FORM 10-Q--QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-24302
COLUMBIA BANCORP
(exact name of registrant as specified in its charter)
Maryland 52-1545782
- ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10480 Little Patuxent Parkway, Columbia, Maryland 21044
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(410) 465-4800
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,572,132 shares as of October
31, 1998.
(1)
<PAGE>
COLUMBIA BANCORP
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of
September 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income and Comprehensive Income for
the Three Months and Nine Months
Ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
(2)
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,788,244 $ 13,497,010
Federal funds sold 24,280,201 2,013,538
Investment securities (fair value $73,206,943
in 1998 and $65,149,749 in 1997) 72,590,247 64,970,889
Securities available-for-sale 4,130,814 1,674,464
Residential mortgage loans originated-for-sale 11,731,659 6,557,090
Loans:
Commercial 44,461,164 37,518,405
Real estate development and construction 109,107,256 110,413,134
Real estate mortgage:
Residential 9,779,291 11,077,563
Commercial 18,878,710 21,146,275
Retail, principally residential equity
lines of credit 84,935,369 84,039,255
Credit card 1,512,768 1,639,070
-------------- -------------
Total loans 268,674,558 265,833,702
Less: Unearned income, net of
origination costs 460,019 640,189
Allowance for credit losses 3,906,652 3,631,664
-------------- -------------
Loans, net 264,307,887 261,561,849
Other real estate owned 4,144,722 4,621,873
Property and equipment, net 8,786,743 9,125,396
Prepaid expenses and other assets 10,328,541 9,429,002
-------------- -------------
Total assets $ 415,089,058 $ 373,451,111
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 53,652,431 $ 56,584,646
Interest-bearing deposits 277,019,228 256,772,797
-------------- -------------
Total deposits 330,671,659 313,357,443
Short-term borrowings 29,087,767 23,725,237
Long-term borrowings 15,000,000 -
Accrued expenses and other liabilities 2,579,214 1,983,617
-------------- -------------
Total liabilities 377,338,640 339,066,297
-------------- -------------
Stockholders' equity:
Common stock, $.01 par value per share;
authorized 9,550,000 shares; outstanding
4,572,110 and 4,400,330 shares,
respectively 45,721 44,003
Additional paid in capital 23,698,458 22,918,578
Retained earnings 14,006,239 11,423,350
Accumulated other comprehensive income - (1,117)
-------------- -------------
Total stockholders' equity 37,750,418 34,384,814
-------------- -------------
Total liabilities and
stockholders' equity $ 415,089,058 $ 373,451,111
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
(3)
<PAGE>
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans $7,045,415 $6,943,217 $21,013,922 $19,796,219
Investment securities 1,226,997 876,468 3,281,231 2,309,836
Federal funds sold 249,487 51,177 412,734 160,629
---------- ---------- ----------- -----------
Total interest income 8,521,899 7,870,862 24,707,887 22,266,684
---------- ---------- ----------- -----------
Interest expense:
Deposits 2,843,204 2,613,642 8,292,233 7,306,006
Borrowings 535,973 420,332 1,413,987 1,027,361
---------- ---------- ----------- -----------
Total interest expense 3,379,177 3,033,974 9,706,220 8,333,367
---------- ---------- ----------- -----------
Net interest income 5,142,722 4,836,888 15,001,667 13,933,317
Provision for credit losses 334,000 234,000 517,000 629,000
---------- ---------- ----------- -----------
Net interest income after
provision for credit losses 4,808,722 4,602,888 14,484,667 13,304,317
---------- ---------- ----------- -----------
Noninterest income:
Gains and fees on sales of
mortgage loans, net of costs 482,724 86,571 836,648 217,688
Fees charged for services 374,228 338,995 1,005,831 927,501
Other 188,922 134,364 578,659 442,084
---------- ---------- ----------- -----------
Total noninterest income 1,045,874 559,930 2,421,138 1,587,273
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 2,032,892 1,716,018 5,787,327 4,890,913
Occupancy, net 484,827 358,044 1,405,574 1,020,690
Equipment 308,586 258,444 892,642 742,983
Marketing 107,049 110,729 404,882 461,488
Data processing 192,012 163,397 575,731 437,060
Cash management services 91,403 117,788 255,034 329,457
Professional fees 119,580 123,180 265,519 302,394
Deposit insurance premiums and
assessments 31,973 28,475 94,416 80,799
Net expense (income) on other
real estate owned (30,726) 147,688 (38,879) 166,784
Other 528,655 538,257 1,812,781 1,633,905
---------- ---------- ----------- -----------
Total noninterest expense 3,866,251 3,562,020 11,455,027 10,066,473
---------- ---------- ----------- -----------
Income before income taxes 1,988,345 1,600,798 5,450,778 4,825,117
Income tax expense 697,000 515,400 1,910,000 1,769,000
---------- ---------- ----------- -----------
Net income 1,291,345 1,085,398 3,540,778 3,056,117
Other comprehensive income, net of tax:
Unrealized gains (losses) on
securities available-for-sale (88) 1,591 1,117 6,740
========== ========== =========== ===========
Comprehensive income $1,291,257 $1,086,989 $ 3,541,895 $ 3,062,857
========== ========== =========== ===========
Per common share data:
Net income: Basic $ 0.28 $ 0.25 $ 0.78 $ 0.71
Diluted 0.28 0.24 0.77 0.67
Cash dividends declared $ 0.07 $ 0.06 $ 0.21 $ 0.18
