163,000, and an increase in security gains
of $364,000, which increases were offset by declines totaling $304,000 in loan
sale gains.
NONINTEREST EXPENSES
Noninterest expenses, excluding merger-related expenses, increased $72,000
(0.21%) for the first nine months of 2000, when compared to the first nine
months of 1999.
Total salaries and employee benefits increased $397,000 (2.06%) over the first
nine months of 1999. The increase in salaries and employee benefits reflects
general merit and cost-of-living adjustments. Additional increased health care
costs and pension expenses are the primary causes for the remaining portion of
this increase.
Occupancy expenses decreased $114,000 (2.62%) and equipment expenses increased
$180,000 (6.00%) over the first nine months of 1999. The increase in equipment
expense is directly attributable to the activity surrounding the acquisition of
First Frederick Financial Corporation. Branch upgrading, signage, computer and
equipment upgrades have resulted in increased depreciation and maintenance
expenses.
Other operating expenses decreased $391,000 (4.67%) compared to the nine months
of 1999.
For the third quarter of 2000, salaries and benefits decreased $18,000 (.28%),
occupancy expenses decreased $67,000 (4.40%), equipment expenses increased
$62,000 (6.29%), and other operating expenses decreased $255,000 (8.92%). The
decrease in salaries and benefits costs is primarily related to the decreased
number of full-time equivalent employees, which decreased to 546 from 585 as of
September 30, 2000 and 1999.
INCOME TAXES
The Company's effective tax rates for the first nine months of 2000 and 1999
were 31.74% and 31.85%, respectively. The Company's income tax expense differs
from the amount computed at statutory rates primarily due to the tax-exempt
earnings from certain loans, investment securities and the bank-owned life
insurance program. Additionally, the Company derives income tax benefits from a
subsidiary located in the state of Delaware that holds and manages a portion of
its investment portfolio.
11
<PAGE>
ALLOWANCE FOR CREDIT LOSSES AND PROBLEM ASSETS
The Company follows the guidance of Statement of Financial Accounting Standards
No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan" as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." It requires that impaired loans within
its scope be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable market
price, or the fair value of the collateral if the loan is collateral dependent.
SFAS 114 excludes smaller balance and homogeneous loans from impairment
reporting. Therefore, the Company has designated consumer, credit card and
residential mortgage loans to be excluded for this purpose. From the remaining
loan portfolio, loans rated as doubtful or worse, classified as nonaccrual, and
troubled debt restructurings are considered to be impaired. Loans are placed on
nonaccrual when a loan is specifically determined to be impaired or when
principal or interest is delinquent for 90 days or more. Any unpaid interest
previously accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received. Up to this
point, the Company considers slow payment on a loan, to only be a minimum delay.
The Company has identified commercial real estate and commercial and industrial
type loans as the major risk classifications to be used in the application of
SFAS 114.
Selected information concerning the Company's recorded investment in impaired
loans and related interest income are summarized as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
September 30, 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with specific allocation of allowance for credit losses $2,813 $4,215
Specific allocation of allowance for credit losses 854 1,416
Other impaired loans 2,689 5,172
Average recorded investment in impaired loans 6,052 9,831
Interest income recognized on impaired loans based on cash payments received 47 145
</TABLE>
Additional information concerning the Company's recorded investment in
nonaccrual loans, for which impairment had not been recognized are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
September 30, 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $1,612 $5,172
Interest income not recognized due to loans in nonaccrual status 16 21
------------------------------------------------------------------------------------------------------------
</TABLE>
The Company maintains its allowance for credit losses at a level deemed
sufficient to provide for estimated potential losses in the credit extension
process. Management reviews the adequacy of the allowance each quarter,
considering factors such as current and future economic conditions and their
anticipated impact on specific borrowers and industry groups, the growth and
composition of the loan portfolio, the level of classified and problem assets,
historical loss experience, and the collectability of specific loans. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows.
The provision for credit losses is charged to income in an amount necessary to
maintain the allowance at the level management believes is appropriate. The
allowance for credit losses for 1999 was increased $2.9 million as a merger
related adjustment to align the accounting assumptions in analyzing the
allowance for credit losses. Charge-offs for 1999 of $1.3 million in the
commercial and agricultural section of the allowance for credit losses reflect
merger adjustments related to First Bank.
12
<PAGE>
The provision for credit losses is charged to income in an amount necessary to
maintain the allowance at the level management believes is appropriate.