========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(4)
<PAGE>
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,1998 and 1997
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,540,778 $ 3,056,117
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 833,674 769,532
Provision for credit losses 517,000 629,000
Provision for losses on other real estate owned 40,925 46,000
Gains on sales of loans (836,648) (217,688)
Proceeds from the sales of residential
mortgage loans originated-for-sale 112,598,590 33,500,901
Disbursements for residential mortgage loans
originated-for-sale (116,936,511) (34,809,827)
Decrease in unearned income, net of
origination costs (180,170) (410,123)
Increase in prepaid expenses and other assets (762,072) (875,310)
Increase in accrued expenses and other liabilities 583,768 22,789
------------- ------------
Net cash provided by (used in) operating activities (600,666) 1,711,391
------------- ------------
Cash flows provided by (used in) investing activities:
Loan disbursements in excess of principal repayments (6,512,602) (28,661,823)
Loan purchases (3,560,749) (4,245,078)
Loan sales 6,656,909 2,155,421
Purchases of investment securities (33,585,674) (26,969,340)
Purchases of investment securities available-for-sale (3,157,400) (17,600)
Proceeds from maturities and principal repayments
of investment securities 25,996,850 6,121,183
Proceeds from maturities and principal repayments of
securities available-for-sale 701,356 2,690,939
Additions to other real estate owned (1,405,560) (272,725)
Sales of other real estate owned 2,175,360 160,782
Purchases of property and equipment (525,313) (1,963,093)
Sales of property and equipment - 64,517
Increase in cash surrender value of life insurance (136,898) (1,022,262)
------------- ------------
Net cash used in investing activities (13,353,721) (51,959,079)
------------- ------------
Cash flows provided by (used in) financing activities:
Net increase in deposits 17,314,216 39,437,901
Increase in short-term borrowings 5,362,530 11,204,077
Increase in long-term borrowings 15,000,000 -
Cash dividends distributed on common stock (945,203) (776,889)
Net proceeds from stock options exercised
and common stock exchanged 780,741 127,480
------------- ------------
Net cash provided by financing activities 37,512,284 49,992,569
------------- ------------
Net increase (decrease) in cash and cash equivalents 23,557,897 (255,119)
Cash and cash equivalents at beginning of period 15,510,548 21,230,610
------------- ------------
Cash and cash equivalents at end of period $ 39,068,445 $ 20,975,491
============= ============
Supplemental information:
Interest paid on deposits and borrowings $ 9,650,515 $ 8,288,501
Income taxes paid 1,990,000 1,975,000
Transfer of loans to other real estate owned $ 333,574 $ 4,062,937
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
(5)
<PAGE>
COLUMBIA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine months
ended September 30, 1998 and 1997 is unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements for Columbia Bancorp
(the "Company") have been prepared in accordance with the instructions for Form
10-Q and, therefore, do not include all information and notes necessary for a
fair presentation of financial condition, results of operations and cash flows
in conformity with generally accepted accounting principles. The consolidated
financial statements should be read in conjunction with the audited financial
statements included in the Company's 1997 Annual Report on Form 10-K.
The consolidated financial statements include the accounts of the
Company's subsidiary, The Columbia Bank, and its wholly-owned subsidiaries,
McAlpine Enterprises, Inc. and Howard I, LLP (collectively, the "Bank"). All
significant intercompany balances and transactions have been eliminated.
Certain amounts for 1997 have been reclassified to conform to the
presentation for 1998.
Effective January 1, 1998, management adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. It requires all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed in
equal prominence with other financial statements. It requires that an enterprise
display an amount representing total comprehensive income for each period. It
does not require per share amounts of comprehensive income to be disclosed. The
adoption of the provisions of SFAS No. 130 did not have a material impact on the
financial condition or results of operations of the Company.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 established standards for the way
public business enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial statements issued to
shareholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. Management intends to adopt its provisions
during 1998.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It is effective for all
fiscal quarters or fiscal years beginning after June 15, 1999. Initial
application of the Statement should be as of the beginning of an entity's fiscal
quarter. On that date, hedging relationships must be designated anew and
documented pursuant to the provisions of SFAS No. 133. Earlier application is
encouraged, but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of SFAS No. 133. It should not be applied retroactively to
financial statements of prior periods. Management is currently evaluating SFAS
No. 133 to determine its impact and to determine when management will adopt the
provisions of SFAS No. 133.
The consolidated financial statements as of September 30, 1998 and for
the three months and nine months ended September 30, 1998 and 1997 are unaudited
but include all adjustments, consisting only of normal recurring adjustments,
which the Company considers necessary for a fair presentation of financial
position and results of operations for those periods. The Consolidated Statement
of Income for the nine months ended September 30, 1998 is not necessarily
indicative of the results that will be achieved for the entire year.
(6)
<PAGE>
NOTE 2 - PER SHARE DATA
Information relating to the calculations of earnings per common share is
summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------
1998 1997
----------------------------------------------
Basic Diluted Basic Diluted
----------------------------------------------
<S> <C> <C> <C> <C>
Net income $3,540,778 $3,540,778 $3,056,117 $3,056,117
==============================================
Weighted average shares outstanding (a) 4,514,949 4,514,949 4,309,502 4,309,502
Dilutive securities (a) - 102,618 - 256,858
----------------------------------------------
Adjusted weighted average shares
used in EPS computation (a) 4,514,949 4,617,567 4,309,502 4,566,360
==============================================
Net income per common share $ 0.78 $ 0.77 $ 0.71 $ 0.67
==============================================
<CAPTION>
Three Months Ended September 30,
----------------------------------------------
1998 1997
----------------------------------------------
Basic Diluted Basic Diluted
----------------------------------------------
<S> <C> <C> <C> <C>
Net Income $1,291,345 $1,291,345 $1,085,398 $1,085,398
==============================================
Weighted average shares outstanding (a) 4,571,841 4,571,841 4,329,096 4,329,096
Dilutive securities (a) - 88,308 - 255,742
----------------------------------------------
Adjusted weighted average shares
used in EPS computation (a) 4,571,841 4,660,149 4,329,096 4,584,838
==============================================
Net income per common share $ 0.28 $ 0.28 $ 0.25 $ 0.24
==============================================
</TABLE>
--------------------
(a) Weighted average shares outstanding and dilutive securities have been
adjusted to reflect the two-for-one stock split-up in the form of a 100%
stock dividend paid in June 1998.
NOTE 3 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business in order to meet the financing needs of
customers. These financial instruments include commitments to extend credit,
standby letters of credit and mortgage loans sold with limited recourse.
The Company applies the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A summary
of the financial instruments at September 30, 1998 whose contract amounts
represent potential credit risk is as follows:
<TABLE>
<CAPTION>
September 30,
1998
------------------------------------------------------------------
(in thousands)
<S> <C>
Commitments to extend credit (a) $148,397
Standby letters of credit 15,421
Limited recourse on mortgage loans sold 2,989
</TABLE>
--------------------
(a) Includes unused lines of credit totalling $142.3 million regardless of
whether fee paid and whether adverse change clauses exist. The amount
also includes commitments to extend new credit totalling $6.1 million.
(7)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
Liquidity describes the ability of the Company to meet financial
obligations, including lending commitments and contingencies, 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 to meet current and planned expenditures.
The Company's major sources of liquidity ("financing activities" as used
in the Consolidated Statements of Cash Flows) are the Bank's deposit base and
stockholders' equity. At September 30, 1998, total deposits were $330.7 million.
Core deposits, defined as all deposits except certificates of deposit of
$100,000 or more, totalled $304.4 million or 92.1% of total deposits.
Stockholders' equity totalled $37.8 million at September 30, 1998. Also, the
Bank has established a credit line with the Federal Home Loan Bank of Atlanta
("FHLB") as an additional source of liquidity. At September 30, 1998,
outstanding advances from the FHLB totalled $15.0 million. Collateral must be
pledged to the FHLB before advances can be obtained. At September 30, 1998 the
Company's approved credit limit with the FHLB was $45.0 million. However, the
Company had collateral sufficient to borrow up to $80.2 million. Borrowings
above the approved credit limit require special approval. In addition, liquidity
is also provided through the Company's portfolio of cash, interest-bearing
deposits in other banks, and federal funds sold. Such assets totalled $39.1
million or 9.4% of total assets at September 30, 1998.
Capital Resources
The Federal Reserve Board has adopted risk-based guidelines for bank holding
companies. As of September 30, 1998, the minimum ratio of capital to
risk-weighted assets (including certain off-balance-sheet items, such as standby
letters of credit) was 8.0%. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, after subtracting goodwill and making certain other adjustments
("Tier 1 capital"). The remainder may consist of perpetual debt, mandatory
convertible debt securities, a limited amount of subordinated debt, other
preferred stock and limited amounts of credit loss reserves ("Tier 2 capital").