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999 December 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for credit losses $9,178 $9,648 $10,043
------------------------------------------------------------------------------------------------------------------------------------
Allowance as a % of total loans net of
unearned income 0.92% 1.10% 1.11%
------------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $7,114 $8,546 $10,605
Past due loans 1,084 1,220 674
------------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans 8,198 9,766 11,279
Foreclosed properties 2,674 1,198 962
------------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets $10,872 $10,964 $12,241
------------------------------------------------------------------------------------------------------------------------------------
Allowance for credit losses to
nonperforming loans 112.0% 98.8% 89.04%
------------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets to total assets 0.68% 0.75% 0.81%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Nine months ended Year ended
September 30, 2000 December 31, 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Average total loans outstanding during period $954,640 $851,705
----------------------------------------------------------------------------------------------------
Allowance at beginning of year $10,043 $8,237
----------------------------------------------------------------------------------------------------
Charge-offs:
Real estate - construction -- --
Real estate - mortgage 998 702
Commercial and agricultural 1,907 2,619
Consumer 505 519
----------------------------------------------------------------------------------------------------
Total charge-offs 3,410 3,840
----------------------------------------------------------------------------------------------------
Recoveries:
Real estate - construction -- --
Real estate - mortgage 641 179
Commercial and agricultural 248 318
Consumer 256 141
----------------------------------------------------------------------------------------------------
Total recoveries 1,145 638
----------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 2,265 3,202
----------------------------------------------------------------------------------------------------
Additions to allowance charged to operating expenses 1,400 5,008
----------------------------------------------------------------------------------------------------
Allowance at end of period $9,178 $10,043
====================================================================================================
Ratio of net charge-offs to average total loans .24% .38%
====================================================================================================
</TABLE>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
September 30, 2000 %(1) December 31, 1999 %(1)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate - construction $1,061 13% $ 1,145 14%
Real estate - mortgage 3,330 60% 3,583 59%
Commercial and agricultural 3,553 15% 3,440 18%
Consumer 810 12% 1,412 9%
Unallocated 424 -- 463 --
----------------------------------------------------------------------------------------------------
Total Allowance $9,178 100% $10,043 100%
====================================================================================================
</TABLE>
(1) Percent of loans in each category to total loans, net of unearned income.
The Company makes real estate-construction, real estate-mortgage, commercial and
agricultural, and consumer loans. The real estate-construction loans are
generally secured by the construction project financed, and have a term of one
year or less. The real estate-mortgage loans are generally secured by the
property with a maximum loan to value ratio of 75% and generally a term of one
to five years. The commercial and agricultural loans consist of secured and
unsecured loans. The unsecured commercial loans are made based
13
<PAGE>
on the financial strength of the borrower and usually require personal
guarantees from the principals of the business. The collateral for the secured
commercial loans may be equipment, accounts receivable, marketable securities or
deposits in the subsidiary bank of the Company. These loans have a maximum loan
to value ratio of 75% and a term of one to five years. The consumer loan
category consists of secured and unsecured loans. The unsecured consumer loans
are made on the financial strength of the individual borrower. The collateral
for the secured consumer loans may be marketable securities, automobiles,
recreational vehicles or deposits in the Company's subsidiary bank. The usual
term for these loans is three to five years.
As of September 30, 2000, the Company had loans totaling $34.8 million that were
current but as to which there are concerns as to the ability of the borrowers to
comply with present loan repayment terms. While management of the Company does
not anticipate any loss not previously provided for on these loans, changes in
the financial condition of these borrowers may necessitate future modifications
in their loan repayment terms, additional charge-offs or provisions for loan
losses.
At September 30, 2000, the Company had a significant concentration of credit
risk in the real estate loan portfolio of 15%. 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 September 30, 2000, classifiable
as nonaccrual, past due, restructured or problem assets.
14
<PAGE>
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differentials
The following table shows average balances of asset and liability categories,
interest income and paid, and average yields and rates for the periods
indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
-------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Daily Income(1)/ Yield/ Daily Income(1)/ Yield/
(dollars in thousands) Balance Paid Rate Balance Paid Rate
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 2,653 $ 124 6.23% $ 3,851 $ 131 4.54%
------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 18,575 870 6.25% 16,519 647 5.22%
------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 591 35 7.90% 4,526 243 7.16%
------------------------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable 456,605 21,904 6.40% 434,404 20,150 6.18%
Tax exempt 9,824 600 8.14% 10,413 648 8.29%
------------------------------------------------------------------------------------------------------------------------------
Total investment securities 466,429 22,504 6.43% 444,817 20,798 6.23%
------------------------------------------------------------------------------------------------------------------------------
Loans(2) 954,640 63,130 8.82% 840,476 55,260 8.77%
------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,442,888 86,663 8.01% 1,310,189 77,079 7.84%
Noninterest-earning assets 109,880 106,703
Net effect of SFAS 115 (12,905) (105)
------------------------------------------------------------------------------------------------------------------------------
Total assets $1,539,863 $1,416,787
==============================================================================================================================
------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits $875,848 29,934 4.56% $806,560 25,187 4.16%
Other short-term borrowings 354,989 15,972 8.39% 311,134 11,951 5.12%
Long-term debt 40,250 2,533 6.00% 40,250 2,533 8.39%
------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,271,087 48,439 5.08% 1,157,944 39,671 4.57%
Noninterest-bearing deposits 166,536 149,090
Other liabilities 15,203 14,328
------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,452,826 1,321,362
------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 99,942 95,530
Net effect of unrealized gains (losses)
on securities available for sale (12,905) (105)
------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 87,037 95,425
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $1,539,863 $1,416,787
------------------------------------------------------------------------------------------------------------------------------
Net interest income 38,224 37,408
==============================================================================================================================
Net interest spread 2.93% 3.27%
==============================================================================================================================
Net interest margin 3.53% 3.81%
==============================================================================================================================
</TABLE>
(1) Taxable equivalent adjustments of $254,000 for 2000 and $401,000 for 1999
are included in the interest income for total interest-earning assets.