The maximum amount of supplementary capital elements that qualifies as Tier 2
capital is limited to 100% of Tier 1 capital, net of goodwill and certain other
intangible assets. The Federal Reserve Board also has adopted a minimum leverage
ratio (Tier 1 capital to assets) of 3% for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. The
rule indicates that the minimum leverage ratio should be at least 1.0% to 2.0%
higher for holding companies that do not have the highest rating or that are
undertaking major expansion programs. Failure to meet the capital guidelines
could subject a banking institution to a variety of enforcement remedies
available to federal bank regulatory agencies.
The following table summarizes the Company's capital ratios:
<TABLE>
<CAPTION>
Minimum
Columbia Bancorp Regulatory
September 30, 1998 Requirements
----------------------------------------------------------------
<S> <C> <C>
Risk-based capital ratios:
Tier 1 capital 11.82% 4.00%
Total capital 13.05 8.00
Tier 1 capital leverage ratios 9.54 3.00
</TABLE>
(8)
<PAGE>
Material Changes in Financial Condition
Cash and Due from Banks
Cash and due from banks represents cash on hand, cash on deposit with
other banks and cash items in the process of collection. As a result of the
Company's cash management services provided to large, sophisticated corporate
customers, which includes processing coin and currency transactions for, and
checks received by, retail customers, the Company's cash balances may fluctuate
more widely on a daily basis and may be higher than industry averages for banks
of a similar asset size.
Residential Mortgage Loans Originated-for-Sale
Mortgage loans originated-for-sale increased $5.2 million or 78.9% from
December 31, 1997 to September 30, 1998 due to lower interest rates and a
corresponding increase in consumer refinancing activity.
Loans
At September 30, 1998, the Company's loan portfolio, net of unearned
income, totalled $268.2 million, or 64.6% of its total assets of $415.1 million.
The categories of loans in the Company's portfolio are commercial, real estate
development and construction, residential and commercial mortgages and consumer.
Since December 31, 1997, total loans increased $2.8 million, or 1.1%.
Commercial loans accounted for substantially all of the increase in total loans
outstanding, increasing $6.9 million, or 18.5% since December 31, 1997. This was
partially offset, however, by a decrease of $2.3 million in commercial mortgage
loans and a decrease of $1.3 million in residential mortgage loans, resulting
from a lower interest rate environment and a corresponding increase in
refinancing activity.
Real estate development and construction loans constitute the largest
portion of the Company's lending activities, and consisted of the following at
September 30, 1998:
<TABLE>
<CAPTION>
Amount Percent
-------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Residential construction (a) $ 45,570 41.8%
Residential land development 43,599 40.0
Residential land acquisition (b) 10,586 9.7
Commercial construction 9,352 8.5
--------- -----
$ 109,107 100.0%
========= ======
</TABLE>
--------------------
(a) Includes $11.5 million of loans to individuals for construction of their
primary person residence.
(b) Includes $2.8 million of loans to individuals for the purchase of
residential building lots.
The Company provides interim residential real estate development and
construction loans to builders, developers and persons who will ultimately
occupy the single family dwellings. These loans are typically made for 80% or
less of the appraised value of the property. Residential real estate development
and construction loan funds are disbursed periodically as pre-specified stages
of completion are attained based upon site inspections. Interest rates on these
loans are usually adjustable.
Residential construction loans constitute the largest component of the
real estate development and construction loan portfolio, representing primarily
loans for the construction of single family dwellings. At September 30, 1998,
loans to individuals for the construction of primary personal residences
accounted for $11.5 million of the $45.6 million residential construction
portfolio. These loans are typically secured by the property under construction,
frequently include additional collateral
(9)
<PAGE>
(such as a second mortgage on the borrower's present home), and commonly have
maturities of six to twelve months. The remaining $34.1 million of residential
construction loans represented loans to residential builders and developers.
Approximately 62% of these loans were for the construction of residential homes
for which a binding sales contract existed and the prospective buyers had been
pre-qualified for permanent mortgage financing by either third-party lenders
(mortgage companies or other financial institutions) or the Company. To date,
permanent mortgage loan financing has primarily been provided by third-party
lenders. The Company attempts to obtain the permanent mortgage loan under terms,
conditions and documentation standards which permit the sale of the mortgage
loan in the secondary mortgage loan market. The Company's practice is to
immediately sell substantially all residential mortgage loans in the secondary
market with servicing released.
Loans for the development of residential land represented the second
largest component of the real estate development and construction loan portfolio
at September 30, 1998, totalling $43.6 million or 40.0% of the portfolio.
Generally, development loans are extended only when evidence is provided that
the lots under development will be or have been sold to builders satisfactory to
the Company. These loans are generally extended for a period of time sufficient
to allow for the clearing and grading of the land and the installation of water,
sewer and roads, typically a minimum of 18 months to three years. In addition,
residential land development loans generally carry a loan to value ratio not to
exceed 75% of the value of the project as completed.
The Company has limited loan losses in this area of lending through the
monitoring of development and construction loans with on-site inspections and
control of disbursements on loans in process. Development and construction loans
are secured by the properties under development or construction and personal
guarantees are typically obtained. Further, to assure that reliance is not
placed solely upon the value of the underlying collateral, the Company considers
the financial condition and reputation of the borrower and any guarantors, the
amount of the borrower's equity in the project, independent appraisals, cost
estimates and pre-construction sales information.
The following table provides information concerning nonperforming assets
and past-due loans.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
---------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans (a) $ 624 $ 599 $ 504
Other real estate owned 4,145 4,622 4,576
--------- --------- ---------
Total nonperforming assets $ 4,769 $ 5,221 $ 5,080
========= ========= =========
Loans past-due 90 days or more $ 222 $ 63 $ 115
========= ========= =========
</TABLE>
-------------------
(a) Loans are placed in nonaccrual status when they are past-due 90 days as
to either principal or interest or when, in the opinion of management,
the collection of all principal and interest is in doubt. Management
may grant a waiver from nonaccrual status for a 90-day past-due loan
which is both well secured and in the process of collection. A loan
remains in nonaccrual status until the loan is current as to payment of
both principal and interest and the borrower demonstrates the ability
to pay and remain current.
The largest component of nonperforming assets at September 30, 1998 was
the Company's portfolio of other real estate owned totalling $4.1 million. At
September 30, 1998, other real estate owned included a land development project
consisting of 207 residential building lots with a carrying value of $3.6
million net of participations sold, a 24 unit residential condominium
construction project with 9 remaining units and a carrying value of $344,000 net
of participations sold and one residential condominium building site with a
carrying value of $158,000. The land development project is being completed
under the direction of the Company. Currently, 120 lots are under contract of
sale for settlement through July 2000, and the remainder of the project is being
marketed for sale. Construction of the residential condominium project is
complete and 8 units are under contract of sale and are scheduled for settlement
during 1998. The remaining units are being marketed for sale. The condominium
building site is under contract of sale for settlement in 1998.
(10)
<PAGE>
Nonaccrual loans totalled $624,000 at September 30, 1998 and consisted
primarily of a land acquisition loan totalling $349,000.
Subsequent to September 30, 1998, the Company placed a residential
construction relationship consisting of three loans totalling $2.2 million in
the aggregate on nonaccrual status. The Company is secured by residential real
estate in various stages of completion. Foreclosure proceedings have been
scheduled for December, 1998.
Impaired loans at September 30, 1998 totalled $814,000 and represented
$382,000 in residential construction nonaccrual loans and $432,000 in
residential construction and commercial loans which have demonstrated weaknesses
in the past. All impaired loans were collateral dependent loans, which are
measured based on the fair value of the collateral. There were no impaired loans
at September 30, 1998 with an allocated valuation allowance. An impaired loan is
charged-off when the loan, or a portion thereof, is considered uncollectible.
Allowance for Credit Losses
The Company provides for credit losses through the establishment of an
allowance for credit losses (the "Allowance") by provisions charged against
earnings. Based upon management's evaluation, monthly provisions are made to
maintain the Allowance at a level adequate to absorb potential losses within the
loan portfolio. The factors used by management in determining the adequacy of
the Allowance include the historical relationships among loans outstanding;
credit loss experience and the current level of the Allowance; a continuing
evaluation of nonperforming loans and loans classified by management as having
potential for future deterioration taking into consideration collateral value
and the financial strength of the borrower and guarantors; and a continuing
evaluation of the present and future economic environment. Regular review of the
loan portfolio's quality is conducted by the Company's staff. In addition,
independent consultants, bank regulatory agencies and independent accountants
periodically review the loan portfolio. At September 30, 1998 the Allowance was
1.46% of total loans, net of unearned income. The Allowance at September 30,
1998 is considered by management to be appropriate in consideration of the
possible risks in the loan portfolio given current conditions and information.
The changes in the Allowance are presented in the following table.
<TABLE>
<CAPTION>
Nine Months ended September 30,
-------------------------------
1998 1997
- ----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Allowance for credit losses -
beginning of period $ 3,632 $ 3,293
Provision for credit losses 517 629
Charge-offs (252) (336)
Recoveries 10 38
-------- --------
Allowance for credit losses -
end of period $ 3,907 $ 3,624
======== ========
Allowance as a percentage of loans
receivable, net of unearned income 1.46% 1.37%
Allowance as a percentage of nonperforming
loans and loans past-due 90 days or more (a) 461.82% 585.46%
======== ========
</TABLE>
------------------
(a) There is no direct relationship between the size of the Allowance and
the related provision for credit losses, and the nonperforming and
past-due loans. Accordingly, the ratio of Allowance to nonperforming
and past-due loans may tend to fluctuate significantly.