(2) Nonaccruing loans, which include impaired loans, are included in the
average balances. Net loan fees included in interest income totaled $1.66
million in 2000, and $2.51 million in 1999.
15
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/liability management involves the funding and investment strategies
necessary to maintain an appropriate balance between interest sensitive assets
and liabilities. It also involves providing adequate liquidity while sustaining
stable growth in net interest income. Regular review and analysis of deposit and
loan trends, cash flows in various categories of loans, and monitoring of
interest spread relationships are vital to this process.
The conduct of our banking business requires that we maintain adequate liquidity
to meet changes in the composition and volume of assets and liabilities due to
seasonal, cyclical or other reasons. Liquidity describes the ability of the
Company to meet financial obligations that arise during the normal course of
business. Liquidity is primarily needed to meet the borrowing and deposit
withdrawal requirements of the customers of the Company, as well as for meeting
current and future planned expenditures. This liquidity is typically provided by
the funds received through customer deposits, investment maturities, loan
repayments, borrowings, and income. Management considers the current liquidity
position to be adequate to meet the needs of the Company and its customers.
The Company seeks to limit the risks associated with interest rate fluctuations
by managing the balance between interest sensitive assets and liabilities.
Managing to mitigate interest rate risk is, however, not an exact science. Not
only does the interval until repricing of interest rates on assets and
liabilities change from day to day as the assets and liabilities change, but for
some assets and liabilities, contractual maturity and the actual maturity
experienced are not the same. For example, mortgage-backed securities may have
contractual maturities well in excess of five years but, depending upon the
interest rate carried by the specific underlying mortgages and the current
prevailing rate of interest, these securities may be repaid in a shorter time
period. Accordingly, mortgage-backed securities and collateralized mortgage
obligations that have average stated maturities in excess of five years are
evaluated as part of the asset/liability management process using their expected
average lives due to anticipated prepayments. Loans held for sale which have a
contracted maturity of five to thirty years are included in the one year or less
time frame since they are available to be sold at any time and are carried at
the lower of cost or fair value.
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.
The Company employs computer model simulations for monitoring interest rate
sensitivity. Interest rate risk ("IRR") management has various sources and it is
not simply the risk from rates rising and falling. In fact, there are four
sources of IRR: repricing risk, basis risk, yield curve risk, and option risk.
Gap modeling only focuses on repricing risk. Income simulations that incorporate
cash flow analyses: (1) measure the size and direction of interest rate exposure
under a variety of interest rate and yield curve shape scenarios; (2) 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 September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Change in Interest Rate Assumption
-------------------------------------------------------------------------------------------------------------
(dollars in thousands) +100bp +200bp +300bp -100bp -200bp -300bp
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income-increase
(decrease) $(1,485) $(3,146) $(4,169) $2,796 $4,786 $5,819
Net interest income - % change (2.85) (6.04) (8.01) 5.37 9.20 11.18
-------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
CAPITAL RESOURCES
The following table shows the risk-based capital and the leverage ratios for the
Company as of September 30, 2000:
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes: Prompt Corrective
Action Provisions:
------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Total Capital
(to Risk-Weighted Assets):
FCNB Corp $148,320 12.37% $95,956 8.00% N/A N/A
FCNB Bank $119,970 10.17% $94,417 8.00% $118,021 10.00%
Tier I Capital
(To Risk-Weighted Assets):
FCNB Corp $133,673 11.14% $47,978 4.00% N/A N/A
FCNB Bank $83,746 7.10% $47,209 4.00% $70,813 6.00%
Tier I Capital
(To Average Assets):
FCNB Corp $133,673 8.41% $63,586 4.00% N/A N/A
FCNB Bank $83,746 5.34% $62,753 4.00% $78,441 5.00%
</TABLE>
INFLATION
The effect of changing prices on financial institutions is typically different
than on non-banking companies since virtually all of a bank's assets and
liabilities are monetary in nature. In particular, interest rates are
significantly affected by inflation, but neither the timing nor magnitude of the
changes are directly related to price level indices; therefore, the Company can
best counter inflation over the long term by managing net interest income and
controlling net increases in noninterest income and expenses.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
No. 11 - Statement Regarding the Computation of Per Share Earnings
No. 27 - Financial Data Schedule
Reports on Form 8-K
On July 28, 2000, the Company filed a report on Form 8-K reporting under
item 5, the execution and announcement of the definitive agreement pursuant
to which the Company would be merged with and into BB&T.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FCNB CORP
(Registrant)
November 7, 2000 By: /s/ A. Patrick Linton
---------------------
A. Patrick Linton
President Chief Executive Officer and Director
November 7, 2000 By: /s/ Mark A. Severson
--------------------
Mark A. Severson
Senior Vice President and Treasurer
18