(11)
<PAGE>
Results of Operations
The Company reported net income of $1.3 million and $3.5 million for the
three months and nine months ended September 30, 1998, representing diluted net
income per share of $.28 and $.77, respectively. Net income was $1.1 million and
$3.1 million for the corresponding periods in 1997, representing diluted net
income per share of $.24 and $.67, respectively.
Net Interest Income
Net interest income totalled $5.1 million and $15.0 million for the three
months and nine months ended September 30, 1998, respectively, as compared to
$4.8 million and $13.9 million for the same periods in 1997. Improvement in net
interest income was primarily the result of an increase in the average balance
of loans and investment securities outstanding during the three months and nine
months ended September 30, 1998, as compared to the same periods in 1997.
Despite an increase of only 1.1% in outstanding balances since December 31,
1997, average loans outstanding, net of unearned income, recorded an increase of
$14.7 million or 5.5%, and $26.3 million or 10.4% for the three months and nine
months ended September 30, 1998, respectively, as compared to the same periods
in 1997, representing growth in the Company's commercial and second mortgage
portfolios, as well as in loans originated for sale. Average investment
securities and securities available-for-sale increased $20.0 million and $19.8
million for the three and nine months ended September 30, 1998, respectively, as
compared to the same periods in 1997, primarily as a result of increased
investments in U.S. Treasury securities.
The increase in net interest income due to increases in average earning
assets was mitigated by higher average balances in deposits and borrowings.
Average interest-bearing deposits outstanding during the three months and nine
months ended September 30, 1998 increased $31.1 million or 12.8% and $35.5
million or 15.3%, respectively, as compared to the same periods in 1997, while
average borrowings increased $9.4 million or 28.3% and $8.4 million or 30.5%.
Furthermore, the net interest margin declined from 5.91% and 6.01% for the three
months and nine months ended September 30, 1997, respectively, to 5.46% and
5.54% for the same periods in 1998. The decline in the net interest margin was
the result of competitive pressure on loan pricing, which has caused the yield
on loans to decrease from 10.51% for the nine months ended September 30, 1997 to
10.10% for the same period in 1998. In addition, loans, the Company's highest
yielding asset, on average declined as a percentage of interest-earning assets
from 81.5% for the nine months ended September 30, 1997 to 77.0% for the same
period in 1998.
(12)
<PAGE>
The following table provides further analysis of the increase in net interest
income:
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
compared to the nine months ended
September 30, 1997
- ------------------------------------------------------------------------------
Increase/(Decrease)
due to (a):
Increase -------------------
(Decrease) Rate Volume
----------------------------------
(in thousands)
<S> <C> <C> <C>
Interest income:
Loans (b) $ 1,218 $ (795) $ 2,013
Investment securities and
securities available-for-sale 971 26 945
Federal funds sold 252 2 250
------- ------ -------
Total interest income 2,441 (767) 3,208
------- ------ -------
Interest expense:
Deposits 986 (52) 1,038
Borrowings 387 (12) 399
------- ------ -------
Total interest expense 1,373 (64) 1,437
------- ------ -------
Net interest income $ 1,068 $ (703) $ 1,771
======= ====== =======
</TABLE>
(a) The changes in interest income and interest expense due to both rate and
volume have been allocated to rate and volume changes in proportion to the
absolute dollar amounts of the change in each.
(b) Includes interest on loans originated for sale.
Noninterest Income
Noninterest income totalled $1.0 million and $2.4 million for the three
months and nine months ended September 30, 1998, respectively, as compared to
$560,000 and $1.6 million for the corresponding periods in 1997. Growth in
noninterest income primarily reflected an increase in gains on sales of mortgage
loans originated for sale, net of deferred costs, of $396,000 and $619,000 for
the three months and nine months ended September 30, 1998, respectively, as
compared to the same periods in 1997. The increase was a result of higher loan
sale volume, as total mortgage loans sold increased from $14.9 million and $33.5
million during the three months and nine months ended September 30, 1997,
respectively, to $42.6 million and $112.6 million for the same periods in 1998.
Noninterest Expense
Noninterest expense increased $304,000 or 8.5% and $1.4 million or 13.8%
for the three months and nine months ended September 30, 1998, respectively,
over the corresponding periods in 1997. The increase in noninterest expense
corresponded with an increase in business activity, including related expansion.
Specifically, salaries and employee benefits increased $317,000 and $896,000
during the three months and nine months ended September 30, 1998, respectively,
as compared to the same periods in 1997 and primarily represented merit
increases and the net addition of 13 employees since September 30, 1997. Growth
in the employee base has been necessary to accommodate increased business
activity, including the addition of a full-service branch facility in November
of 1997. Occupancy costs increased $127,000 and $385,000, equipment costs
increased $50,000 and $150,000 and data processing increased $29,000 and
$139,000 for the three months and nine months ended September 30, 1998,
respectively, as compared to 1997, also as a result of these expansion efforts.
Data processing costs increased further as a result of the introduction of new
products and services. These increased costs were mitigated by decreases in net
expense on other real estate owned of $178,000 and $206,000 for the three months
and nine months ended September 30, 1998 as compared to the same periods in
1997, reflecting the impact of gains recorded as individual units are sold.
(13)
<PAGE>
Tax Expense
The Company's effective tax rate declined from 36.7% for the nine months
ended September 30, 1997 to 35.0% for the nine months ended September 30, 1998
as the result of an increase in investment securities exempt for state tax
purposes.
Year 2000 Action Plan
The Company, like all businesses, faces a very real challenge regarding
the use of technology subsequent to the turn of the century. Specifically, many
of today's computer programs are not capable of properly recognizing years after
1999. If left uncorrected, the programs could fail or provide inaccurate
results. This Year 2000 issue is critically important to the Company, as well as
many other businesses, given the significant reliance on computers and related
software ("IT Systems") and other equipment which contain embedded
microcontrollers ("Non-IT Systems"), such as elevators, HVAC systems and
machinery.
In 1997, the Company adopted a Year 2000 Action Plan (the "Plan"). The
Plan identifies the process by which the Company will address Year 2000 issues.
The process is systematic and includes the following phases: awareness,
assessment, renovation, validation, and implementation. Senior management is
responsible for implementation of the Plan and reports progress on a regular
basis to the Board of Directors. Management anticipates substantial completion
of the Company's Year 2000 efforts by December 31, 1998.
As of the date of this report, the Company has completed the assessment
phase of the Plan and is in various stages of the renovation, validation and
implementation phases. Specifically, IT Systems and Non-IT Systems
(collectively, "Systems") have been inventoried and evaluated for Year 2000
compliance. Systems which are not yet Year 2000 compliant are in the process of
either renovation or replacement. In addition, all Systems have been risk-rated
in order to identify those which are "mission critical" to the ongoing operation
of the Company. Since the Company relies heavily on independent third-party
technology companies to provide the bulk of its Systems' support and service, it
is working closely with these service providers to ensure each has adopted plans
to address Year 2000 issues and is progressing in accordance with their plan.
The Company has no internally developed software nor any unique hardware which
require customized renovation.
Identified below are several of the "mission critical" Systems and their
current status:
[check] Data processing - The Company's data processing is provided by a large
national service bureau which provides similar services to over 700
banks across the country. The vendor has adopted a formal plan to
address Year 2000 issues. Management is closely monitoring the vendor's
progress. In October 1998, the Company converted to the vendor's data
processing platform system which utilizes a four digit date field. The
platform system is expected to be Year 2000 compliant essentially in
its current form. The vendor is in the process of testing and
certifying the system as Year 2000 compliant and anticipates completing
such in February 1999.
[check] Transaction processing - The Company processes transactions on-site and
transmits the related information to its data processing service
provider daily. Hardware associated directly with this process has been
confirmed Year 2000 compliant and software currently in use has been
renovated to process utilizing a four digit date. Management expects
completion of testing and validation prior to December 31, 1998.
[check] Internal wide-area network - The Company utilizes a wide-area network
to provide connectivity among its various locations and to allow
employees access to internal information. An assessment of hardware
utilized throughout the network has been completed and all hardware
identified as not Year 2000 compliant has either been scheduled for
replacement in the normal course of business prior to December 31, 1999
or will be upgraded prior to December 31, 1998.
(14)
<PAGE>
[check] Federal Reserve - The Company interfaces on a daily basis with the
Federal Reserve to settle balances owed and balances due based upon
activity. The Federal Reserve has completed renovation of the software
used in this process and the first phase of on-site testing has been
completed. Additional testing is scheduled for completion prior to
December 31, 1998.
[check] Telecommunications and Utilities - The Company's ability to
electronically transmit and receive data to and from its data
processing service provider and others subsequent to the turn of the
century is entirely dependent upon its local and long distance phone
companies. In addition, all of the Company's facilities are supplied
power by the local gas and electric company. As of the date of this
report, the phone companies and the utilities have responded to the
Company's inquiries indicating that they are addressing the issues
involved and expect compliance by mid-year 1999.
[check] Product and Services Automated Delivery Channels - These devices
include primarily the Company's Automated Teller Machine Network,
Telephone Banking system and Home Banking (personal computer) software.
Upgrades to these devices necessary to become Year 2000 compliant have
been identified and are scheduled to be installed and confirmed
compliant prior to year-end 1998.
[check] Non-IT Systems - The bulk of the Year 2000 concerns regarding Non-IT
Systems relate to the Company's banking and office facilities, whether
owned or leased. Systems involved include primarily heating and air
conditioning units, elevators and security systems, including but not
limited to burglar and fire alarms, video cameras, time locks,
etc...The Company is currently working with third-party vendors and
landlords to confirm that all applicable Non-IT Systems will function
without interruption with the turn of the century.
Through September 30, 1998, the costs incurred by the Company related to
Year 2000 efforts have been incurred primarily in the normal course of business
with ordinary upgrade of IT Systems in order to maintain pace with technological
advances. Because the Company has neither customized software nor hardware, no
programming costs have been incurred. As the Company continues to pursue Year
2000 compliance, total costs could range to $200,000, much of which will be
capitalized in the normal course of business with the continued purchases of
advanced technology.
While the risks associated with the Company's Year 2000 efforts are
numerous, the Company believes that the "most reasonably likely" worst case
scenario involves temporary interruption of telecommunication or utility
services. Recognizing the possibility of a disruption in telecommunication
services, the Company has developed a contingency plan which will require the
delivery of critical transaction data in paper form to its data processing
service provider in Milwaukee, Wisconsin. The Company's data processing service
provider has the capability to capture and process the data and produce the
required reports accordingly. In addition, the Company will process in an
off-line mode and employ the standard off-line procedures for security purposes.
In the event that utility services are unavailable, the Company will close
facilities that are not functional and will open at a minimum its Ellicott City,
MD facility which is supported by a diesel generator. The facility is centrally
located within the Company's branch network and also houses the Company's data
processing department which supports various critical functions.
Given the progress to date and additional available resources, it is
unlikely that the Company's data processing platform system will not be Year
2000 compliant upon the turn of the century. Regardless, the Company has
developed a contingency plan which primarily involves manual processing and
posting of transaction activity based upon year-end information downloaded and
saved immediately prior to December 31, 1999.
In addition to recognizing and addressing Year 2000 issues associated with
the Company's internal IT and Non-IT systems, the Company recognizes that Year
2000 may have a potential operational and/or financial impact on commercial
customers and, correspondingly, their ability to meet their financial
obligations to the Company. In response, the Company has incorporated procedures
to evaluate the potential impact of Year 2000 on commercial customers and the
manner in which they are addressing the issues. These procedures have been
applied in the Company's
(15)
<PAGE>
underwriting practices and also have been expanded to include large corporate
depositors of the Company in order to mitigate potential liquidity risk. To
further mitigate risk, the Company has attempted to keep all customers informed
of its Year 2000 efforts through information provided in a special Year 2000
brochure mailed to all customers and the Company's customer newsletter.
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On September 29, 1998, the Board of Directors of the Company declared a
$.07 per share cash dividend to common stockholders of record on October
16, 1998, payable October 29, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K are set forth below.
Exhibit No. Reference
----------- ---------
27.0 Financial Data Schedule Page 18
(b) Reports on Form 8-K
None
(16)
<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.
COLUMBIA BANCORP
PRINCIPAL EXECUTIVE OFFICER:
November 13, 1998 John M. Bond, Jr.
- ------------------- ----------------------------
Date President and
Chief Executive Officer
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
November 13, 1998 John A. Scaldara, Jr.
- ------------------- ----------------------------
Date Executive Vice President,
Corporate Secretary and
Chief Financial Officer
(17)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,788,244
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 24,280,201
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,130,814
<INVESTMENTS-CARRYING> 72,590,247
<INVESTMENTS-MARKET> 73,206,943
<LOANS> 279,946,198
<ALLOWANCE> (3,906,652)
<TOTAL-ASSETS> 415,089,058
<DEPOSITS> 330,671,659
<SHORT-TERM> 29,087,767
<LIABILITIES-OTHER> 2,579,214
<LONG-TERM> 15,000,000
0
0
<COMMON> 45,721
<OTHER-SE> 37,704,697
<TOTAL-LIABILITIES-AND-EQUITY> 415,089,058
<INTEREST-LOAN> 21,013,922
<INTEREST-INVEST> 3,281,231
<INTEREST-OTHER> 412,734
<INTEREST-TOTAL> 24,707,887
<INTEREST-DEPOSIT> 8,292,233
<INTEREST-EXPENSE> 9,706,220
<INTEREST-INCOME-NET> 15,001,667
<LOAN-LOSSES> 517,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,455,027
<INCOME-PRETAX> 5,450,778
<INCOME-PRE-EXTRAORDINARY> 5,450,778
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,540,778
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.77
<YIELD-ACTUAL> 5.54
<LOANS-NON> 624,410
<LOANS-PAST> 221,854
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,211,302
<ALLOWANCE-OPEN> (3,631,663)
<CHARGE-OFFS> 252,065
<RECOVERIES> 10,054
<ALLOWANCE-CLOSE> (3,906,652)
<ALLOWANCE-DOMESTIC> (3,906,652)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
